Tuesday, May 31, 2011
The University of Michigan’s Survey of Consumers asks, "By about what percent do you expect your (family) income to increase during the next 12 months?”:
I've made this point several times, e.g. here, but given the misinformation out there about effective versus statutory corporate tax rates, it's certainly worth emphasizing again:
Are Taxes in the U.S. High or Low?, by Bruce Bartlett, Economix: ...[F]ederal taxes are at their lowest level in more than 60 years..., just 14.8 percent of GDP... The last year in which revenues were lower was 1950... Revenues averaged 18.2 percent of G.D.P. during Ronald Reagan’s administration...
In short,... the current level is unusually low and has been for some time. ... Yet if one listens to Republicans, one would think that taxes have never been higher, that an excessive tax burden is the most important constraint holding back economic growth and that a big tax cut is exactly what the economy needs to get growing again.
Just last week, House Republicans released a new plan to reduce unemployment. Its principal provision would reduce the top statutory income tax rate on businesses and individuals to 25 percent from 35 percent. No evidence was offered ... that cutting taxes for the well-to-do and big corporations would reduce unemployment...
The G.O.P. says global competitiveness requires the United States to reduce its corporate tax rate. But the United States actually has the lowest corporate tax burden of any of the member nations of the Organization for Economic Cooperation and Development. [graph] ...
[O]ne almost never hears that total revenues are at their lowest level in two or three generations as a share of GDP or that corporate tax revenues as a share of GDP are the lowest among all major countries. One hears only that the statutory corporate tax rate in the United States is high compared with other countries, which is true but not necessarily relevant. ...
The many adjustments ... permitted by the tax code ... explain why the average federal income tax rate on the 400 richest people in America was 18.11 percent in 2008,... down from 26.38 percent when these data were first calculated in 1992. Among the top 400, 7.5 percent had an average tax rate of less than 10 percent, 25 percent paid between 10 and 15 percent, and 28 percent paid between 15 and 20 percent.
The truth of the matter is that federal taxes in the United States are very low. There is no reason to believe that reducing them further will do anything to raise growth or reduce unemployment.
Or, conversely, that raising them will do anything to reduce growth or increase unemployment.
However, with that said, I'd be hesitant to raise any taxes during the recovery. I don't think raising taxes on the wealthy would have much if any effect on economic growth or employment, but given the unemployment crisis I don't see any reason to take chances. But I also see no reason at all to keep these taxes at historically low rates once the economy is on solid footing (and if you are worried about confidence eroding due to the deficit, put the plan into place now, and have it become effective once employment or some other economic indicator crosses a pre-determined threshold).
Shared Capitalism, by Nancy Folbre: ...The term “shared capitalism” is a catchall for a variety of arrangements that businesses can make to share profits with ... employees, whether through stock ownership or incentive pay based on company performance. ...
Many Americans long for more evenly shared prosperity, and a new wave of economic research suggests that more gain-sharing in large companies could help us move in that direction. ...
How could public policies promote and expand this shared capitalism? Public policies already offer companies tax benefits for setting up employee stock-ownership plans... It would also be relatively easy to encourage companies to offer more workers incentive pay... Companies are allowed to write off costly stock options that represent incentive pay for top executives, despite a lack of evidence that such incentives lead to improved company performance.
Why not restrict the tax benefits to companies that provide the same type of incentive pay for all full-time employees, stipulating that the value expended on the bottom 80 percent of employees by salary must equal at least that expended on the top 5 percent? Similar restrictions have long been in effect for employee retirement and health plans. The costs of these programs are not tax-deductible unless they are offered in a nondiscriminatory way to all workers.
Private-sector precedents are also strong. Two very successful American companies, the Wegmans supermarkets and Cisco Systems, offer broad-based incentive systems that effectively meet these restrictions.
If America’s capitalists mean what they say about the virtues of an ownership economy, they should throw their weight behind modest changes in tax incentives that could expand it. If they don’t, we might infer that they prefer to keep the benefits of ownership to themselves.
Here's a post from a few years ago on the same topic:
Does Shared Capitalism Work?: When I think about the evolution of economic systems over time, I often wonder if capitalism is the end of the road, the last and best economic system that will emerge. I'm not sure, but I see no necessary reason why we can't do better.
But what would come next? One possibility is employee ownership. At first glance it appears to provide better incentives to workers than wages, but more thought leads to a consideration of free riding problems - if everyone but you works really hard you will still receive a large profit share -- and it was never clear how such a system could work in its pure form since the entrepreneurial function would be absent. That is, how would new businesses get started? Who would accumulate the capital and execute the plans needed to get things going? Financial innovation could pool funds, but how does a large group of workers get together and decide to open a new business? It seems like some sort of individual entrepreneurship function would still be necessary, coupled with some economic incentive to transfer ownership to workers over time.
Despite those problems, however, employee ownership is growing in popularity:
Does shared capitalism work in the United Kingdom?, by Alex Bryson and Richard B. Freeman, Vox EU: Does shared capitalism work...
After a disappointing first quarter, economists largely predicted the U.S. recovery would ramp back up as short-term disruptions such as higher gas prices, bad weather and supply problems in Japan subsided.
But there's little indication that's happening. Manufacturing is cooling, the housing market is struggling and consumers are keeping a close eye on spending, meaning the U.S. economy might be on a slower path to full health than expected.
"It's very hard to generate a rapid recovery when rapid recoveries are historically driven by housing and the consumer," said Nigel Gault, an economist at IHS Global Insight. He expects an annualized, inflation-adjusted growth rate of less than 3% in coming quarters—better than the first-quarter's 1.8% rate, but too slow to make a meaningful dent in unemployment.
To what extent will incoming data impact monetary policy? At this point, I think policymakers are still in “wait and see” mode. To be sure, they cannot ignore the spate of weak data. I think it has to be a topic in upcoming speeches. But they can continue to view it as a temporary blip. Moreover, I think it has been made clear that there is a high bar for QE3 – especially as the commodity-induced inflation mouse passes through the belly of the snake. Which means that while the specter of inflation remains alive and well on Constitution Ave., we should expect at most talk of pushing back the eventual policy tightening. But I think we would need to see a serious downgrade of the 2012 forecast to push the Fed into another round of asset purchases.
Monday, May 30, 2011
Maybe this is why my econometrics class got so upset when I wouldn't allow calculators to be used during exams:
The mathematics generation gap, by Frances Woolley: Here's my theory: Some students struggle with economics because they do not fully understand the mathematical tools economists use. Profs do not know how their students were taught mathematics, what their students know, what their students don't know - and have no idea how to help their students bridge those gaps.
The arithmetic gap is the most obvious one: profs over a certain age (and some immigrant profs) were drilled in mental math;... students under a certain age haven't been. Some implications of the arithmetic gap are familiar: profs who can't understand why students insist on using calculators; students who can't understand why their profs are so unreasonable. ...
Another aspect of the mental arithmetic gap that is easily overlooked is its widening over time. Calculators became affordable in the mid- to late-1970s. Students in the 1980s were taught by teachers who had learned mathematics without calculators, and could do basic mental arithmetic. Students today might be taught by a teacher who is himself unable to work out 37+16 without help. ...
The average professor might be unaware of just how ubiquitous calculators are in elementary and secondary schools. The Ontario province-wide grade 6 math test allows students to use calculators at all times. The use of calculators is mandated by the high school curriculum...
School curricula reflect society at large. Back in the 1950s, grade 5 students were taught to answer questions such as "Joe picked 3/4 bu. [bushels] of apple while Jack picked 1/4 bu. How many more did Joe pick than Jack?" No amount of back-to-basics rhetoric will change the fact that the ability to subtract fractional apple bushels is a useless life skill. Today an average Canadian can live a happy and fulfilled life without being able to compute $4892.16+$5860.03+$512.41+$8967.35. So why teach those skills?
Recent research is suggesting that deep understanding of mathematical concepts is related to basic number sense. A person who can look at two sets of dots and quickly determine which set is larger will also generally be better at abstract, conceptual, mathematical reasoning. I have had a student in my office who could not work out 3x5=? without a calculator. I wonder: what else was she missing out on?
But perhaps the struggling students make a deeper impression on me than the competent ones. ... So maybe I'm just out of touch. Take graphics calculators, for example. I don't know precisely how they work or what they do, but I regard them with suspicion. Graphing the production function F(x)=ln(x) by entering the function into a graphics calculator and copying down the result just seems like cheating. And because I've heard these calculators are programmable, I ban their use in exams. It's another mathematics generation gap: between students who were taught from a curriculum that encourages - or even requires - graphics calculators, and their old-school profs. But I don't know what you do know and what you don't know, and I don't know how to teach you the basic mathematical concepts you require to understand economics.
Other technologies also create generation gaps. Today's undergrads have been carrying a cell-phone since their early teens, if not earlier. They rarely wear watches. Some will struggle to read an analogue clock... The disappearance of analogue clocks ... means that profs risk confusing students when they use clock-based language: "Rotate counter-clockwise." "Turn clockwise." "At 2 o'clock" (as in, 60 degrees to your right).
Maps are another rapidly changing technology. Google maps was launched in 2005, in other words, when an undergraduate entering university this Fall was 11 or 12 years old. She has always been able to navigate by reading a list of instructions from Google maps, she might never have had to locate two points on a map and plan a route from one to the other. Yet maps imbed spatial concepts very similar to those used in economics. An indifference curve or iso-profit line is, conceptually, similar to a contour line on a topographical map. What forms of understanding do students lose -and what do they gain - when they rely on Google maps rather than map-reading?
I originally titled this post "bridging the mathematics generation gap." ... But I need to work out where the mathematics generation gap lies, and what its consequences are, before writing about how to bridge it.
I think there is a lot of intuition that can be gleaned from a bottom up approach that emphasizes basic skills. During these rote exercises, the mind searches for shortcuts, and much intuition and insight can be gained from the aha moments when you find a way to shorten the exercise with a trick of some sort. E.g., to multiply any single digit number by nine, just add a zero to the end and subtract the number. Thus, 8*9 must be 80-8=72. Or, 4*9 = 40-4. Then, it's easy to generalize, 9 times any two digit number is the number with a zero attached minus the number. Thus, 28*9=280-28=252. Or, 9*32 = 320-32 = 288. Then extend further -- it works for a single digit times numbers of any size, e.g. four digit would be 9*1234=12340-1234 = 11,106, something you can do relatively easy in your head. This can be generalized further (it's best to do it for 8s, then 7s, until you see the pattern emerging). To find x*y, where x is one digit and y is any whole number, use x*y = 10*y - (10-x)*y. So, to find 187*7, it's 1870-3*187. But you say, the second number is too hard to multiply in my head! No problem, just apply the rule again, or better use some other trick, like finding 3*200-3*13 = 600-39=561. Thus, the answer is 1870-561=1,309, and it can all be done in your head. When I was a kid using tricks like this allowed me to speed up finishing worksheets for homework so I could do what I really wanted to do, go outside and play. This also leads directly to the proof -- just expand the right hand side, then cancel terms -- but how do you discover this rule, and learn how to take it to a proof, without rote exercises that force you to search for shortcuts? I understand that the response to all of the above is to use a calculator instead, these tricks aren't needed if you have a calculator at hand, but that isn't the point. The point is that these exercises lead to additional insights, proofs, etc. and those insights are critical for more advanced insights and more complex proofs.
I plan to remain hard-headed about this until I am convinced that abandoning the rote sorts of exercises done in, say, a linear algebra class (which can also be done on a calculator) does not hinder our ability to form intuition about how to do proofs, etc. And these skills are valuable in other settings as well. I don't know how many times I've written computer programs by brute force initially, then realized the programs can be shortened and made much more elegant by exploiting the patterns that emerge in the brute force program, and that usually leads to a very compact, linear algebra representation of the program (which can then lead to further insights about the underlying statistical model). The inductive type reasoning that emerges from these exercises is valuable in many settings -- I'd guess learning to find patterns is a skill that is useful beyond pure mathematics -- and I worry that an over reliance on calculators will erode the development of these skills. I am absolutely convinced, for example, that forcing people to do econometric and statistical exercises by hand develops intuition that you cannot get any other way, and this is a key to moving on to doing proofs.
But what is your view on all of this?
I first started worrying about the possibility of a slow recovery of unemployment long ago, e.g. I criticized policymakers in 2008 "for not anticipating the slow response of employment when putting the stimulus package into place." Ever since, I've tried to keep this issue alive here and in columns, reminding everyone at every opportunity that we need to do more about the unemployment problem, calling or jobs programs, more from the Fed, etc., etc. It's been frustrating. A year ago I gave up on policymakers, but promised "I'll still complain -- there's no reason to let policymakers off the hook." I've tried to do that, to the point where I've sometimes wondered if I'm overdoing it by making the same point again and again. I'm still pessimistic about anything being done to help the millions of unemployed -- I talked earlier this week about how "there seems to be no shortage of reasons to dismiss weakness in labor markets" -- but it's worth it to continue to try. So I'm glad to see others making the case that we need to do far more than we are doing to help the unemployed:
Against Learned Helplessness, by Paul Krugman, Commentary, NY Times: Unemployment is a terrible scourge across much of the Western world. Almost 14 million Americans are jobless, and millions more are stuck with part-time work or jobs that fail to use their skills. ... Nor is the situation showing rapid improvement. This is a continuing tragedy, and in a rational world bringing an end to this tragedy would be our top economic priority.
Yet ... on both sides of the Atlantic a consensus has emerged among movers and shakers that nothing can or should be done about jobs. Instead..., one sees a proliferation of excuses for inaction, garbed in the language of wisdom and responsibility. ...
There’s nothing wrong with our workers — remember, just four years ago the unemployment rate was below 5 percent. The core of our economic problem is, instead, the debt — mainly mortgage debt — that households ran up during the bubble years... Now that the bubble has burst, that debt is acting as a persistent drag on the economy, preventing any real recovery in employment. And once you realize that the overhang of private debt is the problem, you realize that there are a number of things that could be done about it.
For example, we could have W.P.A.-type programs putting the unemployed to work doing useful things like repairing roads — which would also, by raising incomes, make it easier for households to pay down debt. We could have a serious program of mortgage modification, reducing the debts of troubled homeowners. We could try to get inflation back up to the 4 percent rate that prevailed during Ronald Reagan’s second term, which would help to reduce the real burden of debt. ...
In pointing out that we could be doing much more about unemployment, I recognize, of course, the political obstacles to actually pursuing any of the policies that might work. In the United States, in particular, any effort to tackle unemployment will run into a stone wall of Republican opposition. Yet that’s not a reason to stop talking about the issue. In fact, looking back at my own writings over the past year or so, it’s clear that I too ... said far too little about what we really should be doing to deal with our most important problem.
As I see it, policy makers are sinking into a condition of learned helplessness on the jobs issue: the more they fail to do anything about the problem, the more they convince themselves that there’s nothing they could do. And those of us who know better should be doing all we can to break that vicious circle.
Sunday, May 29, 2011
Discussion Question: What's the Biggest Piece of Disinformation Circulating Right Now? What's the Best Way to Debunk It?
In an attempt to help Brad DeLong and others "for when [we are] surprised, as [we] will be, by an unexpected question from an unexpected direction while talking to reporters, phone callers, passers-by, radio interviewers, cable TV interviewers, etc.":
What's the biggest piece of disinformation circulating right now, and what's the best way to debunk it?
This asks about the biggest piece of disinformation, but identifying potential "surprise" pieces of disinformation that reporters and others might ask about and how to debunk them would also be very helpful.
Click on the question to answer. (The answers to previous questions are in the outermost sidebar.)
Despite claims to the contrary, the Ryan budget plan does not "strengthen the safety net":
Welfare Reform Not the “Success” Ryan Claims, CBPP: House Budget Committee Chairman Paul Ryan cites the “unprecedented success” of welfare reform to support his claim that the House-passed Republican budget that he authored would "strengthen the safety net." The facts tell a very different story. ... [continue reading]...
First, Bloomberg reports on signs that wages may be accelerating. It’s worth bearing in mind that we’re talking about modest stuff — if the employment cost index accelerates to 2 percent, that’s still just productivity growth, and hardly a sign of runaway inflation. Still, this isn’t what I expected to see, and I will be watching developments.
Yes, 2 percent is hardly anything to be concerned about. As Krugman notes, this is just productivity growth. It is the next issue I struggle with – should we care if, at least in the short run, wages accelerate at a rate faster than productivity growth?
Note the path of unit labor costs since 1983:
Further note how far below trend we are:
Constrained unit labor costs probably have no small role in these kinds of stories:
“The bright side is that there’s a clear dichotomy between the health of corporate America and the economy,” said Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC, which manages $53 billion. “We’ve softened somewhat. Still, profits remain good and there’s M&A activity. That tells me that we’re not going to see a huge move in stocks in either direction.”
To return to trend, unit labor costs would need to accelerate at a rate greater than trends. That this might come at the expense of corporate profits does not upset me. It will, however, upset the Fed, who will tighten policy in response, as they will assume – not without reason – that profits will not suffer. Firms will simply pass on the wage gains in the form of higher prices. Which leaves me wondering again how income will be transferred back to employees? Under what circumstances might we expect unit labor costs to revert to trend? Especially if the Fed remains in a trigger-happy state of mind?
Saturday, May 28, 2011
Tyler Cowen wants government to pave the way for -- or at least get out of the way of -- driverless cars.
Eclipsed, by Ronald Brownstein, National Journal: From Revolutionary days through 2004, a majority of Americans fit two criteria. They were white. And they concluded their education before obtaining a four-year college degree. ... But as the country grew more diverse and better educated, the white working-class share of the adult population slipped to just under 50 percent in ... 2005... That number has since fallen below 48 percent.
The demographic eclipse of the white working class is likely an irreversible trend as the United States reconfigures itself yet again as a “world nation” reinvigorated by rising education levels and kaleidoscopic diversity. ...
Still, amid all of this change, whites without a four-year college degree remain the largest demographic bloc in the workforce. ... They are also, polls consistently tell us, the most pessimistic and alienated group in American society. ...
This worry is hardly irrational. As Massachusetts Institute of Technology economists Frank Levy and Tom Kochan report in a new paper, the average high-school-educated, middle-aged man earns almost 10 percent less than his counterpart did in 1980. Minorities haven’t been exempt from that trend: In fact, high-school-educated minority men have experienced even slower wage growth than their white counterparts over the past two decades, calculates Larry Mishel, president of the liberal Economic Policy Institute.
But for minorities, that squeeze has been partially offset by the sense that possibilities closed to their parents are becoming available to them as discrimination wanes. “The distinction is, these blue-collar whites see opportunities for people like them shrinking, whereas the African-Americans [and Hispanics] feel there are a set of long-term opportunities that are opening to them that were previously closed on the basis of race or ethnicity,” said Mark Mellman, a Democratic pollster...
By contrast, although it is difficult to precisely quantify, the sense of being eclipsed demographically is almost certainly compounding the white working class’s fear of losing ground economically. That huge bloc of Americans increasingly feels itself left behind—and lacks faith that either government or business cares much about its plight. Under these pressures, non-college whites are now experiencing rates of out-of-wedlock birth and single parenthood approaching the levels that triggered worries about the black family a generation ago. Alarm bells should be ringing now about the social and economic trends in the battered white working class and the piercing cry of distress rising from this latest survey.
Perhaps it's not what's intended, but this reads like: We don't have to pay as much attention to minorities as we do to disaffected whites because minority groups are benefiting from not being discriminated against as much as in the past (and making less noise than white groups) -- as though less of a bad thing somehow works out to be a net benefit. And that's seems to be what's happening. Loud groups of disaffected whites get all the press and attention from politicians, while minority households -- who have faced even higher costs due to the recession -- have received little notice. I'll leave trends in the sociology of the family to others, I don't know these data well enough to say whether the assertions in the article are valid, and if they are valid how worrisome they actually are. But one thing would surely help in any case -- jobs, jobs, jobs --- for middle class whites, for minorities, and for anyone else who needs one, and that's where policymakers ought to be focusing their attention.
The driving force behind fears of growing debt in the future is rising health care costs. That's what's behind all the scary projections about future debt burdens. I've said many times that if we solve the health care cost problem, the rest of the budget problem will be relatively easy to fix. And, conversely, if we don't fix the health care cost problem, the other things we do to the budget won't help much at all (while cutting other parts of the budget doesn't fix the debt problem, i.e. the benefits are small, the loss of services could have large costs).
But how much confidence should we have in the health care cost inflation estimates? Is the increase in costs due to quality improvements, which is not inflation, or pure price increases without the accompanying quality changes, which is? If we are going to cut social services such as Medicare based upon the fear of rising healch care costs , we should be aware of how much confidence we have in the estimates of health care inflation.
So how much inflation is there in health care? Mark Bils, an expert on "the intricacies of price measurement," says we really aren't sure but the problem may not be as bad as we think. In either case -- quality changes or pure price increases -- we still have to consider the impact of rising health care costs on the budget. But public policy should be very different if the cost increase is due to the discovery of, say, a cure for cancer rather than pure inflation:
Meyer: What type of prices do you think might have been overestimated?
Bils: Services and healthcare. When you look at healthcare expenditures, you see that inflation is extremely rapid, much more rapid than other inflation rates. But we have no idea what the inflation rates for health expenditures really are. We don’t know! You can’t measure quality of healthcare very well.
If I compare healthcare costs today versus in the year 1800, well, I could go out and buy a bunch of leeches today for almost nothing. And I could have the healthcare I had in 1800. If you had a certain condition and you had $10,000 to get treated at today’s health prices, or $10,000 to get treated at 1960s prices with 1960s technology, I don’t think it’s so obvious that people would want to go back in time to get their important health conditions dealt with. In that sense, you say, I don’t know if there’s inflation. It’s pretty hard to say that there’s been a lot of inflation over the long haul in healthcare. ...
Meyer: So you do believe that healthcare prices have been overestimated?
Bils: Yes, the inflation rate for healthcare prices has been overestimated. It relates to the work I did later on durable goods, like cars. When we get a new model car, the 2011 Camry versus the earlier model, the prices jump. Now, is that inflation, or is it a better model?
The same issue comes up with surgical procedures. If I have a new procedure for treating heart problems, how much better is it? If I look just at the expenditure, the cost of providing that, it goes up a lot. But if the treatments are better, if the bounce-back time to get back to work is faster, how to measure these things is hard to say. And in practice a lot of that is being fed into inflation. ...
Glad to see the CBPP take this on:
Misconceptions and Realities About Who Pays Taxes, by Chuck Marr and Brian Highsmith, CBPP: Executive Summary A recent finding by Congress’ Joint Committee on Taxation that 51 percent of households owed no federal income tax in 2009  is being used to advance the argument that low- and moderate-income families do not pay sufficient taxes. Apart from the fact that most of those who make this argument also call for maintaining or increasing all of the tax cuts of recent years for people at the top of the income scale, the 51 percent figure, its significance, and its policy implications are widely misunderstood.
- The 51 percent figure is an anomaly that reflects the unique circumstances of 2009, when the recession greatly swelled the number of Americans with low incomes and when temporary tax cuts created by the 2009 Recovery Act — including the “Making Work Pay” tax credit and an exclusion from tax of the first $2,400 in unemployment benefits — were in effect. ... Both of these temporary tax measures have since expired. In a more typical year, 35 percent to 40 percent of households owe no federal income tax. In 2007, the figure was 37.9 percent. 
- The 51 percent figure covers only the federal income tax and ignores the substantial amounts of other federal taxes — especially the payroll tax — that many of these households pay. As a result, it greatly overstates the share of households that do not pay any federal taxes. Data from the Urban Institute-Brookings Tax Policy Center show only about 14 percent of households paid neither federal income tax nor payroll tax in 2009, despite the high unemployment and temporary tax cuts that marked that year.
- This percentage would be even lower if federal excise taxes on gasoline and other items were taken into account.
- Most of the people who pay neither federal income tax nor payroll taxes are low-income people who are elderly, unable to work due to a serious disability, or students, most of whom subsequently become taxpayers. (In a year like 2009, this group also includes a significant number of people who have been unemployed the entire year and cannot find work.)
- Moreover, low-income households as a whole do, in fact, pay federal taxes. Congressional Budget Office data show that the poorest fifth of households as a group paid an average of 4 percent of their incomes in federal taxes in 2007 (the latest year for which these data are available), not an insignificant amount given how modest these households’ incomes are — the poorest fifth of households had average income of $18,400 in 2007.  The next-to-the bottom fifth — those with incomes between $20,500 and $34,300 in 2007 — paid an average of 10 percent of their incomes in federal taxes.
- Even these figures understate low-income households’ total tax burden, because these households also pay substantial state and local taxes. Data from the Institute on Taxation and Economic Policy show that the poorest fifth of households paid a stunning 12.3 percent of their incomes in state and local taxes in 2010.
- When all federal, state, and local taxes are taken into account, the bottom fifth of households paid 16.3 percent of their incomes in taxes, on average, in 2010. The second-poorest fifth paid 20.7 percent.  ...
This analysis now explores these issues in more detail. ...
- The fact that most people who do not pay federal income tax in a given year do pay substantial amounts of other taxes, and also are net federal income taxpayers over time, belies the claim that households that don’t owe income tax will form bad policy judgments because they ostensibly “don’t have any skin in the game.”
- The federal tax system is progressive overall, but state and local tax systems are regressive and undo a significant share of that progressivity. There is nothing wrong with having one part of the overall tax system shield low- and moderate-income households, who pay substantial amounts of other taxes and who generally pay federal income tax as well in other years. ...
Friday, May 27, 2011
Jeff Frankel argues that the next managing director of the IMF should come from a developing country (I agree):
Who Should Lead the IMF?, by Jeffrey Frankel, Commentary, Project Syndicate: Every time the International Monetary Fund awaits a new managing director, critics complain that it is past time for the appointee to come from an emerging-market country. But whining won’t change the unjust 60-year-old tradition by which a European heads the IMF and an American leads the World Bank. Only if emerging-market countries unite behind a single candidate will they have a shot at securing the post.
Unfortunately, that is unlikely this time around, too, so the job will probably go to a European yet again. ... But the proposition that the ongoing sovereign-debt crisis on Europe’s periphery is a reason to appoint a European is wrong. ...
Europe has lost its implicit claim to be the best source of serious people with the experience needed to run the international monetary system. ...[continue reading]...
Paul Ryan is having a hard time coming to grips with the fact that his budget plan is a "political disaster":
Medicare and Mediscares, by Paul Krugman, Commentary, NY Times: Yes, Paul Ryan, the chairman of the House Budget Committee, is a sore loser. Why do you ask?
To be sure, Mr. Ryan had reason to be upset after Tuesday’s special election in New York’s 26th Congressional District. It’s a very conservative district.... Yet ... Kathy Hochul, a Democrat, took the seat, with a campaign focused squarely on Mr. Ryan’s plan to dismantle Medicare and replace it with a voucher system.
How did Ms. Hochul pull off this upset? The Wisconsin congressman blamed Democrats’ willingness to “shamelessly distort and demagogue the issue, trying to scare seniors to win an election,” and he predicted that by November of next year “the American people are going to know they’ve been lied to.” ...
But the reality is that the Ryan plan is turning into a political disaster for Republicans, not because the plan’s critics are lying about it, but because they’re describing it accurately. Take, for example, the statement that the Ryan plan would end Medicare as we know it. This may have Republicans screaming “Mediscare!” but it’s the absolute truth...
The new program might still be called Medicare ... but it wouldn’t be the same program. And ... the ... vouchers — which by 2030 would cover only about a third of seniors’ health costs — would leave many if not most older Americans unable to afford essential care.
If anyone is lying here, it’s Mr. Ryan himself, who has claimed that his plan would give seniors the same kind of coverage that members of Congress receive — an assertion that is completely false. ...
Still, are Democrats doing a bad thing by telling the truth about the Ryan plan? “If you demagogue entitlement reform,” says Mr. Ryan, “you’re hastening a debt crisis; you’re bringing about Medicare’s collapse.” Maybe he should have a word with his colleagues who greeted the modest, realistic cost control efforts in the Affordable Care Act with cries of “death panels.”
Anyway, the underlying premise ... is ... that the Ryan plan represents a serious effort to come to grip with America’s long-run fiscal problems. But... Once you remove the absurd assumptions — discretionary spending, including defense, falling to Calvin Coolidge levels, and huge tax cuts for corporations and the rich, with no loss in revenue? — it’s highly questionable whether it would reduce the deficit at all.
What the Ryan plan is, instead, is an attempt to snooker Americans into accepting a standard right-wing wish list under the guise of deficit reduction. And Americans, it seems, have seen through the deception. ...
What of Mr. Ryan’s hope that voters will realize that they’ve been lied to? Well, as I see it, that’s already happening. And it’s bad news for the G.O.P.
There's been some pushback against the statement I made in this post that the economy would *eventually* return to the trend rate of growth it has displayed since at least 1870.
This is a debate, in part, about whether the economy returns to trend after a shock, i.e. whether shocks are permanent or temporary. It is also a debate about the nature of the trend itself, i.e. whether the trend rate of economic growth is a smooth process that can be approximated by a trend line (with demand shocks responsible for most of the variation around the trend), or if the trend is a variable series subject to both permanent and temporary shocks (so that a substantial part of the variation in output over time comes from the trend itself, i.e. from supply-shocks -- an extreme version of this view asserts that all variation in output can be attributed to supply-shocks).
The point I wanted to make in the post was about the slow recovery, not trend reversion. Thus, I probably could have made it better if I had acknowledged the controversy over trend reversion, noted that if shocks are permanent we'll never, ever return to where we were, and then made the point that, "even if you believe, as I do, that the economy trend reverts, that doesn't mean it will happen fast or that policy has no role to play in helping the economy recover." That might have kept the focus on the slow recovery rather than the question about trend reversion (I intended the answer to the question in the title -- "Does This Ease Your Worries?" -- to be no, but not sure that came through as clearly as I intended).
But the question about trend reversion is important, and should not be swept aside. This is not the first time the topic of trend reversion has been debated in the blogosphere. Let me start with Greg Mankiw who thinks shocks are permanent rather than temporary (he uses the term stationarity instead of trend reversion -- stationarity is a broader concept but the difference is of little consequence for this discussion):
Thursday, May 26, 2011
- After the Greek Default - Martin Feldstein
- As the Economy Wavers, Is Washington Paying Attention? - NYT
- Milton Friedman: "We Curtsy to Marshall but ..." - Brad DeLong
- Obama, GOP unveil competing plans for job growth - Washington Post
- The death penalty and racial bias in the US - Vox EU
- New frontiers in debt ceiling shamelessness - Andrew Leonard
- How did small losses cause the Great Recession? - Matt Rognlie
- Now is not the time to raise interest rates - Adam Posen
- Visualizing Keynesian & Monetarist recessions - interfluidity
More on the state of the economy from Justin Wolfers:
The New GDP Data Is Bad. The Hidden Data Behind It Is Worse, by Justin Wolfers: This morning the Bureau of Economic Analysis (BEA) released its latest estimates of GDP. And there’s bad news, hidden in the details. Most analysts are focused on the fact that GDP growth in the first quarter of this year was unrevised, remaining at 1.8%. But they’re focused on the wrong number.
National accounting aficionados know that hidden beneath the headline number is an alternative estimate of GDP. This alternative is often called GDP(I), because it is based on income data, rather than spending data. And GDP(I) is actually a more reliable estimate. Unfortunately, this more accurate indicator tells us that GDP grew by only 1.2%. That’s bad news.
In fact, this alternative indicator says that GDP is still below its level from late 2006. ... Okun’s Law tells us growth needs to exceed 3% before the unemployment rate will decline.
Rebecca Wilder has more on the report.
New claims for unemployment insurance went back up last week, and historically claims at this level indicate job loss. Every time claims go up we hear about holidays falling at unusual times, seasonal adjustment problems, weather related problems -- there seems to be no shortage of reasons to dismiss weakness in labor markets. So I'll be interested to see what excuse policymakers come up with this time to ignore the unemployment crisis.
I just posted this at MoneyWatch:
Does This Ease Your Worries?: US GDP from 1870-2008: As you can see from this picture, historically we've always recovered from recessions. Eventually. But as you can also see from the Great Depression, recovery has not always been immediate -- the source of Keynes famous "In the long-run we're all dead."
I am confident that we'll return to trend this time as well, the question is how long it will take us to get there. At this point -- with the worrisome signs in recent data -- it's not looking to be anywhere near as fast as we'd like (source):
The graph only goes through 2008. Here's a picture of more recent data (note the dates Lucas uses at the top of the graph to date the recession):
Again, though we are beginning to grow at trend rate again and that's better than the free fall we were in, there is a lot of ground to make up. That requires a period of growth in excess of trend, and there's nothing to indicate that will happen anytime soon. [And it will be even slower if we begin cutting the deficit too soon.]
This looks about right to me (though I should note that in the past these forecasts have been overly optimistic):
And the recovery of employment is likely to be even slower. So we will get back to trend. But it will be awhile before we get there.
[Note: The first two graphs are from a talk Robert Lucas gave at the University of Washington (I found it here - click on the graph). I mostly agreed with the outline of the talk until the bottom of page 35 where Lucas asks in regard to the slow recovery, "Is this because government isn't spending enough," and on page 36 where he answers (based partly on page 25):
- Believe it is more accurate to say that the problem is government is
doing too much
- Again, I see analogies to the U.S. of the 1930s
- Likelihood of much higher taxes, focused on the “rich”
- Medical legislation that promises large increase in role of government
- Financial legislation that assigns vast, poorly-defined responsibilities
to Fed, others
- Are these conditions that foster a revival in business investment, consumer
I don't think that's right. It's not the lack of confidence fairy that is holding things back, it's lack of demand and that's the problem we need to fix.]
Update: Brad DeLong comments.
I Sorta Told You So, by Michael Froomkin: A few weeks ago I suggested that the political tea leaves looked kind of good for the Democrats, and it was time for some optimism. Mark Thoma, speaking no doubt for many, asked if I wasn’t maybe overly optimistic.
Well, I think I can claim a sorta told you so as it has been a surprisingly productive May for Democrats, culminating in last night’s win of a Jack Kemp’s old seat in upstate New York.
I haven't posted anything on methodology lately, so here's part of a much longer review of Frydman and Goldberg's Beyond Mechanical Markets to -- hopefully anyway -- keep the conversation alive:
Frydman and Goldberg's Beyond Mechanical Markets, by Robert Teitelman: How wrong were we? After several years of commentary on the causes of the financial crisis, we still struggle to plumb the full depths of the event. We have tossed up, like so much confetti, a variety of culprits, both human and systemic, many of which undoubtedly played some role and had some complicity: from executive compensation to lack of transparency to Alan Greenspan to Congress to credit default swaps. Journalists have been excoriated for missing what was apparently obvious; homeowners blamed; Wall Street pilloried; economists accused of intellectual dishonesty. We have chewed over questions of structure, size, capital, leverage, risk. We have put the Zeitgeist (blame the '60s!) in the chair, probed trade imbalances, decried the presence of greed and taken refuge in irrational impulses. And yet, there is a strong sense that we are just swirling pieces of a jigsaw puzzle across the table. There remains a feeling that perhaps we were wrong in some deeper way. ...
Beyond Mechanical Markets ... marshals a powerful argument that's bolstered by empirical reality: the eternal failures of mechanical forecasting; the sheer difficulty of beating the market with consistency; the unforeseeable ways that history unfolds. The belief in precise prediction resembles a kind of utopian project, a tower of economic Babel. At bottom, the pair makes a philosophical point that Knight, Keynes and Hayek (ironic, they comment, given that rational expectations came out of Chicago, where Hayek taught) offered many decades ago: the combination of men and events, particularly in these manmade constructs called markets, certainly improves our ability to price assets (and to forecast) over that of an individual or bureaucracy. But that inclusion of freely determined humanity ... conspires to erode any simple, mechanical or guaranteed relation between past and future. They quote Popper: "Quite apart from the fact that we do not know the future, the future is objectively not fixed. The future is open: objectively opened." At bottom, they're trying to thread the needle in the ancient free will versus determinism argument. ...
Will anything change? Not quickly. As they admit, the power of fully predetermined models may have actually increased because of the crisis. Economic pundits continue to speak with great certainty, and these issues are complex, nuanced and often hidden. Besides, the insurrection Frydman and Goldberg argue for is far greater than just an overthrow of rational expectations; it's an entire economic world view that claims the power to accurately predict, forecast and capture market reality. Generally, the classic response of an orthodoxy (or what Thomas Kuhn famously called a paradigm) is to ignore any threat, not only out of fear of what might be lost (tenure, prizes, careers), but out of incomprehension; to the predetermined model builders, Frydman and Goldberg's argument must literally seem like babble. ...
Wednesday, May 25, 2011
This study "shows 'informal taxation' in developing countries is far greater than suspected, supporting public works -- and adding a burden for the poor." I don't have much to say about it -- maybe you will? -- just found it interesting:
MIT research: Taxation without documentation, EurekAlert: Developing countries often lack the official government structure needed to collect taxes efficiently. This lack of systematic tax collection limits the ability of those countries to provide public services that aid growth, such as roads, sanitation and access to water.
But a new study co-authored by MIT economist Benjamin Olken reveals that developing countries actually have extensive informal systems in which citizens contribute money and labor to public-works projects. In effect, local governments in the developing world collect more taxes and produce more public goods than many outsiders have realized, a finding with implications for aid groups and governments trying to decide how to fund anti-poverty projects worldwide.
"It's really surprising just how many people are doing this, and how prevalent this is," says Olken, an associate professor in MIT's Department of Economics. "...It's supporting a large share of what's going on at the village level."
These informal taxes are generally regressive: While better-off citizens contribute more than the poor do in absolute terms, the percentage of income they pay is lower than the percentage of income that the poor pay. Because organizations such as World Bank sometimes recommend that governments use local co-financing of public-works projects, that means some programs intended to help curb poverty may actually place a larger relative tax burden on the poor.
"For aid groups, it's useful to know what the distributional implications will be, and compare that to other financing mechanisms," Olken says. "I hope that people will start thinking about these implications."...
Researchers have been aware that such practices existed; in Indonesia, these informal systems are called gotong royang, and in Kenya they are called harambee. But while the existing data Olken and Singhal used, such as the World Bank surveys, contain information about local life, that information had not previously been pieced together to create a picture of local taxation practices.
"We're not the first people to have noticed this phenomenon, but I think this is the first paper to treat it like a tax issue," Olken says. ...
Give me your money or your labor
Among the quirks of informal taxation in the developing world, Olken notes, is that "it's not formally enforced through the legal system." And yet, the size of people's contributions is not quite voluntary. About 84 percent of households in the survey data report that their levels of taxation are assigned by village or neighborhood leaders.
In many places, those payments can be made either by cash, or by contributing labor to the public-works projects. "The poorer people tend to contribute more in kind, and the richer people tend to do more in cash," Olken says.
As Olken notes, that option — paying by labor or cash — constitutes what economists call an "optimal screening mechanism," which adds to the knowledge local leaders have about their neighbors. "This kind of device, letting people do either in cash or in kind, can be a way of getting people … to reveal some information about themselves that you might otherwise not know."
Luttmer hopes future research will help scholars further understand how citizens make these kinds of decisions. ...
Built to Bust, by J. Bradford DeLong, Commentary, Project Syndicate: In the mid-2000’s, the United States had a construction boom. From 2003-2006, annual construction spending rose to a level well above its long-run trend. Thus, by the start of 2007, the US was, in essence, overbuilt: about $300 billion in excess of the long-run trend in construction spending.
When these buildings were constructed, they were expected to more than pay for themselves. But their profitability depended on two shaky foundations: a permanent fall in long-term risky real interest rates, and permanent optimism about real estate as an asset class. Both foundations collapsed.
By 2007, therefore, it was reasonable to expect that construction spending in the US would be depressed for some time to come. Since cumulative construction spending was $300 billion above trend, it would have to run $300 billion below trend over a number of years in order to return to balance.
So, in 2007, everyone expected a construction-led slowdown. And, starting that year, construction spending did indeed fall below trend. But we were expecting a minor decline: a fall in construction spending below trend of $150 billion a year for two years or $100 billion a year for three years or $75 billion a year for four years. Instead, spending fell $300 billion below trend in 2007 alone, and has remained depressed for four years. Moreover, there is no prospect of anything like a rapid return to normal levels. ...[continue reading]...
I have a new column:
The emphasis on growth above all else makes it harder for us to address the unemployment crisis.
Debt Arithmetic (Wonkish): The whole tone of current discussion about deficits is one of urgency: deficits must be brought down now now now or crisis looms. Where is this coming from? Not from the arithmetic..., even with substantial deficits, the pace of long-term budget worsening is very slow. If it’s a debt death spiral, it’s a slooooowww motion death spiral. ...
As I’ve often written, we’re in a strange state now where people who actually take textbook economics and simple arithmetic seriously are seen as dangerously radical and irresponsible, while people who believe in invisible bond vigilantes and confidence fairies, who claim to know what the market will want even though there’s no sign of that desire in current asset prices, are viewed as Very Serious.
Anyway, the arithmetic of debt is much less scary than you might think.
When it becomes more expensive for producers in China to sell their goods in the US due to tariffs, bi-lateral exchange rate changes, increasing wage costs in China, etc., production does not necessarily move to the US:
Antidumping in Action, by Bill C: Today's Washington Post provides another example of our dysfunctional "Antidumping" rules in action. This case is about antidumping tariffs imposed on furniture imports from China:But do tariffs work? In the case of bedroom furniture, they’ve clearly helped slow China’s export machine. In 2004, before tariffs went into force, China exported $1.2 billion worth of beds and such to the United States. The figure last year was just $691 million.Over the same period, however, imports of the same goods from Vietnam — where wages and other costs are even lower than in China — have surged, rising from $151 million to $931 million. The loss of jobs in America, meanwhile, only accelerated.
This may be a case where the differential tariff treatment between Chinese and Vietnamese furniture which resulted from the antidumping case induced "trade diversion" - i.e., an efficiency loss because the trade preferences result in imports coming from someplace other than the low cost producer. However, in this example, it could also be the case that comparative advantage shifted to Vietnam as China's labor costs have risen.
Furthermore:The only Americans getting more work as a result of the tariffs are Washington lawyers, who have been hired by both U.S. and Chinese companies. ...
Tuesday, May 24, 2011
I'm wondering how much agreement there will be on this:
Click on the question to answer.
This is what Republicans want to repeal:
More Solid Proof That Obamacare Is Working, by Rick Ungar: Recent data provided by the nation’s largest health insurance companies reveals that a provision of the Affordable Care Act – or Obamacare – is bringing big numbers of the uninsured into the health care insurance system. And they are precisely the uninsured that we want– the young people who tend not to get sick.
The provision of the law that permits young adults under 26, long the largest uninsured demographic in the country, to remain on their parents’ health insurance program resulted in at least 600,000 newly insured Americans during the first quarter of 2011. ...
The Health & Human Services Department had estimated that the changes in the law would result in about 1.2 million new enrollees in 2011. However,... it now looks as if that number will be exceeded. ...
Meanwhile, things continue to improve on the small business front where ... there has been a significant uptick in small businesses taking advantage of the tax benefits offered by the ACA to provide health insurance to employees... According to a Kaiser survey, there has been a 46% uptick in businesses with less than 10 employees offering health benefits as compared to last year. ... Further improving the outlook, the IRS has, in the past month, issued guidelines for small businesses which very much bolster the tax credits offered. ...
Health care reform is working, folks – and we have yet to get to the really big benefits which kick in come 2014. ... The time has arrived for even the most critical to take another look at health care reform. ...
How Will the Debt Limit “Game of Chicken” End?, by Bruce Bartlett: It appears that Republicans are determined to hold the nation’s credit rating hostage to their demand that federal spending be slashed before allowing the debt limit to rise. Rep. Paul Ryan, chairman of the House Budget Committee, is already warning Wall Street that a “technical default” is likely; that is, some bondholders may not get their interest payments precisely on schedule.
The Treasury continues to warn that a financial apocalypse will occur if the debt limit isn’t raised soon, but Republicans pooh-pooh such concerns as political grandstanding. They maintain that as long as the Treasury has sufficient cash flow to pay interest on the debt, then Treasury can simply put off paying its other bills for a while and default will be avoided. They point to a 1985 opinion by the U.S. General Accounting Office (now known as the Government Accountability Office), which says that the Treasury is not obligated to pay its bills in the order in which they are received and can prioritize payments. ...
Undoubtedly, there are bills that can be put off for a few weeks or longer. ... The problem is that we are getting close to the end of the fiscal year, which ends on Sept. 30. Since funds are normally apportioned on a quarterly basis, once we are in the fourth quarter of a fiscal year, OMB’s flexibility is greatly reduced...
Where OMB may have some important flexibility is with spending for some Department of Defense projects that have multi-year appropriations. For example, if DoD is building an aircraft carrier the funds need to be appropriated for the entire project even though it may take several fiscal years to complete. ... There ... may be $200 billion or so of appropriations that can be shifted into fiscal year 2012 that may provide Treasury with flexibility to manage its cash.
The real problem is Social Security. It’s unthinkable that Treasury would fail to make Social Security payments on schedule; too many of the elderly live from hand-to-mouth on them and there’s no way Republicans would risk their wrath. But Treasury is inevitably going to be forced at some point to choose between paying Social Security benefits or making interest payments and may face an untenable situation. ...
When Treasury faced this problem back in March 1996, it told Congress that it could not make Social Security payments unless Congress passed a law specifically exempting such payments from the debt limit. Congress acted instantly. It will undoubtedly be forced to do so again if the debt fight is protracted, which it probably will be.
House Speak John Boehner and Majority Leader Eric Cantor have repeatedly said that massive cuts in Medicare are their price for allowing a debt limit increase. But the only plan Republicans have on the table is one that would effectively abolish Medicare and replace it with a voucher intentionally designed to pay less than the per-beneficiary cost of Medicare, which is how its costs would be cut. However, there is little public support for the Republican plan and as Democrats make people more aware of it, support will undoubtedly fall further.
The Republican strategy seems to be to ram their Medicare abolition plan into law within the next two months – Treasury says the ‘drop-dead” date for raising the debt limit is August 2 – before people learn what they are really doing to Medicare. But President Obama clearly has some strong cards to play – especially the real threat that Social Security benefits may not be paid if Republicans insist that interest payments to bondholders take precedence. Budget expert Stan Collender thinks the Democrats are holding a stronger hand and that the Republicans will blink first. We shall see.
I'm not sure who will win the political battle over the debt ceiling, though the Republicans have made a mistake with Medicare giving Democrats the upper hand for the moment. But both both sides have deficit fever -- the Republicans have successfully shifted the political conversation -- and the economy and the unemployed are likely to lose in either case.
Monday, May 23, 2011
- New Economic Thinking on Greece - Perry Mehrling
- Inflation Expectations Overly Sensitive to Food, Energy - RTE
- Household Inflation Expectations and the Price of Oil - FRBSF
- Causation From Base Money To The Mult.: The QE2 Evidence - John Taylor
- Adventures in Balance Sheet Recessions - Modeled Behavior
- Valuing the Capital Assistance Program - Liberty Street
- External versus domestic debt in the euro crisis - Daniel Gros
Financial insecurity is widespread:
Nearly Half of Americans Are ‘Financially Fragile’, by Phil Izzo: Nearly half of Americans say that they definitely or probably couldn’t come up with $2,000 in 30 days, according to new research, raising concerns about the financial fragility of many households. ...
The survey asked a simple question, “If you were to face a $2,000 unexpected expense in the next month, how would you get the funds you need?” In the U.S., 24.9% of respondents reported being certainly able, 25.1% probably able, 22.2% probably unable and 27.9% certainly unable. The $2,000 figure “reflects the order of magnitude of the cost of an unanticipated major car repair, a large copayment on a medical expense, legal expenses, or a home repair,” the authors write. ...
Financial fragility isn’t limited to low-income groups. ... “The ... surprising finding is that a material fraction of seemingly ‘middle class’ Americans also judge themselves to be financially fragile...”
Lusardi, Schneider and Tufano also looked at the ways in which people coped with an unexpected expense. Most would use multiple methods ranging from dipping into savings, asking for help from family and friends, using loans or credits cards, taking out payday loans or selling possessions. “Taken together with those who would pawn their possessions, sell their home, or take out a payday loan, 25.7% of respondents ... would come up with the funds for an emergency by resorting to what might be seen as extreme measures,” the authors write. “Along with the 27.9% of respondents who report that they could certainly not cope with an emergency, this suggests that approximately 46.5% of all respondents are living very close to the financial edge.” ...
Is the ECB trying to provoke a financial crisis?:
When Austerity Fails, by Paul Krugman, Commentary, NY Times: ...In Europe,... the pain caucus has been in control for more than a year, insisting that sound money and balanced budgets are the answer to all problems. Underlying this insistence have been economic fantasies, in particular belief in the confidence fairy — that is, belief that slashing spending will actually create jobs, because fiscal austerity will improve private-sector confidence.
Unfortunately, the confidence fairy keeps refusing to make an appearance. And a dispute over how to handle inconvenient reality threatens to make Europe the flashpoint of a new financial crisis.
After the creation of the euro in 1999, European nations that had previously been considered risky, and that therefore faced limits on the amount they could borrow, began experiencing huge inflows of capital. After all, investors apparently thought, Greece/Portugal/Ireland/Spain were members of a European monetary union, so what could go wrong?
The answer to that question is now, of course, painfully apparent... What to do? European leaders offered emergency loans to nations in crisis, but only in exchange for promises to impose savage austerity programs, mainly consisting of huge spending cuts. ...
But ... Europe’s troubled debtor nations are, as we should have expected, suffering further economic decline thanks to those austerity programs, and confidence is plunging instead of rising. It’s now clear that Greece, Ireland and Portugal can’t and won’t repay their debts in full, although Spain might manage to tough it out.
Realistically, then, Europe needs to prepare for some kind of debt reduction, involving a combination of aid from stronger economies and “haircuts” imposed on private creditors... Realism, however, appears to be in short supply.
On one side, Germany is taking a hard line against anything resembling aid to its troubled neighbors, even though one important motivation for the current rescue program was an attempt to shield German banks from losses.
On the other side, the E.C.B. is acting as if it is determined to provoke a financial crisis. It has started to raise interest rates despite the terrible state of many European economies. And E.C.B. officials have been warning against any form of debt relief...
If Greek banks collapse, that might well force Greece out of the euro area — and it’s all too easy to see how it could start financial dominoes falling across much of Europe. So what is the E.C.B. thinking?
My guess is that it’s just not willing to face up to the failure of its fantasies. And if this sounds incredibly foolish, well, who ever said that wisdom rules the world?
Is heavy taxation bad for the economy?, by Lane Kenworthy: Taxes reduce the payoff to entrepreneurship, investment, and work effort. If taxation is too heavy, these disincentives will weaken a nation’s economy. But at what point does the harmful impact kick in? And how large is it?
Half a century ago, in 1960, taxes totaled about a quarter of GDP in Denmark, Sweden, and the United States. The tax take then began to rise in Denmark and Sweden, reaching half of GDP by the mid-1980s, where it has remained. In America it has barely budged, hovering between 25% and 30% of GDP throughout the past five decades.
Has heavy taxation hurt the Danish and Swedish economies? If so, how much?
His detailed answer to these questions is here. The bottom line is:
At what point does the harmful impact of taxes on the economy kick in? And how large is it? The Danish and Swedish experiences over the past generation pose a challenge for those who believe the answers to these two questions are “somewhere below 50% of GDP” and “large.” It’s a challenge that in my view has yet to be met.
The War on Inflation, by Tim Duy: During World War II, advertisements warning against inflationary behavior were common. One example:
This is a simple description of a wage-price spiral, something that was a real threat at the time as massive resources were being directed at the war effort. Some members of the Federal Reserve appear to believe this threat is as real today as it was then. Mark Thoma directs us to the Wall Street Journal, where Kathleen Madigan reads the FOMC minutes and concludes:
Windfall for commodity producers, no problem. Bigger paychecks for U.S. workers, now wait a minute…
That’s one reading of the minutes from the Federal Reserve‘s April 26-27 Federal Open Market Committee. The strategy makes sense from an economics’ standpoint; but it carries risks on both the political and growth fronts.
The extreme end of these fears can be found in Kansas City Federal Reserve President Thomas Hoenig’s recent Washington Post interview:
WP: One place where there’s not any inflation is in wages. Can you really have an inflation problem without wages rising?
TH: Not initially. But people are losing real purchasing power, and that changes how they’re going to negotiate. People want this lost purchasing power back in time. In negotiating, they’ll say, “Prices have been rising, we deserve more.” We’re already seeing it in some of the surveys that we run. Businesses are telling us, “Yes, we had a pay freeze a year and a half ago, but we’re doing some catch up now. We want to make sure we keep our good people.”
Any significant wage gains in the current environment appear to be sector specific – it certainly does not appear in the aggregate data. And note Hoenig’s distress that some firms are looking to play catch-up. I think you could interpret this as Hoenig desiring to see a downward level shift in trend wages. In other words, Hoenig expects the recession should result in a permanently lower level of standard of living than would have been the case otherwise.
For the moment, however, calmer minds prevail, pushing the Fed to delay tightening. From the minutes:
In their discussion of monetary policy, some participants expressed the view that in the context of increased inflation risks and roughly balanced risks to economic growth, the Committee would need to be prepared to begin taking steps toward less-accommodative policy. A few of these participants thought that economic conditions might warrant action to raise the federal funds rate target or to sell assets in the SOMA portfolio later this year, but noted that even with such steps, monetary policy would remain accommodative for some time to come. However, some participants indicated that underlying inflation remained subdued; that longer-term inflation expectations were likely to remain anchored, partly because modest changes in labor costs would constrain inflation trends; and that given the downside risks to economic growth, an early exit could unnecessarily damp the ongoing economic recovery.
If unit labor cost growth remains constrained, the Fed will tend to delay tightening, as the overriding economic reality is that simply described by New York Federal Reserve President William Dudley:
...the recovery remains moderate and we still have a considerable way to go to meet the Fed's dual mandate of full employment and price stability.
That said, it is worth considering that even the Fed doves probably have something of an itchy trigger finger when it comes to tightening. They are willing to stay the course given the lack of pass-through to wages, but one could imagine that changing quickly with the slightest whiff of rising unit labor costs. Which brings to mind an interesting topic. Way back in 2009, spencer at Angry Bear noted that labor payments as a share of output have been falling since the early 1980’s. Can this situation ever be reversed if the Fed steps on the brakes every time workers get a little too confident for their own good?
Mark concludes his review of the Madigan piece with:
We are much too worried about a wage-price inflation cycle breaking out and causing problems. If the Fed is too trigger happy, it could snuff out the recovery it is hoping to bring about.
The Fed is much, much better at slowing the economy down than it is at speeding it up. Thus, if the Feds is going to make an error, it should be biased toward the error it can fix the easiest. That is, in the face of uncertainty the Fed should be biased toward policy that is too loose rather than policy that is too tight -- a policy that is too loose is easier to correct if it's wrong. Unfortunately, I don't think the Fed sees it this way.
No, the Fed doesn’t see it this way. I think I know exactly how the Fed would respond to Mark: You think the 1980’s were easy? The expansion of the balance sheet has given rise to too many fears of the 1970’s within the Fed, and those fears will drive the Fed to try to stay far ahead of the inflation curve. That argues for a premature tightening. This year? Still seems difficult to imagine given the state of the economy. But next year seems reasonable, as further strengthening of the labor market will enhance fears that inflationary wage gains are just around the corner.
Finally, for those in Congress chastising the Fed for inflation, note point 4 in the advertisement above:
Support higher taxes…pay them willingly.
I don't say anything particularly novel, it's just another futile attempt to prevent us from repeating the errors of the past.
Sunday, May 22, 2011
Brad DeLong is in Phoenix delivering bad news about the prospects for the economy (I cut quite a bit from the original, so you may want to read the full post):
The Economic Outlook as of May 2011: Yes, This Is Called the Dismal Science. Why Do You Ask?, by Brad Delong: ...This is a bad time to be an economist. ... Four years ago we economists were writing learned papers about the "Great Moderation": about how it looked as though the governing institutions of the world economy had finally learned how to control and moderate if not completely eliminate the business cycle...
We have been seeing these ... business cycles fairly regularly since at least 1825. And we have been claiming that we have it licked fairly regularly since 1825 as well. ... But did we learn? No. We did it again.
In the 2000s,... we were happy to take credit for superior macroeconomic management that had caused the "Great Moderation" and finally tamed the business cycle. ...
And now we are sitting here in the middle of the greatest macroeconomic catastrophe since the Great Depression itself, and we economists are all scratching our heads and saying: "what happened?" ...
We economists ... had worries about Wall Street. But our worries were not about systemic risk arising from subprime.
Some of our worries were about Glass-Steagall repeal. Others were about Fannie Mae. ... But... It simply was not the case in the 2000s that those post-Glass-Steagall investment banks with large commercial banking deposits were in any sense engaged in riskier behavior than those that had only hot money liabilities. ... And Fannie Mae was not the big problem. ...
As the foundations of this crisis were laid, there were always arguments against massive regulatory intervention to deal with it. Those arguments always sounded convincing. ... The first argument was: "well it is their money." Countrywide probably knows what it is doing. ...
Second, Alan Greenspan really is a Randite, really is a follower of Ayn Rand. He really does believe that it is a bad thing to infringe your freedom and protect you from yourself. He really is the kind of person who thinks that it is bad for you if the government keeps you from making stupid investments that cost you all your money. ...
The third argument was: "who is going to get hurt?" Investors in Countrywide, but they are rich and risk-loving and if they want to build the rest of us houses we should probably say "thank you." ... So why should the government step in and keep people from getting these deals if Countrywide wants to provide them?
Fourth, and most important, it is a big political loser for regulators to go before Congress. The Democratic members would whack them: why aren’t you letting my constituents buy the houses they want to buy? The Republican members would whack them: why aren’t you letting my contributors make the loans they want to make?" ...
Fifth, there was the fact that the old framework for lending locked lots of people out of the real estate asset class, and ... that we should be trying to broaden the access of the poorer half of Americans to high-return investment vehicles.
Most important, however, was the overall belief on the part of the regulators that they could handle it. Subprime was a small asset class in the global economy. The Federal Reserve was powerful. Whatever stupid things financial markets did, the Federal Reserve could clean up the mess afterwards...
Even in the spring of 2008, when I was a worrywort, the general line was that all the losses in subprime mortgages had a maximum value of $500 billion in a global economy with an $80 trillion asset base. A loss of $500 billion out of a total of $80 trillion is not, should not be the kind of thing that could set the whole financial system on fire. ...
So we had the crisis, and the collapse. We had the subprime losses. We had the general panic as everybody feared that the large highly-leveraged money-center banks' debt was no good because they held a lot of subprime and their subprime losses had eaten through their capital. And we had a bigger panic as people feared other things that might go wrong--the same financial establishment that had no clue what risks they were running in subprime probably had other points of vulnerability as well. All confidence that the highly-trained and highly-compensated risk management professionals on Wall Street knew what they were doing evaporated.
It was the standard story. It was the story that we have seen over and over again since 1825. ...
Now, this downturn is not nearly as bad as it could have been. Kevin O'Rourke and Barry Eichengreen point out that the 2008 shock to the world economy was bigger than the 1929 shock. ... The nonfarm unemployment rate didn’t get anywhere near the 28% of the great depression, it didn’t get anywhere near the 16 or 17% that Allan Blinder and Mark Zandi calculate would have been the peak unemployment rate had the government followed ineffective and counterproductive Herbert Hoover policies.
I think that if you could go to Tim Geithner get him to tell you what he thinks, he would say that a 10% unemployment peak is not a good thing but it is not 17%, and it is definitely not 28%. He would say that he and his peers have done a lot better job at handling this than their predecessors 80 years ago did handling their problem.
And he would be right.
But now we have a stubbornly persistent slump in the economy..., with very little signs of closing the gap between the productive capacity of the American economy and its current level of production. We have a Washington DC that is dysfunctional--out of ammunition to take any effective additional steps to boost the economy. There is now substantial fear of inflation--even though there are no signs of inflation gathering anywhere... There is now substantial fear of crowding out--that boosting US government spending or cutting taxes to get more money into the hands of the consumers would discourage private investment even though there are no signs of crowding... It is a fact that a bunch of us--including me--think that there really should be signs of crowding out right now--that financial markets should be scared of the fiscal future of America--but they are not. And there is the problem that Washington DC has degenerated into pure Dingbat Kabuki theater on lots of levels. ...
But the biggest problem generated by this right now is that Washington DC's focus on the Dingbat Kabuki theater of the long-run fiscal stability of America is keeping it from taking any effective steps to use government to boost employment and output now. And things aren't helped by the fact that the way the rescue of the banking system was carried out convinced a lot of people that stimulus policies exist to enrich the top 1% of Americans at the expense of everybody else.
This means that our hopes for economic recovery right now rest not on any government boost to aggregate demand--whether through fiscal, monetary, or banking policy--but rather on the natural equilibrium-restoring full-employment achieving market forces of the economy, especially in the labor market.
And so we are in trouble: right now there are no signs that the economy is crawling up back to anything like full employment on its own. ... The economy will grow, but we won’t close the gap between actual and potential output. We will not for a long time to come get back to the 62 to 64% of the adult population having jobs that we thought was normal back in the decades of the 2000.
And that is the depressing overall macroeconomic picture. I wish I could paint a better one. ...
This is based on the work of a new colleague, Alfredo Burlando:
What happens when the power goes out? Using blackouts to help understand the determinants of infant health, by Jed Friedman: Low birth weight, usually defined as less than 2500 grams at birth, is an important determinant of infant mortality. It is also significantly associated with adverse outcomes well into adulthood such as reduced school attainment and lower earnings. Maternal nutrition is a key determinant of low birth weight...
But what about the down-side risk of temporary income fluctuations - do short-lived negative income shocks have equally significant effects on low birth weight? Households may be able to prioritize the consumption and care of pregnant mothers during adverse shocks, but of course households must know about the pregnancy in the first place. This knowledge doesn’t usually manifest until after the first 6-8 weeks of pregnancy and those initial weeks of pregnancy are also critical ones to ensure the health of the fetus. One recent study by Alfredo Burlando focuses on this critical window of time when households do not yet have sufficient knowledge and thus do not sufficiently protect against the changing economic circumstances.
In May of 2008, the undersea cable that brings power to the Tanzanian island of Zanzibar was ruptured, plunging the island into a blackout that lasted 4 weeks. As a result, households employed in sectors such as manufacturing or tourism that relied on electricity experienced income declines while households in more traditional sectors such as farming did not suffer noticeable shortfalls. Fortunately any income decline was short-lived – the power was only out for 4 weeks – and in a matter of months income in all affected sectors had recovered to previous levels. Despite the brief duration of this income shock, could there have been any long-lasting consequences?
Well it turns out that infants born 7 to 9 months after the blackout were significantly smaller – an average of 75 grams smaller – than infants born within 6 months of the start of blackout or beyond 9 months after its end. This reduction translates into an 11% increase in the probability of a low weight birth. Burlando proposes reduced nutritional intake and heightened maternal stress, brought on by the blackout induced income shock, as the main transmission mechanism for lower birth weights. ...
The findings suggest that women who were known to be pregnant at the time of the black out, i.e. those who were visibly pregnant, received insurance from the shock where as women who did not realize they were yet pregnant (or who had conceived during the blackout) did not receive the same protection.
For me, the take away messages from this study are threefold:
- These findings highlight the importance of behavioral responses and that people in the face of a crisis can be resilient when they are armed with relevant knowledge – households with women who knew they were pregnant apparently prioritized maternal nutrition. It also underscores the obvious point that any protective program that targets pregnant women faces the challenge of improving the informational barriers that prevent early pregnancy awareness.
- The study also highlights the long-lasting effects of even very brief income shocks if (a) they occur at critical moments in fetal development and (b) households cannot fully smooth consumption or otherwise insure themselves from temporary declines. ...
Saturday, May 21, 2011
Christina Romer is frustrated with discussions among policymakers about the value of the dollar:
Needed: Plain Talk About the Dollar, by Christina Romer, Commentary, NY Times: At a recent news conference, Ben S. Bernanke ... was asked about the falling dollar. He parried the question, saying that the Treasury secretary was the government’s spokesman on the exchange rate — and, of course, that the United States favors a strong dollar.
Listening..., I flashed back to one of my first experiences as an adviser to Barack Obama. In November 2008, I was sharing a cab ... with Larry Summers... To help prepare me for the interviews and the hearings to come, Larry graciously asked me questions and critiqued my answers. When he asked about the exchange rate for the dollar, I began: “The exchange rate is a price much like any other price, and is determined by market forces.”
“Wrong!” Larry boomed. “The exchange rate is the purview of the Treasury. The United States is in favor of a strong dollar.” ... That strikes me as a shame. Perhaps if government officials could talk about the exchange rate forthrightly, there would be more ... rational policy discussions.
Such discussions would start with some basic economics..., there is no universal good or bad direction for the dollar to move. ...
Strangely, every politician seems to understand that [in the current situation] it would be desirable for the dollar to weaken against ... the Chinese renminbi. ... The United States would export more and grow faster... But in the very next breath, the same members of Congress shout about the importance of a strong dollar. If a decline in its value relative to the renminbi would be beneficial, a fall relative to the currency of many countries would help even more...
To say this openly risks being branded not just an extremist but possibly un-American. Perhaps it is time for a more adult conversation. ...
Interesting to think about this in the context of markets as aggregators of information:
Sharing Information Corrupts Wisdom of Crowds, by Brandon Keim, Wired: ...In a new study of crowd wisdom — the statistical phenomenon by which individual biases cancel each other out, distilling hundreds or thousands of individual guesses into uncannily accurate average answers — researchers told test participants about their peers’ guesses. As a result, their group insight went awry.
“Although groups are initially ‘wise,’ knowledge about estimates of others ... undermines” collective wisdom, wrote researchers led by mathematician Jan Lorenz and sociologist Heiko Rahut of Switzerland’s ETH Zurich... “Even mild social influence can undermine the wisdom of crowd effect.”
The effect ... has been described for decades... Lorenz and Rahut’s experiment ... recruited 144 students from ETH Zurich, sitting them in isolated cubicles and asking them to guess Switzerland’s population density, the length of its border with Italy, the number of new immigrants to Zurich and how many crimes were committed in 2006.
After answering, test subjects were given a small monetary reward based on their answer’s accuracy, then asked again. This proceeded for four more rounds; and while some students didn’t learn what their peers guessed, others were told.
As testing progressed, the average answers of independent test subjects became more accurate... Socially influenced test subjects, however, actually became less accurate.
The researchers attributed this to three effects. The first they called “social influence”: Opinions became less diverse. The second effect was “range reduction”: In mathematical terms, correct answers became clustered at the group’s edges. Exacerbating it all was the “confidence effect,” in which students became more certain about their guesses. ...
Lorenz and Rahut ... think this problem could be intensified in markets and politics — systems that rely on collective assessment. “Opinion polls and the mass media largely promote information feedback and therefore trigger convergence of how we judge the facts,” they wrote. The wisdom of crowds is valuable, but used improperly it “creates overconfidence in possibly false beliefs.”
In the experiment, people are giving honest answers, and they aren't actively trying to move collective opinion one way or another. In the political realm, that's not the case, and the deterioration of collective wisdom could be even worse.