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Wednesday, November 30, 2011

Did the Fed Go Far Enough?

More comments at the NY Times Room for Debate on today's announcement that monetary authorities are taking steps to increase the availability of dollar loans to foreign banks in the hopes of avoiding a Lehman-like crisis. The question we were asked is:

Should the Fed be more aggressive in dealing with Europe’s financial crisis? What are the risks of its involvement?

Here are our responses:

[Additional comments here.]

    Posted by on Wednesday, November 30, 2011 at 04:29 PM in Economics, Financial System, International Finance, Monetary Policy | Permalink  Comments (15)


    DeLong: The 70% Solution

    Busy morning -- quick one between meetings:

    The 70% Solution, by J. Bradford DeLong, Commentary, Project Syndicate: Via a circuitous Internet chain – Paul Krugman of Princeton University quoting Mark Thoma of the University of Oregon reading the Journal of Economic Perspectives – I got a copy of an article written by Emmanuel Saez, whose office is 50 feet from mine, on the same corridor, and the Nobel laureate economist Peter Diamond. Saez and Diamond argue that the right marginal tax rate for North Atlantic societies to impose on their richest citizens is 70%.

    It is an arresting assertion, given the tax-cut mania that has prevailed in these societies for the past 30 years, but Diamond and Saez’s logic is clear. The superrich command and control so many resources that they are effectively satiated: increasing or decreasing how much wealth they have has no effect on their happiness. So, no matter how large a weight we place on their happiness relative to the happiness of others – whether we regard them as praiseworthy captains of industry who merit their high positions, or as parasitic thieves – we simply cannot do anything to affect it by raising or lowering their tax rates.

    The unavoidable implication of this argument is that when we calculate what the tax rate for the superrich will be, we should not consider the effect of changing their tax rate on their happiness, for we know that it is zero. Rather, the key question must be the effect of changing their tax rate on the well-being of the rest of us.

    From this simple chain of logic follows the conclusion that we have a moral obligation to tax our superrich at the peak of the Laffer Curve... [continue reading]...

      Posted by on Wednesday, November 30, 2011 at 09:55 AM in Budget Deficit, Economics, Equity, Taxes | Permalink  Comments (82)


      The Fed's Move to Help Europe

      I did a short Q&A for CBS News on the news that central banks around the world are taking steps to make it cheaper for foreign banks to borrow dollars:

      Will the Fed's move to help Europe hurt the U.S.?

        Posted by on Wednesday, November 30, 2011 at 09:55 AM in Economics, Financial System, International Finance | Permalink  Comments (28)


        Self-Referral Increases Medical Costs

        This isn't a surprise -- we've known about this problem for a long time -- the question is why we haven't done something about it:

        Self-referral leads to more negative exams for patients, EurekAlert: Physicians who have a financial interest in imaging equipment are more likely to refer their patients for potentially unnecessary imaging exams...
        "Self-referral," whereby a non-radiologist physician orders imaging exams and directs patients to imaging services in which that physician has a financial interest, is a concerning trend in medicine and a significant driver of healthcare costs. "Self-referred medical imaging has been shown to be an important contributor to escalating medical costs," said Ben E. Paxton, M.D., radiology resident at Duke University Medical Center in Durham, N.C. ...
        Between 2000 and 2005, ownership or leasing of MRI equipment by non-radiologists grew by 254 percent, compared to 83 percent among radiologists. The U.S. Government Accountability Office (GAO) reported that the proportion of non-radiologists billing for in-office imaging more than doubled from 2000 to 2006. During that same time period, private office imaging utilization rates by non-radiologists who control patient referral grew by 71 percent.
        For the study, the researchers set out to determine if utilization of lumbar spine MRI differs, depending on the financial interest of the physician ordering the exam. They reviewed 500 consecutive diagnostic lumbar spine MRI exams ordered by two orthopedic physician groups serving the same community. The first group had financial interest in the MRI equipment used (FI group), and the second had no financial interest in the equipment (NFI group). ...
        "Orthopedic surgeons with financial interest in the equipment had a much higher rate of negative lumbar spine MRIs," Dr. Paxton said. "In addition, they were much more likely to order MRI exams on younger patients. This suggests that there is a different clinical threshold for ordering MRI exams in the setting of financial incentivization."
        Dr. Paxton added that increased imaging utilization due to self-referral may not yield medically useful information and may place the patient at risk for potential adverse consequences.
        "It is important for patients to be aware of the problem of self-referral and to understand the conflict of interest that exists when their doctor orders an imaging exam and then collects money on that imaging exam," he said.

          Posted by on Wednesday, November 30, 2011 at 12:42 AM in Economics, Health Care, Market Failure | Permalink  Comments (18)


          Links for 2011-11-30

            Posted by on Wednesday, November 30, 2011 at 12:06 AM in Economics, Links | Permalink  Comments (25)


            Tuesday, November 29, 2011

            More Europessimism

            One more from Tim Duy:

            More Europessimism, by Tim Duy: I hate to beat a dead horse, but the situation in Europe is dire, and two issues crossing my desk this afternoon only add to my angst. First, Karl Smith at Modeled Behavior sees that the ECB is losing all control of monetary policy:

            Based on entirely different indicators this looks to be the point where the ECB’s control over Eurozone monetary policy began to come unmoored.

            At the crux of the problem seems to be the inability to arbitrage away differences in funding costs between institutions and countries because of malfunctioning in the European Repo market.

            This malfunctioning appears to be down right mechanical with trades regularly not settling on time, collateral not being delivered, awkward interventions by local regulatory agencies and a host of other deep, deep problems.

            Very, very scary - remember that the ECB is the last great hope. But it can't be effective if the European banking system collapses, which looks more likely each day. A signal that the related rush to cash is severe is that the ECB is no longer able to fully sterilize its asset purchases. Stories at the Wall Street Journal and the Financial Times. Recognize the risk that even when the ECB switches to quantitative easing, the resulting cash just sits unused in bank reserves. Sound familiar? Europe has liquidity trap written all over it.

            A second point comes from Edward Harrison, who spots a story which claims France and Germany are looking to impose a strict zero (!) percent budget deficit target by 2016. Harrison's take:

            Note that an adjustment to balanced budgets throughout the euro zone requires either an exactly equivalent offset in private sector savings down or in the export sector up . So implicitly, Germany and France are calling for a massive private sector dissaving or a large reduction in the external value of the euro area currency. I see this as a pipe dream. It tells you that bad things are definitely going to happen in Euroland.

            This is my fear - that Germany and France continue to press ahead with the "austerity first" plan, with the ECB cheering them along. Unequivocally, this is not going to work. It hasn't worked yet, and there is zero reason to believe that it will in the future. All Europe is doing is setting itself up for greater speculative attacks as each new turn toward austerity pushes the deficit targets further out of reach.

            We are setting the stage for a massive counter-example to the US reaction to its financial crisis. The US allowed the fiscal deficit to swell while force-feeding capital to the banking sector (not enough, but that is another story). Europe is pushing for massive fiscal austerity and, to prevent additional fiscal borrowing, pretending that the banks can survive via "liability management exercises." If you think the US would have been better off shrinking the deficit while letting the banking system collapse, it is time for you to go long on Europe.

            For the rest of us, enjoy the policy-driven market upturns while they last.

              Posted by on Tuesday, November 29, 2011 at 03:42 PM in Economics, Fed Watch, International Finance | Permalink  Comments (44)


              Another European "Solution" Coming?

              Tim Duy:

              Another European "Solution" Coming?, by Tim Duy: Financial market participants continue to digest what is viewed as generally good news coming out of Europe. Importantly, European policymakers appear to be aggressively moving toward what they see as an overarching response to the crisis. Edward Harrison at Credit Writedowns offers a possible three pillar policy path that has emerged in recent days. My summary:

              1. An IMF aid package for Italy and likely Spain, financed by the ECB.
              2. A credible, binding agreement for EU fiscal oversight. In return, the ECB would intervene more aggressively to support sovereign debt.
              3. A path to Eurobonds, assuming point 2 above.

              Despite these optimistic signals, there remains room for plenty of disappointment in the days ahead. Notably, Reuters reports that German Chancellor Angela Merkel will not back Eurobonds or additional ECB intervention. This may be just internal posturing, but does speak to the high degree of internal resistance toward greater EU fiscal integration. Moreover, we have seen in the past the internal bickering yields responses that seem bold at first but quickly fail to stabilize the crisis.

              And, when assessing the economic impact, what you don't see is as important as what you do see. What I don't see here is:

              1. A path to true fiscal integration, which would imply direct transfers from relatively rich to relatively poor member states.
              2. Similarly, a new path toward internal rebalancing. A commitment to stronger fiscal oversight implies continued pursuit of rebalancing via deflation in troubled economies. Moreover, as Paul Krugman notes, this will be attempted in the context of low inflation, which only exacerbates and extends the pain of adjustment. This path only ensures deeper recession.
              3. A coordinated, continent-wide banking sector recapitalization. Note that Moody's just placed European bank debt under review. Downgrades are almost inevitable at this point.
              4. An open door for stimulative policies to offset the demand contraction currently underway.

              These are not small details. My fear is that European leaders think they can avoid these issues by enshrining fiscal austerity which, when combined with ECB intervention, will end the sovereign debt crisis. Confidence fairies will then fly to the rescue and fix the rest of the problems. To be sure, I think getting the sovereign debt crisis under control is critically important, but that alone will not stop the recession from deepening.

              For those still expecting a mild European recession, I offer up Bloomberg's chart of the day - shipping rates from China to the US and Europe. The text:

              Slumping shipping costs show exports to Europe from China are “falling off a cliff” as the euro- region crisis chokes off consumer spending, according to RS Platou Markets AS, a unit of Norway’s biggest shipbroking group.

              The CHART OF THE DAY shows how the cost of hauling goods to Europe from China is falling faster than rates for deliveries to the U.S. The price for shipments to Europe is down 39 percent to $511 per twenty-foot box since Aug. 31, according to figures from Clarkson Securities Ltd., a unit of the world’s largest shipbroker. That’s more than double the 18 percent slide in the cost to the U.S. West Coast, measured in 40-foot units.

              Not surprisingly, the appreciation of the renminbi has come to a standstill as Chinese authorities act to support exporters.

              Finally, note that Portuguese bond yields are pushing higher in recent days, up 15bp to 13.60% today, above the highs of last July. It looks like market participants expect the next bailout will require some private sector involvement. Unsurprisingly, austerity isn't working. From Market News International:

              The deterioration of Europe's debt crisis over the past months is hitting Portugal's banking sector and making it more difficult for the country to execute its fiscal adjustment program, the Bank of Portugal said in its financial stability report published Tuesday.

              The central bank noted that in the past six months, the "materialization of risks" to financial stability have intensified "substantially," both internationally and inside Portugal. "This aggravation of economic and financial conditions has resulted in a deterioration of profitability in the Portuguese banking system," it added. "In the short term, this trend towards aggravation of risks is likely to persist."

              The bank warned that the situation "is increasing the challenges confronted by the Portuguese economy, as well as by the Portuguese financial system, given that the adjustment of economic imbalances must now be carried out in a much more adverse context, particularly as regards the expected trajectory of external demand."

              Bottom Line: European policymakers understand they need faster and bolder action. But the situation has many, many moving pieces. It is increasingly difficult to pull the brakes on this runaway train.

                Posted by on Tuesday, November 29, 2011 at 12:15 PM in Economics, Fed Watch, International Finance | Permalink  Comments (9)


                How to Avoid Public Anger over Bank Bailouts

                How to avoid public anger over bank bailouts, e.g. the recent uproar over the report from Bloomberg that too big to fail banks made $13 billion on loans from the discount window:

                Better than a Bank Bailout: A Federal Lottery

                (I'm not sure if I'm serious about this or not, the point is that we need to focus policy on people, not banks.)

                  Posted by on Tuesday, November 29, 2011 at 01:08 AM in Economics, Financial System, Fiscal Policy, Fiscal Times, Housing, Politics | Permalink  Comments (36)


                  Time for the Fed to Take Over the ECB’s Job?

                  Dean Baker says the Fed should step in if the ECB refuses to act as a lender of last resort (Antonio Fatas is also frustrated with the ECB's failure to act):

                  Time for the Fed to Take Over the European Central Bank’s Job, by Dean Baker, Al Jazeera English: The European Central Bank (ECB) has been working hard to convince the world that it is not competent to act as central bank. One of the main responsibilities of a central bank is to act as the lender of last resort in a crisis. The ECB is insisting that it will not fill this role. It ... would sooner see the eurozone collapse than risk inflation exceeding its 2.0 percent target.
                  It would be bad enough if the ECB’s incompetence just put Europe’s economy at risk. ... However, it is also likely that the financial panic following the collapse of the euro will lead to the same sort of financial freeze-up that we saw following the collapse of Lehman. In this case,... we will be seeing unemployment possibly rising into a 14-15 percent range. This would be a really serious disaster.
                  Fortunately, the Fed has the tools needed to prevent this sort of meltdown. It can simply take the steps that the ECB has failed to do. First and most importantly it has to guarantee the sovereign debt of eurozone countries. ... This doesn’t mean giving the eurozone countries a blank check. The Fed can adjust the interest rate at which it guarantees debt depending on the extent to which countries reform their fiscal systems. ... The difference between a 2.0 percent interest rate and 7.0 percent interest would be a powerful incentive to eliminate corruption and waste. ...
                  Of course this sort of intervention will look horrible from the standpoint of the eurozone countries. It will appear as though they cannot be trusted to manage their own central bank and deal with their own economic affairs.
                  Unfortunately, this is the case. They have entrusted the continent’s most important economic institution to a group of ideological zealots who are infatuated by the sight of low inflation rates...
                  Perhaps the Europeans will respond... But if they can’t rise to the task, we should not allow the ECB ideologues to wreak havoc on the lives of tens of millions of innocent people in Europe, the developing world, and here in the United States.

                  While the Fed is solving the world's problems, it might also think about the high rates of unemployment that already exist in the US, and how easing policy at home could help.

                    Posted by on Tuesday, November 29, 2011 at 12:42 AM in Economics, International Finance, Monetary Policy | Permalink  Comments (53)


                    Republicans Don't Mind a Payroll Tax Increase

                    John Kyl doesn't mind some types of tax increases:

                    Saturday’s Jon Kyl vs. Sunday’s Jon Kyl, by Steve Benen: On Saturday, Senate Minority Whip Jon Kyl (R-Ariz.), along with his five other GOP colleagues from the super-committee, wrote a Washington Post op-ed on the debt-reduction process. Kyl’s point wasn’t subtle: he and other Republicans just can’t accept tax increases, at least for the foreseeable future.

                    Kyl called tax increases “the wrong medicine for our ailing economy,” and said the mere possibility of tax increases has “put a wet blanket over job creation and economic recovery.”

                    That was Saturday. Just 24 hours later, Kyl told a national television audience he’s comfortable with a payroll tax increase on all American workers on 2012. ......

                    Senate Democrats are moving forward with its plan to extend the payroll tax cut, with a vote perhaps coming as early as this week. Republicans will filibuster the proposal, though Sen. Pat Toomey (R-Pa.) told ABC yesterday that “probably some package” that includes a payroll extension “might very well pass.”

                    The reason for the objection, as Steve Benen points out, is that the payroll tax cut would be paid for by increasing taxes on the very wealthy. Can't have that. But unlike their reaction to other types of proposed tax increases, Republicans are not insisting that spending be cut to protect workers from a tax increase. Wonder why?

                      Posted by on Tuesday, November 29, 2011 at 12:33 AM in Economics, Politics, Taxes | Permalink  Comments (107)


                      Links for 2011-11-29

                        Posted by on Tuesday, November 29, 2011 at 12:06 AM in Economics, Links | Permalink  Comments (36)


                        Monday, November 28, 2011

                        Can the US Decouple From the Eurozone?

                        Tim Duy:

                        Can the US Decouple From the Eurozone?, by Tim Duy: The OECD cut forecasts for 2012. Via the Wall Street Journal:

                        The Paris-based think tank cut its forecasts among its 34 members to 1.9% this year and 1.6% in 2012, from 2.3% and 2.8% in May. The OECD said it expects the euro zone's economy to contract by 1% at an annualized rate in the last quarter of this year and by 0.4% in the first three months of 2012.

                        For 2012, the OECD said the 17-country bloc's economy will only grow by 0.2%.

                        This is far too optimistic. The European economy is about to fall over a cliff, and last week's Eurostat report on new industrial orders reveals that manufacturing is leading the way. New orders fell by a whopping 6.4%, a move that hearkens back to the darkest days of 2008. Will the US be able to resist the pull of the European downturn? These charts don't offer much optimism:

                        Fedwatch1

                        Fedwatch2

                        Not a perfect match, but enough to suggest the idea of substantial decoupling looks like more myth than reality, especially in the face of a severe recession. Could this be why US Treasury yields held steady today even as equities roared forward?  

                        Bottom Line: Don't take US resilience for granted this time around - Europe is getting ugly, and it is far too late to prevent severe recession. The best policymakers can hope for at this point is too avoid a depression.

                          Posted by on Monday, November 28, 2011 at 04:23 PM in Economics, Fed Watch, International Finance | Permalink  Comments (13)


                          The Source of Cronyism Is *Not* Social Programs for the Poor

                          Jeff Sachs:

                          Fairness and the Occupy Movement Revisited, by Jeff Sachs: A recent Wall Street Journal article by Arthur C. Brooks on the Occupy Movement and fairness says some interesting things about potential common ground between free-market ideas and the Occupy movement. Yet Brooks also commits some very important errors. ...
                          Brooks, the head of the American Enterprise Institute, denounces crony capitalism as the dark side of American politics and economics. On this we should all agree. The level of corruption in Washington is staggering, growing, and rife in both parties. ...
                          The Republicans answer to crony capitalism is to slash government. Yet by this they mean mainly an attack on the remaining social programs. This is a kind of bait-and-switch strategy: rev up the anger against government corruption, and then kill the life-support programs of the poor and working class. Crony capitalism exists mainly in the big-ticket sectors of the economy -- banking, oil, real estate, private health insurance, military contractors, and infrastructure -- not in the essential but much smaller parts of the economy: malnutrition of poor children, lack of quality pre-school, insufficient job training, and inadequate student loan coverage.
                          Yes, crony capitalism should be confronted anywhere in the economy, yet cutting the life-support systems for the working class and poor won't fix government, but instead would cripple the prospects of more than 100 million poor and near-poor Americans. To control crony capitalism, we need to direct our attention where it belongs: the wealth-support systems of the rich, not the life-support systems of the poor. ...
                          Yes, Mr. Brooks, let us find common ground. We all agree on the need to end crony capitalism. But let us also work together not to cripple government but to make it work for all Americans.

                          The hope for common ground where there is none can lead to Obama like one-sided concessionary behavior, and we have more than enough of that already. Yes, let's find common ground where it exists, but let's also be careful not to try to meet in the middle when the other side is pursuing a bait and switch strategy. The Republican goal of reducing the size of government through reductions in social programs is unwavering, and they will pursue any argument handy at the moment to bring this about. In recessions, they tell us tax cuts are needed to stimulate the economy, but the real goal is to cut funding for the government permanently. Once the taxes are reduced, they won't agree to increase them again (unless it's to protect their cronies, i.e. an increase in payroll taxes is fine so long as it prevents the increase in taxes on the wealthy needed to fund it). In normal times, we're told tax cuts stimulate economic growth even though there's not much evidence to support this claim. Presently, it's the cronyism argument, and tomorrow it will be something else. The Republicans have their eyes on the ball, and the rules of the game are to be adjusted as necessary to allow them the best opportunity to take the ball across the goal line. Winning is all that matters. Fairness for both sides playing the game, etc. has nothing to do with it and we'd be wise to keep our eyes on the ball as well.

                          The other thing to note is that the location of common ground has shifted to the right from where it used to be. "Meet us in the middle" now means meeting on ground that would have been considered on the right not all that long ago. Democrats have already conceded too much in the ideological war, and there comes time when leaders in the party must take a stand and hold their ground. That time is long past.

                            Posted by on Monday, November 28, 2011 at 11:34 AM in Economics, Equity, Income Distribution, Regulation, Social Insurance | Permalink  Comments (21)


                            "Don't Read Too Much Into Holiday Shopping"

                            Tim Duy wrote this yesterday, but I forgot to post it:

                            Don't Read Too Much Into Holiday Shopping, by Tim Duy: I have something of a visceral dislike of the media frenzy that surrounds the holiday shopping season. And I sense this year will be worse than usual, as we are entering the season with what I believe are relatively low expectations. At first blush, those expectations will be easily beaten. From the Wall Street Journal:

                            Black Friday sales rose 6.6% from a year ago, getting the holiday shopping season off to a strong start, retail data and consulting firm ShopperTrak said Saturday.

                            The gains were the strongest since 2007 and topped last year's anemic 0.3% increase, said ShopperTrak, which installs monitoring devices in stores to gauge foot traffic.

                            Discounting works - more on that later. Although I believe underlying household budgets are fragile, I also have faith the American consumer will not break easily. Indeed, note the path of retail sales - excluding autos, gas, and restaurants - since the end of the recession:

                            Fedwatch1

                            For all the talk of a "new normal," retail spending is growing at nearly exactly its pre-recession trend of 0.43% a month. I have no reason to believe this trend will falter in the next two months, and, therefore, would anticipate the holiday season, at least in nominal terms to be at least average if not a little better (average includes some bad years).
                            What I believe is more interesting is the path of real sales:

                            Fedwatch2

                            In this measure, I converted to real dollars using the GAFO (deparment store type goods) deflator. Note again the similarity between the pre- and post-recession trends, 0.53% and 0.58% respectively. The high real growth is the product of steady price deflation in the retail sector:

                            Fedwatch3

                            Whatever ill is said about outsourcing, it does deliver cheap toys to put under the Christmas tree. Arguably, we are see the tiniest bit of trend reversion, attributable to an acceleration in the deflationary trend through early 2010:

                            Fedwatch6

                            Note that mid-year, retailers attempted to push through higher prices:

                            Fedwatch4

                            Bad timing, as nominal spending slowed somewhat this period to 0.37% a month. The end result was that real growth stalled in the April to August period, growing just 0.2% a month. Retailers apparently expected consumers to simply absorb the higher prices while holding the path of real spending constant. This grossly overestimated the strength of household budgets, and retailers soon reversed course. Prices fell between August and October at a 3.3% annualized pace.

                            The interesting question is how much retailers will panic and extend the price declines, resorting to deep discounting to continue to move volume. If so, we could see a solid real gain in the November to January period. At least so far, it appears discounting is indeed a key factor enticing early shopping. Back to the Wall Street Journal:

                            Brick-and-mortar retailers also saw more visits, with foot traffic to malls and shopping centers up 5.5%, ShopperTrak said.

                            Consumers were drawn out by heavy promotions and early store openings, said Bill Martin, co-founder of the firm.

                            They remain value conscious, however, and are more targeted in their shopping. It remains to be seen whether the rest of the season until Christmas —which accounts for about a fifth of retailers' annual sales—will keep up the strong pace, ShopperTrak said.

                            Will a solid holiday season put the nail on the coffin of recession fears? I don't think so. The US is not in recession right now; it is simply premature to be looking for recession in the data flow. If you are concerned about recession, which I am, you are looking at impending fiscal contraction in 2012 coupled with the implosion of the Eurozone, an event that will likely blow back to the US via the financial channels. But if those fears are realized, don't expect too much of it in the data before the middle of next year.

                            Finally, note that retail sales do not necessarily suffer greatly during a recession. Recall 2001:

                            Fedwatch5

                            The sharp drop we saw in 2008-09 is a relatively unusual permanent (for lack of a better term) negative IS shock that is costing retailers something on the order of $375 billion a year. That is not to likely to be repeated anytime soon. At least I hope not!
                            Bottom Line: Enjoy the Holiday Season. Don't get too preoccupied with the media-driven "holiday spending" frenzy. It just isn't that important, nor is it a key economic indicator.

                              Posted by on Monday, November 28, 2011 at 09:18 AM in Economics, Fed Watch | Permalink  Comments (4)


                              Paul Krugman: Things to Tax

                              Increased in revenue from taxes on very high incomes and taxes on financial transactions should be part of the long-term deficit reduction plan:

                              Things to Tax, by Paul Krugman, Commentary, NY Times: The supercommittee was a superdud — and we should be glad. Nonetheless, at some point we’ll have to rein in budget deficits. And when we do, here’s a thought: How about making increased revenue an important part of the deal?
                              And I don’t just mean a return to Clinton-era tax rates. ... The long-run budget outlook has darkened, which means that some hard choices must be made. Why should those choices only involve spending cuts? Why not also push some taxes above their levels in the 1990s?
                              Let me suggest two areas in which it would make a lot of sense to raise taxes in earnest...: taxes on very high incomes and taxes on financial transactions.
                              About those high incomes: In my last column I suggested that the very rich ... should pay more in taxes. I got many responses from readers ... that even confiscatory taxes on the wealthy couldn’t possibly raise enough money to matter.
                              Folks, you’re living in the past. ... The IRS reports that in 2007 ... the top 0.1 percent of taxpayers — roughly speaking, people with annual incomes over $2 million — had a combined income of more than a trillion dollars. That’s a lot of money, and ... taxes ... would raise a significant amount of revenue...
                              For example,... before 1980 very-high-income individuals fell into tax brackets well above the 35 percent top rate that applies today. ... I’ve extrapolated ... using Congressional Budget Office projections, and what I get for the next decade is that high-income taxation could shave more than $1 trillion off the deficit. ...
                              So raising taxes on the very rich could make a serious contribution to deficit reduction. Don’t believe anyone who claims otherwise.
                              And then there’s the idea of taxing financial transactions... Because there are so many transactions, such a fee could yield several hundred billion dollars in revenue over the next decade. Again, this compares favorably with the savings from many of the harsh spending cuts being proposed in the name of fiscal responsibility.
                              But wouldn’t such a tax hurt economic growth? As I said, the evidence suggests not — if anything,... to the extent that taxing financial transactions reduces the volume of wheeling and dealing, that would be a good thing. ...
                              Now, the tax ideas I’ve just mentioned wouldn’t be enough, by themselves, to fix our deficit. But the same is true of proposals for spending cuts. The point I’m making here isn’t that taxes are all we need; it is that they could and should be a significant part of the solution.

                                Posted by on Monday, November 28, 2011 at 12:33 AM in Budget Deficit, Economics, Taxes | Permalink  Comments (82)


                                Links for 2011-11-28

                                  Posted by on Monday, November 28, 2011 at 12:06 AM in Economics, Links | Permalink  Comments (36)


                                  Sunday, November 27, 2011

                                  Social Insurance and Unemployment: Do People Deserve Poverty?

                                  Casey Mulligan claims that social insurance is a big reason that unemployment is so high:

                                  Were it not for government assistance,... the recession would have pushed 4.2 percent of the population into poverty, rather than 0.6 percent.

                                  One interpretation of these results is that the safety net did a great job... Perhaps if the 2009 stimulus law had been a little bigger or a little more oriented to safety-net programs, all seven would have been caught.
                                  Another interpretation is that the safety net has taken away incentives... Of course, most people work hard despite a generous safety net, and 140 million people are still working today. But in a labor force as big as ours, it takes only a small fraction of people who react to a generous safety net by working less to create millions of unemployed. I suspect that employment cannot return to pre-recession levels until safety-net generosity does, too.

                                  A comment from this post responding to Casey Mulligan takes on this claim:

                                  I'm sure my daughter connived to get herself laid off at Peet's Coffee just as her health insurance would have kicked in and live on $98 a week, far less than she would have brought in in wages, and not even enough to pay her $500 a month rent. And she was so thrilled with this condition that she kept it up for a full two months, and then found herself another job, this one with no health benefits.

                                  The idea that the unemployment problem is due to lack of effort on behalf of the unemployed rather than a lack of demand is convenient for the moralists, but inconsistent with the facts. The problem is lack of demand, not the means through which we smooth the negative consequences of recessions.

                                  But what really irks me is the implicit moralizing, the idea that people deserve to be thrown into poverty. Someone who gets up every day and goes to a job day after day, often a job they don't like very much, to support their families can suddenly become unemployed in a recession through no fault of their own. They did nothing wrong -- it's not their fault the economy went into a recession and they certainly couldn't be expected to foresee a recession that experts such as Casey Mulligan missed entirely. They had no reason to believe they had chosen the wrong place to go to work, but unemployment hit them anyway. And since one of the biggest causes of foreclosure is an event like unemployment, it's entirely possible that this household would lose its home, be forced to declare bankruptcy, etc., and end up in severe poverty if there were no social services to rely upon.

                                  What moral lesson is being taught here? Why does this household deserve to be punished for their bad decisions? It did nothing wrong. I understand that people should suffer the consequences of their own bad choices, but that's not what happens in recessions. People who have done nothing to deserve it are nevertheless hit by severe negative shocks. That's what social insurance is for, to smooth the path for such unfortunate households, to avoid sending people into poverty who have done nothing to deserve it (see "The Need for Social Insurance"). It is not an attempt to reward bad behavior and most programs do their best to avoid giving benefits to people who have made bad choices (for example, the system is far from perfect but in most states unemployment insurance can only be obtained if you lose your job through no fault of your, e.g. if you quit or get yourself fired it is not available). The extent to which we should distinguish between deserving and undeserving households for social insurance programs is debatable and depends upon the type of program, but the idea that all households are undeserving is, in my view, simply wrong. I would apply the social safety net widely myself -- I think the benefit of the doubt should go to compassion, not harshness and moralizing -- but in any case I'd dispute the idea that "safety-net generosity" is too high. If anything, we are not generous enough.

                                  Update: Karl Smith comments on this topic.

                                    Posted by on Sunday, November 27, 2011 at 01:17 PM in Economics, Social Insurance, Unemployment | Permalink  Comments (66)


                                    The Demand for Jobs

                                    Businesses won't hire workers because there is not enough demand to support them, and the public can't supply the needed demand because too many people don't have jobs.

                                    That's what's so frustrating. If the unemployed had jobs, the demand would be there to support them. But the demand has to come first, and workers won't be hired until the demand is there.

                                    I wonder who could provide the missing demand needed to overcome this problem?

                                      Posted by on Sunday, November 27, 2011 at 09:45 AM in Economics, Fiscal Policy, Unemployment | Permalink  Comments (83)


                                      Fed Watch: Europe Scrambles for Solutions

                                      Tim Duy:

                                      Europe Scrambles for Solutions, by Tim Duy: Monday morning is fast approaching, and European leaders are scrambling to come up with something credible to float ahead of the market opening. Recall that we ended last week with the S&P downgrade of Belgium, and policymakers would like to have something on the table in response. Most significant is that policymakers now realize that changing the Lisbon Treaty to enshrine fiscal discipline is a far too lengthy process to serve as an effective counterweight to emerging the soveriegn debt crisis. From Reuters:

                                      Germany's original plan was to try to secure agreement among all 27 EU countries for a limited change to the Lisbon Treaty by the end of 2012, making it possible to impose much tighter budget controls over the 17 euro zone countries -- a way of shoring up the region's defenses against the debt crisis.

                                      But in meetings with EU leaders in recent weeks, it has become clear to both German Chancellor Angela Merkel and French President Nicolas Sarkozy that it may not be possible to get all 27 countries on board, EU sources say.

                                      Even if that were possible, it could take a year or more to finally secure the changes while market attacks on Italy, Spain and now France suggest bold measures are needed within weeks.

                                      As a result, senior French and German civil servants have been exploring other ways of achieving the goal, either via an agreement among just the euro zone countries, or a separate agreement outside the EU treaty that could involve a core of around 8-10 euro zone countries, officials say.

                                      The goal is to provide enough of a framework to allow the ECB to step in and shore up debt markets more decisively:

                                      Germany's Welt am Sonntag newspaper reported on Sunday that Merkel and Sarkozy were working on a new Stability Pact, setting out national debt limits, that could be signed up to by a number of euro zone countries and which would allow the ECB to act more decisively in the crisis.

                                      "If the politicians can agree to a comprehensive step, the ECB will jump in and help," the paper quoted a central banker as saying.

                                      Is the plan for real or just a bargaining ploy?

                                      While EU officials are clear about the determination of France and Germany to push for more rapid euro zone integration, some caution that the idea of doing so with fewer than 17 countries via a sideline agreement may be more about applying pressure on the remainder to act.

                                      By threatening that some countries could be left behind if they don't sign up to deeper integration, it may be impossible for a country to say no, fearing that doing so could leave it even more exposed to market pressures.

                                      The risk here is that market paricipants read the bilateral agreements as they emerge as an invitation to attack those nations not yet signed up to the plan. Those nations would be even more vulnerable as they would explicitly lose any ECB backstop. The other choice for some nations would to be to go down the road of Greece and accept crushing austerity in order to stay in the Eurozone. Damned if you do, damned if you don't.

                                      Note also that although these ideas are bandied about in terms of "greater fiscal integration," I don't think we are seeing much mention of fiscal transfers, just mechanisms to enforce budget discipline. This is certainly a framework for a two-speed Europe.

                                      In other news, someone is floating rumors that the IMF is preparing a massive lending program for Italy. From Bloomberg:

                                      The International Monetary Fund is preparing a 600-billion euro ($794 billion) loan for Italy in case the country’s debt crisis worsens, La Stampa said.

                                      The money would give Italy’s Prime Minister Mario Monti 12 to 18 months to implement his reforms without having to refinance the country’s existing debt, the Italian daily reported, without saying where it got the information. Monti could draw on the money if his planned austerity measures fail to stop speculation on Italian debt, La Stampa said.

                                      Details are unclear. Ed Harrison at Credit Writedowns has a translation of a German version of the story that mentions the possibility of ECB funding of the bailout, with an IMF gaurantee.

                                      Speaking of Italy, the austerity parade marches forward, via Bloomberg:

                                      The Italian government, led by Prime Minister Mario Monti, may introduce additional austerity measures totaling as much as 15 billion euros ($20 billion) on Dec. 5, Il Sole 24 Ore reported.

                                      Monti may levy a tax on first homes, increase value-added tax, and introduce anti-evasion measures on transactions of more than 300 euros to 500 euros, the Italian daily reported, without saying where it got the information. The introduction of a wealth tax is still uncertain, Il Sole said.

                                      Italy needs reform, to be sure. But in the near term, austerity only worsens the European crisis. Troubled European nations need compasionate austerity that rewards progress toward long-term goals with near-term stimulus. But without a fiscal transfer mechanism, their is no way to offer such stimulus.

                                      Finally, I emphasize that austerity and ECB intervention may bring short-term relief to financial markets, and at least one element of the crisis under control, but these efforts do not address the banking crisis that is settling over the Continent. Felix Salmon points us to a must-read IFR report:

                                      European banks are being forced to abandon their efforts to sell off trillions of euros worth of loans, mortgages and real estate after a series of talks with potential investors broke down, leaving many already struggling firms with piles of assets they can barely support.

                                      Lenders have instead turned their attention to reducing the burden of carrying such assets over months and years, with many looking at popular pre-crisis “capital alchemy” arrangements to minimise capital requirements and boost their ability to use the assets to tap central banks for cash.

                                      Deadlocked talks with potential buyers – a mix of private equity firms, hedge funds, foreign banks and insurers – show little sign of making breakthroughs, say bankers taking part in those negotiations, with the stalemate threatening to block the industry’s ability to save itself from collapse through a mass deleveraging.

                                      The article concludes with a key insight:

                                      “Natural deleveraging through not renewing loans is one of the few options remaining to banks to shrink their balance sheets, but the timetable for implementing this kind of strategy can be very protracted,” said Ryan O’Grady, head of fixed income syndicate for EMEA at JP Morgan.

                                      One way or another, Europe will experience a massive credit shock. Presumable, the ECB could help offset this by allowing governments to loosen spending to support demand and fund bank recapitalization. But the path we are on appears to provide ECB help only in return for more austerity. And it is that never-ending pursuit of austerity that leaves me bearish on Europe, regardless of the political news of the day.

                                        Posted by on Sunday, November 27, 2011 at 09:36 AM in Economics, Fed Watch, International Finance | Permalink  Comments (10)


                                        Links for 2011-11-27

                                          Posted by on Sunday, November 27, 2011 at 12:06 AM in Economics, Links | Permalink  Comments (39)


                                          Saturday, November 26, 2011

                                          What Could Bernanke Do?

                                          Brad DeLong explains how the "Federal Reserve might be able to spark a real economic recovery": What Could Bernanke Do?.

                                            Posted by on Saturday, November 26, 2011 at 02:34 PM in Economics, Monetary Policy | Permalink  Comments (12)


                                            "A Share of the Burden"

                                            A little less than two weeks ago, I said:

                                            This trick is used again and again to oppose raising taxes on one interest group or another, but the fact that raising taxes on a particular group won't fully solve the debt problem does not imply that the change in taxes for that group should be zero."

                                            Here's Paul Krugman making the same point -- more forcefully with numbers -- and he shows that raising taxes on the wealthy makes a contribution to deficit reduction that is far from trivial. But even if the numbers were smaller, it still wouldn't imply that the change in these taxes should be zero. Even then, the wealthy "should be bearing a share of the burden" whatever that share might be:

                                            Where The Money Is, by Paul Krugman: I’ve been getting the predictable hysterical reactions to today’s column. And it’s true — I’m a Sharia Jewish atheist Marxist who hates America! Bwahahaha!
                                            But one thing actually worth reacting to is the assertion I keep getting that this is all a distraction, that even if we seized all the money of the top 0.1% it would make no difference to the fiscal outlook. Here’s a piece of advice nobody will take: before you make assertions about numbers, look at the numbers.
                                            So, what we learn from IRS data is that in 2007, before the Great Recession depressed everyone’s income, the top 0.1% had around $1 trillion in taxable income. Now, even confiscating that whole sum wouldn’t eliminate our current deficit, especially since the top 0.1% already paid something like a third of that total in taxes. But then, no single action would close our current budget gap — not even the complete elimination of Social Security or Medicare.
                                            What you want to ask is how much higher taxes on the super-elite might contribute to deficit reduction, as compared with the kinds of things politicians are actually proposing.
                                            So let’s suppose that it was possible to collect an additional 10 percent of that super-elite’s income in taxes, to the tune of $100 billion a year. How would this stack up against the kinds of things on the table right now?
                                            Well, consider the idea of raising the Medicare eligibility age — a move that would create vast hardship. According to the Congressional Budget Office (big pdf), when fully phased in this would save … $42 billion a year.
                                            I could multiply comparisons, but the point is that higher taxes on the very rich could make a significant contribution to deficit reduction. They couldn’t eliminate the deficit on their own, but what could? There’s real money up there, and those making it should be bearing a share of the burden.

                                              Posted by on Saturday, November 26, 2011 at 09:54 AM in Budget Deficit, Economics, Income Distribution, Taxes | Permalink  Comments (50)


                                              Links for 2011-11-26

                                                Posted by on Saturday, November 26, 2011 at 12:06 AM in Economics, Links | Permalink  Comments (64)


                                                Friday, November 25, 2011

                                                Fed Watch: Greece Again

                                                One more from Tim Duy:

                                                Greece Again, by Tim Duy: Just a day after Greece's ND opposition party "committed" in writing to the details of the October summit agreement, Zero Hedge spots a potentially decisive Reuters story:

                                                The country has now started talking to its creditor banks directly, the sources said.

                                                "There are a number of people in the market who are saying why did (the IIF) take upon themselves this responsibility," one of the people said, asking not to be named.

                                                "In part for that reason, Greece has been talking to creditors individually, just to get their own sense of market sentiment," the person said.

                                                The Greeks are demanding that the new bonds' Net Present Value, -- a measure of the current worth of their future cash flows -- be cut to 25 percent, a second person said, a far harsher measure than a number in the high 40s the banks have in mind.

                                                Banks represented by the IIF agreed to write off the notional value of their Greek bondholdings by 50 percent last month, in a deal to reduce Greece's debt ratio to 120 percent of its Gross Domestic Product by 2020.

                                                In all fairness to Greece, the details of the October summit were somewhat fuzzy (as in nonexistent), and so arguably they are not backing out. But the banks were clearly thinking the ultimately haircut not be as great as Greece is demanding. Once again, the complete lack of useful outcomes calls into question why the Europeans even bother to have summits.

                                                But probably more important is the fact that Greece is now taking a direct role in negotiations. Remember that the previous haircuts were "voluntary" and negotiated by Greece's European overlords to prevent triggering a credit event and CDS payouts. And one has to believe that "following the October agreement" implicitly means the Greeks will not upset the apple cart and trigger a credit event unilaterally. But if Greece is at the table forcing lenders to take massive haircuts, it will be virtually impossible to justify that this is not a technical default.

                                                This is shaping up to be the final test of the credibility of the sovereign CDS market - either exposure is hedged or it is not. Interestingly, either outcome is potentially catastrophic, with the end result being either the unknown outcomes of triggering CDS payouts or a complete flight from European sovereign debt. Maybe both.

                                                I really hope somebody at the ECB is sticking around to work this weekend.

                                                  Posted by on Friday, November 25, 2011 at 10:44 AM in Economics, International Finance | Permalink  Comments (18)


                                                  Ideological Bias and Antitrust Law

                                                  Apparently some judges refuse to enforce antritrust law because "Such judges just do not like antitrust laws for ideological reasons." That attitude -- which is not confined to judges -- explains a lot about detrimental the rise of economic and political power in recent decades. This is Shane Greenstein discussing the proposed merger between AT&T and T-Mobile:

                                                  Lawyers invariably ... launch into comments about the uncertain state of antitrust law in the United States, observing that many judges today do not think there is any valid reason to enforce any antitrust law, irrespective of the facts of the case. Such judges just do not like antitrust laws for ideological reasons. Recently such friends have gotten more specific, commenting on the odds of getting past the particular judge assigned to hear the from Department of Justice, as it tries to block the merger.
                                                  Political analysts, in contrast,... invariably launch into comments about AT&T’s enormous powerful presence in Washington, observing that AT&T has gotten whatever it has wanted from the Obama and Bush administrations. Recently such friends have gotten very specific, about which representatives and senators were most likely to act on AT&T’s behalf.

                                                  The point he is making, however, is that in this particular instance economics did seem to matter:

                                                  To make a long story short, there was not much evidence of benefits. To make efficiency gains AT&T would have to fire quite a few people, but to get the merger past its unions AT&T’s management had to promise to preserve jobs. To buy political support AT&T had to promise to build broadband in under-served areas, but independent analysis showed that far cheaper ways to build such broadband than through a thirty billion dollar merger. The economic benefits did not exist. To use an old expression, there was no there there.

                                                  And therefore:

                                                  The FCC recently announced it would move to have a hearing about the AT&T and T-Mobile merger. In response, AT&T withdrew its application from the FCC, delaying the hearing indefinitely (or until AT&T resubmits the application).

                                                  But the fact that the police catch the bad people when (and seemingly only when) the facts are really, really obvious isn't all that comforting. Big banks, for example, appear to be far larger than the size required to take advantage of economies of scale/scope, etc., and the additional size enhances their political clout and the chances of regulatory capture without any clear economic benefits. There are potential costs, large ones -- see the recession. But it's hard to find a solid analysis demonstrating that there's any reason banks need to be so large that they are able to dominate particular markets. However, prior to the crisis instead of looking at these banks with an eye toward reining in their market power, we were told how wonderful such large institutions were -- how necessary firms with so much power are in a global economy. Even now we still hear arguments about how much these firms are needed (and it's still hard to get people to care about this issue).

                                                  Anyway, I could go on with this rant -- the problem of large, powerful firms is by no means confined to the financial industry -- but I've made these points many times in the past (starting before the crisis hit) and hopefully the point is clear. To me, the rise of economic power among the few is one of the strongest and clearest indications of how thoroughly economic and political power has shifted to the rich and powerful in recent decades.

                                                    Posted by on Friday, November 25, 2011 at 10:17 AM in Economics, Market Failure | Permalink  Comments (12)


                                                    Fed Watch: From Bad to Worse

                                                    Tim Duy:

                                                    From Bad to Worse, by Tim Duy: I awoke to this news, via the Wall Street Journal:

                                                    Italian two-year and five-year government-bond yields soared to euro-era highs Friday as investors began giving up on the euro zone's ability to break the political gridlock that is blocking a more decisive response to the currency bloc's debt crisis.

                                                    Italian two-year and five-year yields climbed to 7.7% and 7.8%, respectively, and the 10-year yield moved further above the key 7% mark to 7.3%.

                                                    This just a day after an apparently not-confidence boosting meeting of the leaders of Germany, France and Italy. Perhaps European policymakers need fewer summits, not more?

                                                    Contrary to conventional wisdom, Ralph Atkins at the Financial Times views yesterday's European commitment to back off the ECB as a positive development:

                                                    My reaction on hearing that Mr Sarkozy had agreed to keep silent was that it would actually increase the ECB’s room for manoeuvre. Fiercely independent, the Frankfurt-based institution would have hated any suggestion it was reacting to pressure from Paris. Now, any steps it took would clearly be at its own initiative.

                                                    I am sympathetic to this line of reasoning. That said, Atkins gets to the next problem:

                                                    Of course, this does not mean the ECB will act. Mario Draghi, new ECB president, sees governments as responsible for resolving the crisis and the central bank as having a limited role. He worries about putting ECB credibility at stake.

                                                    Yes, if European Central Bank President Mario Draghi has more room to act, he apparently isn't using it. The ECB's forays into the bond markets appear to be increasingly futile. Via the Financial Times, the ECB is in the market again today:

                                                    The European Central Bank again bought Italian and Spanish debt on Friday but analysts have complained that its purchases are no longer sufficient to stem a wave of selling. Yields on the 2-5 year range for Italy were 7.67-7.77 per cent in late Friday trading.

                                                    Despite the mess in Europe, hope springs eternal on Wall Street. The early news from Bloomberg:

                                                    U.S. stocks rose, snapping a six-day drop in the Standard & Poor’s 500 Index, as speculation European leaders will do more to fight the debt crisis overshadowed concern about higher borrowing costs in the region.

                                                    I think it is dangerous to attribute too much day-to-day noise to news flow. Still, if this is anywhere near accurate, whoever is left on Wall Street today must still be groggy from Thanksgiving feasting. Zero Hedge attributes the morning rally to hopes the Swiss National Bank will act to support the Euro. In any event, the momentum looks to be fading in the late-morning as reality sets in.

                                                    Bottom Line: Europe is quickly moving from bad to worse. To be sure, we should anticipate a rally will follow the eventual ECB capitulation on quantitative easing, but that will only be half the battle. The ECB will only capitulate in return for massive, sustained austerity. It is too late for an easy end to this story.

                                                      Posted by on Friday, November 25, 2011 at 09:27 AM in Economics, Fed Watch, International Finance | Permalink  Comments (3)


                                                      Paul Krugman: We Are the 99.9%

                                                      The wealthy can pay more in taxes without endangering the economy's ability to create jobs:

                                                      We Are the 99.9%, by Paul Krugman, Commentary, NY Times: “We are the 99 percent” is a great slogan. It correctly defines the issue as being the middle class versus the elite (as opposed to the middle class versus the poor). And it also gets past the common but wrong establishment notion that rising inequality is mainly about the well educated doing better than the less educated; the big winners in this new Gilded Age have been a handful of very wealthy people, not college graduates in general.
                                                      If anything, however, the 99 percent slogan aims too low. A large fraction of the top 1 percent’s gains have actually gone to an even smaller group, the top 0.1 percent — the richest one-thousandth of the population.
                                                      And while Democrats, by and large, want that super-elite to make at least some contribution to long-term deficit reduction, Republicans want to cut the super-elite’s taxes even as they slash Social Security, Medicare and Medicaid in the name of fiscal discipline. ...
                                                      But ... why do Republicans advocate further tax cuts for the very rich even as they warn about deficits and demand drastic cuts in social insurance programs?
                                                      Well, aside from shouts of “class warfare!” whenever such questions are raised, the usual answer is that the super-elite are “job creators”... So what you need to know is that this is bad economics. ...
                                                      For who are the 0.1 percent? Very few of them are Steve Jobs-type innovators; most of them are corporate bigwigs and financial wheeler-dealers. One recent analysis found that 43 percent of the super-elite are executives at nonfinancial companies, 18 percent are in finance and another 12 percent are lawyers or in real estate. And these are not, to put it mildly, professions in which there is a clear relationship between someone’s income and his economic contribution.
                                                      Executive pay ... is famously set by boards of directors appointed by the very people whose pay they determine; poorly performing C.E.O.’s still get lavish paychecks, and even failed and fired executives often receive millions as they go out the door.
                                                      Meanwhile, the economic crisis showed that much of the apparent value created by modern finance was a mirage..., seemingly high returns before the crisis simply reflected increased risk-taking — risk that was mostly borne not by the wheeler-dealers themselves but either by naïve investors or by taxpayers, who ended up holding the bag when it all went wrong. ...
                                                      So should the 99.9 percent hate the 0.1 percent? No, not at all. But they should ignore all the propaganda about “job creators” and demand that the super-elite pay substantially more in taxes.

                                                        Posted by on Friday, November 25, 2011 at 12:42 AM in Budget Deficit, Economics, Taxes | Permalink  Comments (129)


                                                        Fed Watch: Europe Can't Move Fast Enough to Halt Crisis

                                                        Tim Duy:

                                                        Europe Can't Move Fast Enough to Halt Crisis, by Tim Duy: Today the leaders of Germany, France, and Italy came together, offering a commitment to work toward new fiscal rules in Europe while keeping a leash on the European Central Bank. From the Wall Street Journal:

                                                        The leaders of the euro zone's three largest economies pledged Thursday to propose modifications to European Union treaties to further integrate economic policy and crack down on profligate spenders, but they played down suggestions that the European Central Bank have a greater crisis-busting role.

                                                        It should be painfully evident at this point that any process toward greater fiscal integration will be a years-long process. Financial markets, however, move at something much closer to the speed of light - as fast as traders can hit the "sell" button. As such, the European political process is grossly incapable of addressing the fiscal crisis. Apparently, however, market participants continue to hold out hope:

                                                        Investors were quick to register their disappointment that the leaders hadn't produced some sort of breakthrough to address the bloc's protracted sovereign-debt crisis. European stocks lost ground while the euro fell to its lowest level in seven weeks.

                                                        Seriously, who believes a breakthrough is coming? I imagine some thought the disastrous German bund auction would force Chancellor Angela Merkel's hands, but it appears to have only deepened her resolve. Obviously, one interpretation of the auction is that the crisis is spreading to Germany, making its debt more risky. But risky how? The specter of Eurobonds, in my opinion, argues for shying away from Eurobonds as investors need to price German debt at that of the eventual Eurobond, which will almost certainly be greater than current German prices. This would help explain Merkel's objection to Eurobonds:

                                                        Germany vehemently opposes creating such commonly backed bonds before a natural alignment of euro-zone economies is achieved through sound economic policies, the introduction of so-called debt brakes to restrict deficits, and creating the ability to severely punish profligate euro-zone members.

                                                        Ms. Merkel, addressing the issue during the news conference, said the recent widening of the gap between euro-zone interest rates reflects the strengths of countries such as Germany and the structural weaknesses of those such as Greece and Portugal. The introduction of euro-zone bonds would create artificial convergence of interest rates and not address the root cause of the crisis, she said.

                                                        "It would be a completely wrong signal to allow these different interest rates to become ineffective because they are an indication of where more work is needed," said Ms. Merkel. "If we all work responsibly, convergence will take place all on its own. But to impose convergence on everyone would weaken us all."

                                                        The message is that you can't identify the bad actors without differential yields, which is possibly reasonable with respect to solvency issues but less so when considering liquidity crisis. Germany is looking for hard and fast rules that would force the periphery debt down to German yields rather than the latter up to the former. Does this suggest that Germany would insist on some sort of convergence criteria as a precondition for the issuance of Eurodebt as well? Something to think about. Calculated Risk directs us to an even more disconcerting Merkel quote via the Telegraph:

                                                        Ms Merkel instead used a three-way summit with France and Italy in Strasbourg to insist that new treaty powers to intervene and punish sinner states remained the key focus of Europe's rescue efforts. She said: "The countries who don't keep to the stability pact have to be punished – those who contravene it need to be penalised. We need to make sure this doesn't happen again."

                                                        Similarly, Germany needed to be punished via the Versailles Treaty - and look how well that worked. It is tough to advise anything other than to sell Europe as long as Germany insists on this morality play.

                                                        If you have any delusions about the difficulties of pushing through new fiscal rules, turn to the story evolving in Ireland. Credit Writedowns points us to Ambrose Evans-Pritchard at the Telegraph:

                                                        The Irish government has suddenly complicated the picture by requesting debt relief from as a reward for upholding the integrity of the EU financial system after the Lehman crisis, though there is no explicit linkage between the two issues...

                                                        ..."We are looking at ways to reduce the debt. We would like to see our European colleagues address this in a positive manner. Wherever there is a reckless borrower, there is also a reckless lender," he said, alluding to German, French, British and Dutch banks.

                                                        "We have indicated to Europe's authorities that it will be difficult to get the Irish public to pass a referendum on treaty change," he said.

                                                        The EU's new fiscal rules would be legally binding and "justiciable" before the European Court, he said. This raises the likelihood that Ireland's top court would insist on a referendum.

                                                        Translation: If you want to move forward on fiscal unity, we need a quid-pro-quo in the form of debt relief. Ultimately, Portugal will want the same. And Greece will eventually ask for more as well. True, the imminent standoff on the next tranche of aid has been alleviated as the ND opposition party offered its written commitment to the October summit deal. Of course, the commitment is predictably soft, with the money quote:

                                                        On the evidence of the budget execution so far, we believe that certain policies have to be modified, so as to guarantee the Program’s success. This is more so, since according to the latest European Economic forecasts, Greece in 2012 will be the only European country with 5 consecutive years in recession!

                                                        The agreement is crushing the Greek economy, so modifications will be needed. But does anyone believe that only minor modifications will suffice? Anyone? Bueller? Still, given the clock was ticking down on the next aid tranche, policymakers probably believe it best for all parties to back down a little and kick the can down the road for another three months, when we can expect another "voluntary" haircut after the deteriorating economic conditions further erodes the Greek fiscal situation.

                                                        While European leaders continue to pretend there exists a timely political solution to the crisis - that the crisis will end the instant sinner states offer up enough political commitment to the ever changing goal of austerity - Germany continues to insist the ECB be kept on a short leash, pushing Italian debt pack above 7%. Via the Telegraph:

                                                        “The three of us want to indicate our support to the ECB and its leaders,” Mr Sarkozy said. “The three of us have indicated that we will respect the independence of this essential institution and we agreed that we should refrain making any demand, positive or negative, on it. That is a position that we have elaborated together.”

                                                        The statement appeared to contradict comments from senior French politicians earlier today that the country was seeking a greater degree of involvement from the area's central bank in tackling the debt crisis.

                                                        Like it or not, the ECB is the one institution that can act quickly. To be sure, arguably it is now too late to act "quickly." Now quick action is needed to just limit the damage as financial conditions accross Europe freeze solid as a block of ice.

                                                        This is not shaping up to be a festive holiday season in Europe.

                                                          Posted by on Friday, November 25, 2011 at 12:33 AM in Economics, Fed Watch, International Finance | Permalink  Comments (13)


                                                          Links for 2011-11-25

                                                            Posted by on Friday, November 25, 2011 at 12:06 AM in Economics, Links | Permalink  Comments (39)


                                                            Thursday, November 24, 2011

                                                            Andolfatto: Not Enough US Debt?

                                                            David Andolfatto says the world has a "huge worldwide appetite for U.S. Treasury debt (as reflected by absurdly low yields)," and "this is the time to start accommodating this demand. Failure to do so at this time will only drive real rates lower (possibly via deflation)." In comments, he adds "Surely, there are infrastructure projects that can yield in excess of zero percent? If not, then we're all in big trouble." Having made the same point myself on many, many occasions, I obviously agree:

                                                            Not enough U.S. debt?, by David Andolfatto: ...The ratio of U.S. federal debt to GDP is currently close to 100%.... Of course, what has a lot of people worried is not the level, but the trajectory, of this ratio. Clearly, the debt-to-GDP ratio cannot rise forever.
                                                            No, but on the other hand, there is some evidence to suggest that it can feasibly go much higher. (Whether it should be permitted to do so is a different question, of course.)
                                                            Before I go on, I want to clear up a misguided analogy that I frequently hear repeated. The misguided analogy is the idea of the government behaving like a household running up a massive amount of credit card debt.
                                                            If this is the way you like to think about things, let me ask you this: Which of your credit cards charge you 0% interest? I ask because that is the interest rate creditors around the world are willing to lend to the U.S. federal government. And what sort of credit card company starts to reduce the interest it charges on your debt as you become progressively more indebted (see the figure...)?
                                                            In fact, the terms are even much better than 0%. The real cost of borrowing is measured by the real (inflation adjusted) interest rate. ... As the following figure shows, the U.S. government can now borrow funds for 10 years at close to zero real interest. It can borrow funds for 5 years at a negative real interest.

                                                            Now, a negative real rate of interest is a pretty cool deal. Imagine importing 100 bottles of beer from China today, and having to return only 99 bottles next year. ... Before we get too carried away, however, I explain here why these very low real rates constitute bad news.
                                                            Why are real rates so low?
                                                            My own view is that this phenomenon, at its root, has little to do with Federal Reserve or Treasury policy. I believe that the decline in real rates on U.S. treasuries reflects a steady change in how agents and agencies around the world want to structure their wealth portfolios. There has been a massive substitution away from many asset classes into U.S. treasuries; and it is this fundamental market force that is driving real interest rates lower.
                                                            The phenomenon began in the early 1990s, with the collapse of the Japanese stock market. Then Mexico in 1994, the Asian crisis 1997-98, Russia in 1998, and Brazil in 1999; see Bernanke (2005). Investors became rationally pessimistic about the returns to investing in these countries, as well as similar countries that had not yet experienced crisis. The natural effect of this would be capital outflows from these countries into relative safe havens, like the United States.
                                                            The basic thesis here is very much related to what Ricardo Caballero calls a "global asset shortage." See his discussion here and here; and my own discussion here and here.
                                                            The global investment collapse associated with the recent recession has pushed already low real rates lower still. There has been a flight to U.S. treasuries not only by foreigners, but this time by Americans too. Evidently, the perceived return to domestic capital spending remains low. (Some basic theory available here.)
                                                            Policy 
                                                            Given this pessimistic outlook, it seems unclear what monetary policy can do (the Fed is largely limited to swapping low interest currency for low interest treasuries).
                                                            I do, however, believe that there may be a role for the U.S. treasury (in principle, at least). In particular, given the huge worldwide appetite for U.S. treasury debt (as reflected by absurdly low yields), this is the time to start accommodating this demand. Failure to do so at this time will only drive real rates lower (possibly via deflation). For a world economy that is reasonably expected to grow, negative real interest rates imply a dynamic inefficiency. In short, this is the time to start raising real rates, not lowering them (real rates theoretically rise when new debt crowds out private capital, but note that new debt can also be used to finance corporate tax cuts to stimulate investment, if so desired).
                                                            Of course, what theory also tells us is that the government should also be prepared to reverse this recommended debt expansion (assuming that tax rates remain unchanged) once the domestic and world economy return to normal. One may legitimately question whether the government can be expected to make these cuts at the appropriate time. If the government lacks credibility along this dimension (or if future governments cannot be expected to abide by policies put in place by previous governments), then political forces may emerge to block an otherwise socially desirable debt expansion. Perhaps this is one way to interpret recent events.

                                                              Posted by on Thursday, November 24, 2011 at 11:07 AM in Budget Deficit, Economics, Fiscal Policy | Permalink  Comments (31)


                                                              Happy Thanksgiving

                                                              Thanksgiving

                                                                Posted by on Thursday, November 24, 2011 at 08:46 AM in Economics | Permalink  Comments (4)


                                                                Links for 2011-11-24

                                                                  Posted by on Thursday, November 24, 2011 at 12:06 AM in Economics, Links | Permalink  Comments (30)


                                                                  Wednesday, November 23, 2011

                                                                  Why America Should Spread the Wealth

                                                                  A recent column:

                                                                  Why America Should Spread the Wealth, by Mark Thoma: Many economists worry that making societies more equal through income redistribution or other means lowers economic growth. This : “big tradeoff” between equality and efficiency, which is supported by comparisons of capitalist and socialist countries, implies that there is a limit to how much redistribution a society should pursue. At some point the tradeoff of more equality for less output – which worsens as we push toward more and more equality – becomes intolerable. However, while the tradeoff is quite unfavorable as we push to extremes, recent experience suggests there is a wide region where the tradeoff is hard to detect. Thus, worries about this tradeoff appear to be overblown.

                                                                  For example, the Bush tax cuts were justified, in part, by the claim that equity had overshadowed efficiency in tax policy decisions. Taxes on the wealthy and the inefficiencies that come with them were much too high, it was argued, and lowering taxes would cause output to go up enough to lift all boats substantially. Accordingly, the lower end of the income distribution would fare much better after income trickled down than it would under redistributive policy. 

                                                                  The economy did grow after the Bush tax cuts, but the rate of growth was unremarkable, especially for jobs, and there’s little evidence that they caused large increases in output growth as promised. In fact, there’s little evidence that the Bush tax cuts had any effect at all. The tradeoff simply wasn’t there.

                                                                  And the tax cuts at the upper end of the income distribution did nothing to correct for the fact that although worker productivity was rising, wages remained flat – a problem that began in the mid 1970s. This was an indication that something was amiss in the mechanism that distributes income to different members of society. Workers were helping to increase the size of the pie, but income did not trickle down as promised and their share of the pie was no larger than before.

                                                                  This is not the only way in which the distribution of income has become disconnected from productivity. While some argue that those at the top of the income distribution earn every cent they receive, and hence deserve to keep all of it, there is plenty of evidence that the compensation of financial executives, CEOs of major corporations, and others at the top of the pyramid exceeds the value of what they contribute to society by a considerable margin. That holds true even without the financial crisis, but how, exactly, can we justify the extraordinarily high income of this group when the result of their actions was to ruin the economy?

                                                                  If those at the top of the income distribution receive far more than the value of what they create, and those at lower income levels receive less, then one way to correct this, at least in part, is to increase taxes at the upper end of the income distribution and use the proceeds to protect important social programs that benefit working-class households, programs that are currently threatened by budget deficits. This would help to rectify the mal-distribution of income that is preventing workers from realizing their share of the gains from economic growth.

                                                                  And there is another reason why taxes on the wealthy should go up. Someone has to pay taxes, and the question is how to distribute the burden among taxpayers. Many believe, and I am one of them, that progressive taxes are the most equitable way to do this. In particular, the guiding principle is that last dollar of taxes paid should cause the same amount of sacrifice for rich and poor alike.

                                                                  There has been an attempt to make it appear that taxes are mostly paid by the wealthy, e.g. the deceptive claim that half the people pay no taxes is part of this. But taxes are less progressive than before the Bush tax cuts, and when all taxes at all levels of government are taken into account “the U.S. tax system just barely qualifies as progressive.”

                                                                  We face a choice between cutting key benefits for the middle class and creating an ever more unequal society, or raising taxes on the wealthy to preserve the social programs that lower-income households rely upon. We hear that raising taxes is unfair and that tax increases will harm economic growth. But there’s nothing unfair about correcting the mal-distribution of income that we’ve seen in recent decades, or about making sure the burden from paying taxes is more equitable than it is now. And there’s no reason to fear that economic growth will be lower if taxes are increased. Cutting taxes on the wealthy during the Bush years didn’t stimulate growth and raising taxes back to the levels we’ve had in the past – times when growth was quite robust – won’t have much of an effect either.

                                                                  The claim that there is a tradeoff between equity and efficiency was a key part of the argument for tax cuts for the wealthy, but the tradeoff didn’t materialize. We sacrificed equity for the false promise of efficiency and growth, and society is now more unequal than at any time since the early part of the last century. It’s time to reverse that mistake.

                                                                    Posted by on Wednesday, November 23, 2011 at 11:43 AM in Economics, Income Distribution | Permalink  Comments (117)


                                                                    "How Occupy Stopped the Supercommittee"

                                                                    Dean Baker:

                                                                    How Occupy stopped the supercommittee, by Dean Baker, CIF: Congress gave us a wonderful Thanksgiving present when we got word that the supercommittee "superheroes" were hanging up their capes. ...
                                                                    It is important to remember ... (by looking at the website of the Congressional Budget Office) that we do not have a chronic deficit problem. In 2007, prior to the collapse of the housing bubble and the resulting economic downturn, the deficit was just 1.2% of GDP. The deficit was projected to remain near this level for the immediate future... All this changed when the collapse of the housing bubble wrecked the economy. The story is simple... This is what created the large deficits that we are now seeing.
                                                                    The $1tn-plus deficits are replacing lost private-sector demand. Those who want lower deficits now also want higher unemployment. They may not know this, but that is the reality...
                                                                    While this is the reality, the supercommittee was about turning reality on its head. Instead of the problem being a Congress that is too corrupt and/or incompetent to rein in the sort of Wall Street excesses that wrecked the economy, we were told that the problem was a Congress that could not deal with the budget deficit.
                                                                    To address this invented problem, the supercommittee created an end-run around the normal congressional process. ... Their strategy was derived from the conclusion that it would not be possible to make major cuts to social security and Medicare through the normal congressional process because these programs are too popular. ... The hope was that both parties would sign on to cuts in these programs, so that voters would have nowhere to go.
                                                                    However, this effort went down in flames this week. Much of the credit goes to the Occupy Wall Street (OWS) movement... It has put inequality and the incredible upward redistribution of income over the last three decades at the center of the national debate. In this context, it became impossible for Congress to back a package that had cuts to social security and Medicare at its center, while actually lowering taxes for the richest 1%, as the Republican members of the supercommittee were demanding.
                                                                    Now that the supercommittee is dead, Congress must be forced to address the real crisis facing the country: the 26 million people who are unemployed, underemployed, or out of the labor force altogether. This would not be difficult if we had a functional Congress...
                                                                    There is a long-term issue with the deficit, but as every budget analyst knows, this is a healthcare story. If the United States fixes its healthcare system, then the deficit will not be a major problem. If we don't, then our broken healthcare system will wreck the economy regardless of what we do with Medicare, Medicaid and other public sector healthcare programs. ...

                                                                    [I made many of the same points here.]

                                                                      Posted by on Wednesday, November 23, 2011 at 11:07 AM in Budget Deficit, Economics, Health Care, Politics, Social Security | Permalink  Comments (16)


                                                                      Over the River and Through the Woods

                                                                      Heading over the river and through the woods today, and hoping the snow on the pass doesn't stop me from getting to grandma's house.

                                                                      [There are posts scheduled for later today.]

                                                                        Posted by on Wednesday, November 23, 2011 at 09:18 AM in Travel | Permalink  Comments (1)


                                                                        Barry Eichengreen: Europe's Never Ending Crisis

                                                                          Posted by on Wednesday, November 23, 2011 at 12:42 AM in Economics, International Finance | Permalink  Comments (14)


                                                                          Fed Watch: And the Global Economic Saga Continues

                                                                          Tim Duy:

                                                                          And the Global Economic Saga Continues, by Tim Duy: The last week has been a non-stop flood of news. And, quite honestly, none of it is encouraging. I imagine the sole exception to that rule is the relatively sanguine nature of the US data. That said, I remain unconvinced that the US can for much longer resist the downward pull of the rest of the globe.

                                                                          What more can we say about Europe that has not already been said? There has been no forward progress in the past week. To be sure, ECB bond buying has helped keep a lid on Italian bond yields. Yet, while ECB monetary policymakers focus on Italy, Spain and Belgium are slipping away. And France is clearly the next domino to fall. The "accidental" downgrade last week simply reveals that S&P has already prepared the report, clearly anticipating a deterioration in France's budget position as the Eurozone recession deepens. And to make matters worse, Zero Hedge points us to signs the Dexia bank rescue is faltering, and the Belgians realize they need to shift more of that burden of that rescue onto France. Meanwhile, the situation in Eastern Europe is rapidly deteriorating - Yves Smith directs us to the Telegraph for that story. And in Greece, the opposition party still insists they will not sign any pledge to commit to the October deal. Was any deal really reached last month?

                                                                          Conventional wisdom is that the European Central Bank eventually acts as a lender of last resort to alleviate the sovereign debt crisis. This was clearly not on the mind of ECB President Mario Draghi in his recent speech. I certainly hope something was lost in translation, as the speech has some memorable moments. Notably:

                                                                          Activity is expected to weaken in most of the advanced economies. This is the result of a weakening of various components of aggregate demand, both domestic and foreign.

                                                                          Economic activity is weakening because the underlying components of economic demand are weakening. I am not sure this is particularly insightful. Is this the best analysis he can muster from the intellectual firepower of ECB economists? If so, we are in very big trouble. But it continues. The first two of Draghi's three pillars of monetary policy:

                                                                          Continuity first and foremost refers to our primary objective of maintaining price stability over the medium term.

                                                                          Consistency means to act in line with our primary objective and with our strategy both in time and over time.

                                                                          I am having a hard time distinguishing between "continuity" and "consistency" here. The third (second?) pillar is predictable:

                                                                          Credibility implies that our monetary policy is successful in anchoring inflation expectations over the medium and longer term. This is the major contribution we can make in support of sustainable growth, employment creation and financial stability. And we are making this contribution in full independence.

                                                                          Gaining credibility is a long and laborious process. Maintaining it is a permanent challenge. But losing credibility can happen quickly – and history shows that regaining it has huge economic and social costs.

                                                                          Translation: "We can only save the Euro, but only at the cost of German hyperinflation of the 1920's." He then pulls a Ben Bernanke and tosses the ball back to fiscal policymakers"

                                                                          National economic policies are equally responsible for restoring and maintaining financial stability. Solid public finances and structural reforms – which lay the basis for competitiveness, sustainable growth and job creation – are two of the essential elements.

                                                                          But in the euro area there is a third essential element for financial stability and that must be rooted in a much more robust economic governance of the union going forward. In the first place now, it implies the urgent implementation of the European Council and Summit decisions. We are more than one and a half years after the summit that launched the EFSF as part of a financial support package amounting to 750 billion euros or one trillion dollars; we are four months after the summit that decided to make the full EFSF guarantee volume available; and we are four weeks after the summit that agreed on leveraging of the resources by a factor of up to four or five and that declared the EFSF would be fully operational and that all its tools will be used in an effective way to ensure financial stability in the euro area. Where is the implementation of these long-standing decisions?

                                                                          Here I think that Draghi is simply delusional. Does he not realize that plans to expand the ESFS are essentially dead at this point? That France and Germany are not willing or able to contribute more capital? That the plans to leverage the ESFS are floundering as the reality sets in that financial engineering will not work here? That the Chinese scoffed at efforts to get them to buy into such a plan? That the EU political system is capable at moving even a fraction of the speed of financial markets?

                                                                          I understand the ECB does not want to take on the role of fiscal authority, but what other choice do they have? Little else than to oversee the collapse of the currency they are charged to protect.

                                                                          Meanwhile, word is the Greek debt haircut deal is in jeopardy. Not a surprise, as not real was really reached at the summit, just a desperate attempt to buy time. Market participants should by now realize the outcome of any European summit is little more than smoke and mirrors.

                                                                          Speaking of smoke and mirrors, the news from this side of the pond is not exactly encouraging. The Supercommitte hit a brick wall, to no one's surprise but Wall Street's. The stage is set for a nontrivial fiscal tightening in short order - 5 weeks or so. Greg Ip at the Economist puts some numbers on what is at stake, and comes up with contractionary policy on the order of 2.4% of GDP. Note that the Federal Reserve forecast for 2012 is 2.5% to 2.9%, and I bet not much fiscal contraction is built into those numbers. So, make no mistake, the failure of the Supercommittee to come up with a plan for "smart" austerity - austerity focused on the medium and long-runs, with stimulus in the short run, is very meaningful. The conventional wisdom is that Congress will not go home for the holidays without at a minimum extending the payroll tax credit. I will follow that lead, but remain worried that the weight of Washington gridlock argues for more disappointment in the weeks ahead.

                                                                          Across the Pacific, another storm is brewing - the Chinese economy continues to slow. Via Bloomberg:

                                                                          China’s manufacturing may contract this month by the most since March 2009 as home sales slide, adding to evidence the world’s second-biggest economy is slowing, a preliminary purchasing managers’ index shows.

                                                                          The reading of 48 reported by HSBC Holdings Plc and Markit Economics today compares with a final number of 51 last month. A number below 50 indicates a contraction.

                                                                          Conventional wisdom is that the downside is limited, as at its heart China is a command and control economy. That said, even a minor slowdown is disconcerting, as the US economy does not need another trade shock to add to the trade and, more importantly, financial shock about to flow from Europe.

                                                                          Bottom Line: The world economy remains in a precarious place as we head into the final month of 2011.

                                                                            Posted by on Wednesday, November 23, 2011 at 12:24 AM in Economics, Fed Watch, International Finance, Monetary Policy | Permalink  Comments (9)


                                                                            Links for 2011-11-23

                                                                              Posted by on Wednesday, November 23, 2011 at 12:06 AM in Economics, Links | Permalink  Comments (50)


                                                                              Tuesday, November 22, 2011

                                                                              Economic Insecurity

                                                                              Via Motoko Rich at the NY Times:

                                                                              ... A new report ... shows that 45 percent of United States residents live without economic security. That means they are not earning enough income to cover basic expenses, plan for important life events like college or save for emergencies like unexpected health bills. ...
                                                                              The report showed that 55 percent of children live in households where families do not earn enough to achieve economic security. Even among those households with two full-time workers, 22 percent of those families with children earn less than is necessary to guarantee economic security.
                                                                              The most vulnerable households are those led by single mothers, as well as African-American and Hispanic households. Only 18 percent of households headed by single mothers are living with economic security, while two-thirds of Hispanic households and 62 percent of African-American households are not earning enough to cover basic needs and saving requirements.
                                                                              Part of the problem ... is that so many jobs pay low wages. ... “We have a construct in this country that if you work full time and keep your nose clean and live by the rules, you will get that full-time job that allows you to take care of your family,” Ms. Addkison said. “And what we’re finding is that workers who are working full time or the equivalent are still struggling.”

                                                                                Posted by on Tuesday, November 22, 2011 at 01:08 PM in Economics, Social Insurance | Permalink  Comments (58)


                                                                                Third Quarter GDP Growth Revised Downward

                                                                                Our not so robust recovery is weaker than first reported:

                                                                                Real gross domestic product ... increased at an annual rate of 2.0 percent in the third quarter of 2011 ... according to the "second" estimate released by the Bureau of Economic Analysis. ... The GDP estimates released today are based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, the increase in real GDP was 2.5 percent...

                                                                                So once again the advance estimate captured headlines and allowed policymakers to say hurray, things are improving, we don't have to act. I disagreed at the time -- even 2.5 percent is a sputtering recovery compared to what we need to reemploy the millions of jobless and policymakers have waited far too long already -- but the headline figure was enough to allow policymakers to "wait and see." Now, with growth even lower than we thought, will policymakers change course? Though I see no reason to let them off the hook, I gave up on fiscal policy authorities long ago. I just hope they won't make things worse. But monetary authorities ought to be acting now to bolster the economy further, especially given the substantial risks from Europe and elsewhere, and it's disappointing that they haven't done more already.

                                                                                Update: More comments at CBS News.

                                                                                  Posted by on Tuesday, November 22, 2011 at 09:36 AM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (14)


                                                                                  "Germany's Finances Not as Sound as Believed"

                                                                                  There may be politics behind this I'm unaware of (or not), but this is an interesting claim from Spiegel:

                                                                                  Germany's Finances Not as Sound as Believed, by Ralf Neukirch and Christian Reiermann, Spiegel: The German government likes to pride itself on its solid finances and claim the country is a safe haven for investors. But Germany's budget management is not nearly as exemplary as it would have people believe, and the national debt is way over the EU's limit. In some respects, Italy's finances are in much better shape.

                                                                                  When it comes to fiscal stability, frugality and responsible economic management, German Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble have only one role model: themselves.

                                                                                  The chancellor praises herself and her team for having "a clear compass for reducing debt," and insists: "Getting our finances in order is good for our country." ...

                                                                                  But it is debatable how much longer Germany can be seen as a refuge of stability and security. In reality, German government finances are not nearly in as good shape as the chancellor and the finance minister would have us believe. ...

                                                                                    Posted by on Tuesday, November 22, 2011 at 12:36 AM in Economics, International Finance | Permalink  Comments (34)


                                                                                    Links for 2011-11-22

                                                                                      Posted by on Tuesday, November 22, 2011 at 12:06 AM in Economics, Links | Permalink  Comments (35)


                                                                                      Monday, November 21, 2011

                                                                                      "The Easy Question in Financial Regulation"

                                                                                      Jeff Frankel:

                                                                                      The Easy Question in Financial Regulation, by Jeff Frankel: Many questions in the field of financial regulation are hard to answer: Would the separation of commercial banking and investment banking help prevent crises? To what extent should individual consumers be protected against foolishly borrowing too much? Should Credit Default Swaps be regulated out of existence? What should regulators do about patterns of high executive compensation that is evidently not a reward for performance? I have views on these questions, just as other observers do. But in these cases I see the arguments on both sides.
                                                                                      The question of funding the U.S. financial regulators, the Securities and Exchange Commission or the Commodity Futures Trading Commission, is easy to answer, however. I do not see the argument for cutting funding of the SEC and CFTC or for the other ways that Republicans in Congress are finding to make it difficult for these agencies to do their jobs. They are also deliberately impeding two new agencies set up in response to the 2008 financial crisis — the Consumer Financial Protection Bureau, lodged at the Fed, and the Office of Financial Research at the Treasury — from doing their respective jobs.
                                                                                      Bernard Madoff was the most obviously venal of the figures in the financial crisis of the fall of 2008. ... The SEC had been warned over and over again in the years before 2008. Why did it do nothing? In large part because it had been given a mandate in effect to regulate as little as possible.
                                                                                      I realize that in the United States, as in every country, we have some regulations that are excessive or undesirable. But how anyone can think that regulation by the SEC was excessive during 2001-08 and that this contributed to the financial crisis?
                                                                                      That is the irrationality on the Right. There is an equally irrational point of view on the Left. It goes like this: because the head of the CFTC is a former investment banker from Goldman Sachs, it must necessarily be that he is serving the interests of the financial community. It happens that Gary Gensler is doing a great job, against great odds. He has been trying to force derivatives trading into clearinghouses with lower counterparty risk, as required by the Dodd-Frank bill, to try to avoid repeats of September 2008. I can see, when an investment banker is appointed to such a position, asking questions that one would not ask otherwise. But he has been in office for 2 ½ years, pursuing regulation of derivatives with sufficient vigor to make most of Wall Street angry. Reading the words "Goldman Sachs" on someone’s resume should not be a substitute for all other thought processes.

                                                                                        Posted by on Monday, November 21, 2011 at 05:04 PM in Economics, Financial System, Politics, Regulation | Permalink  Comments (10)


                                                                                        Where’s the Super Committee for Job Creation?

                                                                                        I have a new column:

                                                                                        Where’s the Super Committee for Job Creation?

                                                                                        I am not happy with the Democrats.

                                                                                          Posted by on Monday, November 21, 2011 at 09:54 AM in Economics, Fiscal Times, Unemployment | Permalink  Comments (98)


                                                                                          "A Hollowing Out of the Middle"

                                                                                          I expected the numbers to be even worse:

                                                                                          Job Polarization in the United States: A Widening Gap and Shrinking Middle, by Jaison R. Abel and Richard Deitz, Liberty Street Economics: ... A Hollowing Out of the Middle Not surprisingly, these patterns have shifted the distribution of jobs among these groups. The chart below indicates the share of workers in each of the wage groups in 1980 and in 2009. In 1980, three-quarters of all workers were employed in mid-skill occupations. Among the occupations included in this group, Machine Operators accounted for 10 percent of the U.S. workforce, and Administrative Support accounted for 18 percent. By 2009, the share of jobs in the mid-skill category had shrunk to two-thirds, with Machine Operators accounting for just 4 percent of all jobs and Administrative Support for 14 percent. Over this same period, there was an increase in the share of jobs in the high and low skill groups. High skill jobs increased their share from 12 percent to 15 percent, while low skill jobs grew from 13 percent to 17 percent. As a result, the share of jobs at the upper end and lower end of the distribution increased between 1980 and 2009, while the share of jobs in the middle group fell.

                                                                                          Shares-of-employment

                                                                                          Clearly, the U.S. workforce has undergone a significant occupational restructuring since the 1980s. Along with an increase in the share of high skill jobs and low skill jobs, there has been a growing wage gap between workers in jobs that pay the most and those that pay the least. With a rising share of jobs at the upper and lower ends of the wage distribution and a wider gap in wages among occupations, jobs have become more polarized in the United States over the past three decades.

                                                                                          This looks like a supercritical pitchfork bifurcation (a potential path to chaos).

                                                                                            Posted by on Monday, November 21, 2011 at 09:45 AM in Economics, Income Distribution, Unemployment | Permalink  Comments (44)


                                                                                            Paul Krugman: Boring Cruel Romantics

                                                                                            Real technocrats don't take "refuge in fantasy as things go wrong"

                                                                                            Boring Cruel Romantics, by Paul Krugman, Commentary, NY Times: There’s a word I keep hearing lately: “technocrat.” ... I call foul. I know from technocrats; sometimes I even play one myself. And these people — the people who bullied Europe into adopting a common currency, the people who are bullying both Europe and the United States into austerity — aren’t technocrats. They are, instead, deeply impractical romantics. ...
                                                                                            And to save the world economy we must topple these dangerous romantics from their pedestals.
                                                                                            Let’s start with the creation of the euro. ...Europe’s march toward a common currency was, from the beginning, a dubious project on any objective economic analysis. ...
                                                                                            So why did those “technocrats” push so hard for the euro, disregarding many warnings from economists? Partly it was the dream of European unification, which the Continent’s elite found so alluring... And partly it was a leap of economic faith ... driven by the will to believe ... that everything would work out as long as nations practiced the Victorian virtues of price stability and fiscal prudence.
                                                                                            Sad to say, things did not work out as promised. But rather than adjusting to reality, those supposed technocrats just doubled down — insisting, for example, that Greece could avoid default through savage austerity, when anyone who actually did the math knew better.
                                                                                            Let me single out in particular the European Central Bank (ECB), which is supposed to be the ultimate technocratic institution, and which has been especially notable for taking refuge in fantasy as things go wrong. Last year, for example, the bank affirmed its belief in the confidence fairy ... that hasn’t happened anywhere.
                                                                                            And now, with Europe in crisis — a crisis that can’t be contained unless the ECB steps in to stop the vicious circle of financial collapse —... Mario Draghi, the ECB’s new president, declared that “anchoring inflation expectations” is “the major contribution we can make in support of sustainable growth, employment creation and financial stability.”
                                                                                            This is an utterly fantastic claim to make at a time when expected European inflation is, if anything, too low, and what’s roiling the markets is fear of ... financial collapse. ...
                                                                                            Just to be clear, this is not an anti-European rant, since we have our own pseudo-technocrats warping the policy debate. ...
                                                                                            So am I against technocrats? Not at all. I like technocrats — technocrats are friends of mine. And we need technical expertise to deal with our economic woes.
                                                                                            But our discourse is being badly distorted by ideologues and wishful thinkers — boring, cruel romantics — pretending to be technocrats. And it’s time to puncture their pretensions.

                                                                                              Posted by on Monday, November 21, 2011 at 12:21 AM in Economics, International Finance, Policy | Permalink  Comments (37)


                                                                                              Links for 2011-11-21

                                                                                                Posted by on Monday, November 21, 2011 at 12:06 AM in Economics, Links | Permalink  Comments (30)


                                                                                                Sunday, November 20, 2011

                                                                                                Summers: We Have to Do Better on Inequality

                                                                                                Larry Summers:

                                                                                                We have to do better on inequality, by Lawrence Summers, A-List, FT.com: The principal problem facing the US and Europe for the next few years is an output shortfall caused by a lack of demand. ... It would, however, be a serious mistake to suppose that our problems are only cyclical...
                                                                                                According to a recent Congressional Budget Office study, the incomes of the top 1 per cent of the US population, after adjusting for inflation, rose by 275 per cent from 1979 to 2007. At the same time, the income for the middle class grew by only 40 per cent. Even this dismal figure overstates the case of typical Americans...
                                                                                                What then is the right response to rising inequality? ...
                                                                                                First, government must be careful that it does not facilitate increases in inequality by rewarding the wealthy with special concessions. ... Second, there is scope for pro-fairness, pro-growth tax reform. ...Third,... the ability of the children of middle-class families to attend college has been seriously compromised by increasing tuition...
                                                                                                At the same time,... a gap has opened between the quality of the private school education offered to the children of the rich and the public school educations enjoyed by everyone else. Most alarming is the near doubling over the last generation in the gap between the life expectancy of the affluent and the ordinary.
                                                                                                Neither the politics of polarization nor those of noblesse oblige will serve to protect the interests of the middle class in the post-industrial economy. We will have to find ways to do better.

                                                                                                  Posted by on Sunday, November 20, 2011 at 02:07 PM in Economics, Income Distribution | Permalink  Comments (37)


                                                                                                  The Surprising Number of "Near Poor"

                                                                                                  Given the shape of the job market, and the hollowing out of the middle class, is there any reason to think this will not get worse in the near future?:

                                                                                                  Older, Suburban and Struggling, ‘Near Poor’ Startle the Census, NY Times: ...When the Census Bureau this month released a new measure of poverty, meant to better count disposable income, it began altering the portrait of national need. Perhaps the most startling differences between the old measure and the new involves data ... showing 51 million people with incomes less than 50 percent above the poverty line. That number of Americans is 76 percent higher than the official account... All told, that places 100 million people — one in three Americans — either in poverty or in the fretful zone just above it.
                                                                                                  After a lost decade of flat wages and the worst downturn since the Great Depression, the findings can be thought of as putting numbers to the bleak national mood — quantifying the expressions of unease erupting in protests and political swings. They convey levels of economic stress sharply felt but until now hard to measure. ... The size of the near-poor population took even the bureau’s number crunchers by surprise. ...
                                                                                                  Outside the bureau, skeptics of the new measure warned that the phrase “near poor” ... may suggest more hardship than most families in this income level experience. A family of four can fall into this range, adjusted for regional living costs, with an income of up to $25,500 in rural North Dakota or $51,000 in Silicon Valley.
                                                                                                  But most economists called the new measure better than the old, and many said the findings, while disturbing, comported with what was previously known about stagnant wages.
                                                                                                  “It’s very consistent with everything we’ve been hearing in the last few years about families’ struggle, earnings not keeping up for the bottom half,” said Sheila Zedlewski, a researcher at the Urban Institute...
                                                                                                  The results scrambled the picture of poverty in many surprising ways. The measure shows less severe destitution, but a bit more overall poverty; fewer poor children, but more poor people over 65. ...
                                                                                                  Perhaps the most surprising finding is that 28 percent work full-time, year round. “These estimates defy the stereotypes of low-income families,” Ms. Renwick said. ...
                                                                                                  One group likely to gain attention is older Americans. By the official count, only 22 percent of the elderly are either poor or near poor. By the alternate count, the figure rises to 34 percent.
                                                                                                  That is still less than the share among children, 39 percent, but it erases about half the gap between the economic fortunes of the young and old recorded in the official count. The likeliest explanation is high medical costs.
                                                                                                  Another surprising finding is that only a quarter of the near poor are insured...

                                                                                                  Medical costs are clearly a large part of the problem. But it's not the only difficulty middle and low income households face. Here's how Jeff Sachs describes the more general problem:

                                                                                                  ...The key to understanding the U.S. economy is to understand that we have two economies, not one. The economy of rich Americans is booming. Salaries are high. Profits are soaring. Luxury brands and upscale restaurants are packed. There is no recession.
                                                                                                  The economy of the middle-class and poor is in crisis. Poverty and near-poverty are spreading. Unemployment is rampant. Household incomes have been falling sharply. Millions of discouraged workers have dropped out of the labor force entirely. The poor work at minimum wages to provide services for the rich.
                                                                                                  There are two forces that account for this deep divide. The first is globalization. Manufacturing employment peaked in 1979, with jobs and factories increasingly shifting overseas. For a while, the housing bubble provided construction jobs that partly offset the loss of manufacturing jobs. Now the housing bubble has burst. Good jobs for young people with a high-school diploma or less have disappeared.
                                                                                                  Unless you have a four-year college degree, you're struggling. Yet only one-third of young men ages 25-29 have a bachelor's degree. Most of the rest are holding on for dear life. Among young Hispanic men, only 11 percent have a bachelor's degree; among young African-American men, the figure is 16 percent. ... Yet with more cuts in state support for tuition and in federal Pell Grants, the situation is rapidly getting worse.
                                                                                                  The second force is politics. When Obama has one of his many $35,800-a-plate fundraising dinners, he doesn't meet young people struggling to cover tuition payments. Obama has been separated from reality by the White House's campaign to collect between $750 million and $1 billion for Obama's re-election bid. The big money on the Republican side is even worse. Big Oil controls the party.
                                                                                                  The upshot is that both parties champion the 1 percent, the Republicans gleefully and the Democrats sheepishly. Both parties have worked together to gut the tax code. Companies use accounting tricks approved by the IRS to shift their profits to foreign tax havens. Hedge-fund managers and recipients of long-term capital gains pay only 15 percent top tax rates. As a result of these irresponsible tax policies and rampant tax evasion, tax collections as a share of national income have sunk to 15 percent, the lowest in modern American history.
                                                                                                  Americans are told daily that these low tax rates on the rich are the natural order of things, that the American economy would collapse if the top 1 percent were to pay more to help fund education, job training, infrastructure, and new technologies. This claim is absurd. ...

                                                                                                  Anyone who thinks struggling households aren't trying hard enough, i.e. that social services cause people to be lazy so eliminating them will motivate these households to work harder, is nuts. You can find exceptions at all income levels, but for the most part these households are doing all they can to survive. It's a self-serving argument by those who are afraid that they might be asked to help the people who, when jobs are available, work so hard day in and day out for wages that do not even keep up with productivity so that they can accumulate their fortunes. Unfortunately, this group has the power to bring self-serving arguments to fruition and so long as the rich and powerful are doing okay, we shouldn't expect much to change.

                                                                                                    Posted by on Sunday, November 20, 2011 at 09:45 AM in Budget Deficit, Economics, Social Insurance, Taxes | Permalink  Comments (46)


                                                                                                    Links for 2011-11-20

                                                                                                      Posted by on Sunday, November 20, 2011 at 12:06 AM in Economics, Links | Permalink  Comments (34)