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Tuesday, January 31, 2012

"New Treaty, Same Old Flaws"

Antonio Fatás is less than impressed with the European Union's new treaty:

New treaty, same old flaws, by Antonio Fatás: The European Union member states (with the exception of the UK and the Czech Republic) agreed yesterday to a new Treaty on "Stability, Coordination and Governance". The text of the agreement can be found in the web site of the European Council. My first reaction after reading the document was that I must have made a mistake and clicked on the wrong (old) document. It is very difficult to see the differences with the current economic policy framework. And, unfortunately, all the flaws of the previous system are still there.
Here is my list of concerns about the agreement.
1. Wrong title. The agreement is mostly about fiscal sustainability not about stability, coordination and governance. ...
2. Numerical limits at the center of the fiscal policy framework. The agreement relies again on strict numerical limits to enforce fiscal discipline. So far this has not worked and it is difficult to imagine why it would work going forward. ...
3. Not enough stress on good years. The main failure of fiscal policy in European countries in the last decade has been not to generate large enough surpluses in good years. By focusing so much on the deficit limit of 0.5% we simply ignore that the real issue is on how to generate those surpluses and we put all the emphasis on the bad economic years where getting things right is so much harder. We have not learned much from the last 10 years.
4. Limited focus on governance. Despite the fact that the word governance appears in the title of the agreement, there is very little change in terms of governance and enforcement. The agreement will be enforced by the governments of the member countries. These are the same actors that can potentially be the sinners. ... The agreement talks about automatic fines. Fines that are paid to whom? To the potential group of offenders? Do we really believe that if we had had in place an automatic fine imposed on Greece for having violated the deficit limit we would not be in a crisis today?
Providing an economic policy framework to manage the Euro area is not an easy task and I am glad that I was not part of the negotiations that have taken place over the last days. But the agreement shows that we have learned very little from the previous experience. We insist on maintaining a system that does not work and that only provides a distraction to other economic policy issues that, if we try hard enough, we might be able to solve.

    Posted by on Tuesday, January 31, 2012 at 08:20 PM in Economics | Permalink  Comments (5)


    The Path to a More Secure Economic Future

    A new column is live:

    The Path to a More Secure Economic Future

    It's a response to president Obama's plan to increase economic growth and job opportunities through a revival of manufacturing in the U.S.

      Posted by on Tuesday, January 31, 2012 at 01:11 PM in Economics, Social Insurance | Permalink  Comments (18)


      Fed Watch: I Don't See How This Can Continue

      Tim Duy:

      I Don't See How This Can Continue, by Tim Duy: The European unemployment numbers are out. The story from the Financial Times:

      Unemployment in the 17 euro countries climbed to 10.4 per cent in December, with the November rate revised upwards to the same rate, setting a fresh record since the introduction of the single currency in 1999. So-called “peripheral” members such as Spain and Greece recorded the highest rates, of 22.9 per cent and 19.2 per cent respectively.

      By contrast, national data from Germany, the eurozone’s bulwark, showed joblessness declined in January to 6.7 per cent, the lowest level since reunification in 1991.

      And a picture is worth a thousand words:

      Euunemp

      Perhaps France and Italy can hang on while relative wage deflation increases competitiveness with Germany, but conditions in the periphery look downright dire. And note that years of austerity have done little to help Greece and Ireland. I don't see the same medicine working in Spain or Portugal either. It is no wonder that Greece is looking for very substantial reductions in its debt, and it seems inevitable that Portugal will come to the same conclusion sooner or later. The great disparity in unemployment rates is another factor that leaves me pessimistic on the ultimate outcome of the Euro experiment. We need real fiscal transfers, and soon. More carrot with stick.
      For now, however, market participants are focused on the salutary effects of the ECB's LRTO (not to mention expectations for another round of QE from the Fed). Have these efforts eased conditions enough to allow for a Portuguese restructuring or even Greece's exit from the Euro? Or have market participants and European policymakers been drawn into a dangerous path of complacency? Thinking aloud, do current market conditions embolden German politicians to think they can finally cut Greece loose with little or no consequences to the rest of Europe? Would this indeed be the case? I have trouble believing in the "orderly exit" story, but perhaps the can has been kicked far enough down the road that it can happen.

        Posted by on Tuesday, January 31, 2012 at 01:08 PM in Economics, Fed Watch, International Finance | Permalink  Comments (18)


        Race and Housing

        Via Richard Green:

        Good news and bad news on race and housing, Richard Green: Ed Glaeser and Jake Vigdor find that all-white neighborhoods are a thing of the past.  They find:

        • The most standard segregation measure shows that American cities are now more integrated than they’ve been since 1910. Segregation rose dramatically with black migration to cities in the mid-twentieth century. On average, this rise has been entirely erased by integration since the 1960s.

        • All-white neighborhoods are effectively extinct. A half-century ago, one-fifth of America’s urban neighborhoods had exactly zero black residents. Today, African-American residents can be found in 199 out of every 200 neighborhoods nationwide. The remaining neighborhoods are mostly in remote rural areas or in cities with very little black population.

        • Gentrification and immigration have made a dent in segregation. While these phenomena are clearly important in some areas, the rise of black suburbanization explains much more of the decline in segregation.

        • Ghetto neighborhoods persist, but most are in decline. For every diversifying ghetto neighborhood, many more house a dwindling population of black residents.

        That said, Andy Reschovsky sends me to the most recent US Census Homeownership and Vacancy Report, which shows the ration of black to white ownership rates fell from .643 in 2006 to .617 in 2011; for hispanics, the fall was from .651 to .632.

          Posted by on Tuesday, January 31, 2012 at 11:07 AM in Economics, Housing | Permalink  Comments (0)


          "Should The U.S. Take A Harder Stance On China's Currency?"

          Joe Gagnon says the "best way to discourage currency manipulation is to tax it heavily":

          Should The U.S. Take A Harder Stance On China's Currency?, by Joe Gagnon, Planet Money: ...Ben Bernanke recently said that Chinese currency manipulation "is blocking what might be a more normal recovery process." In fact, the problem goes beyond China to include many other emerging economies and even a few advanced economies. ... The evidence suggests that currency manipulators jointly have increased their trade balances by about $1 trillion relative to where they would have been in the absence of manipulation. Europe and the United States have suffered the corresponding decline in trade balances. ...
          Based on estimates of the International Monetary Fund, the $1 trillion boost to European and US net exports from the ending of currency manipulation would return these economies to nearly full employment.
          The best way to discourage currency manipulation is to tax it heavily. The taxes should apply to all purchases of European and US assets, including bank deposits, by governments that engage in currency manipulation. Unlike trade sanctions, such taxation is allowed under international law, and it also does not cause the economic distortions that trade sanctions cause. As I outlined recently with my colleague Gary Hufbauer, anti-money-laundering procedures now in place can prevent currency manipulators from hiding their investments through third parties.
          One consequence of a reduction in currency manipulation would be a sharp drop in the values of the dollar and the euro in terms of the currencies of the manipulators. It is this exchange rate adjustment that would boost US and European exports, thereby generating jobs. ...

            Posted by on Tuesday, January 31, 2012 at 12:42 AM in China, Economics, International Finance, International Trade | Permalink  Comments (49)


            "Changing Inequality in U.S. College Entry and Completion"

            From the NBER:

            Gains and Gaps: Changing Inequality in U.S. College Entry and Completion, by Martha J. Bailey, Susan M. Dynarski, NBER Working Paper No. 17633, December 2011: [open link] We describe changes over time in inequality in postsecondary education using nearly seventy years of data... We find growing gaps between children from high- and low-income families in college entry, persistence, and graduation. Rates of college completion increased by only four percentage points for low-income cohorts born around 1980 relative to cohorts born in the early 1960s, but by 18 percentage points for corresponding cohorts who grew up in high-income families. Among men, inequality in educational attainment has increased slightly since the early 1980s. But among women, inequality in educational attainment has risen sharply, driven by increases in the education of the daughters of high-income parents. Sex differences in educational attainment, which were small or nonexistent thirty years ago, are now substantial, with women outpacing men in every demographic group. The female advantage in educational attainment is largest in the top quartile of the income distribution. These sex differences present a formidable challenge to standard explanations for rising inequality in educational attainment.

            There's a more extended summary of the results in the conclusion to the paper.

              Posted by on Tuesday, January 31, 2012 at 12:34 AM in Academic Papers, Economics, Universities | Permalink  Comments (4)


              Links for 2012-01-31

                Posted by on Tuesday, January 31, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (57)


                Monday, January 30, 2012

                FRBSF: Why Is Unemployment Duration So Long?

                What's responsible for the slow recovery of employment in recent recessions? :

                The analyses discussed here suggest that weak labor demand is the primary explanation for prolonged unemployment duration observed in the recent recession and recovery. The weak recovery of employment is similar to the jobless recoveries that followed the 1990–91 and 2001 recessions. This suggests that the labor market has changed in ways that prevent the cyclical bounceback in the labor market that followed past recessions. The shift towards jobless recoveries probably reflects a reduction in temporary layoffs during cyclical downturns. Stricter market incentives to control costs in the face of stiff domestic and international competition may also be factors. In addition, anecdotal evidence suggests that recent employer reluctance to hire reflects an unusual degree of uncertainty about future growth in product demand and labor costs. These special factors are not readily addressed through conventional monetary or fiscal policies. But such policies may be able to offset the central obstacle of weak aggregate demand.

                More here.

                  Posted by on Monday, January 30, 2012 at 01:01 PM in Economics, Fiscal Policy, Unemployment | Permalink  Comments (26)


                  DeLong: Neville Chamberlain was Right

                  Brad DeLong:

                  Neville Chamberlain was Right, by J. Bradford DeLong, Commentary, Project Syndicate: Neville Chamberlain is remembered today as the British prime minister who, as an avatar of appeasement of Nazi Germany in the late 1930’s, helped to usher Europe into World War II. But, earlier in that fateful decade, relatively soon after the start of the Great Depression, the British economy was rapidly returning to its previous level of output, thanks to Chancellor of the Exchequer Neville Chamberlain’s reliance on fiscal stimulus to restore the price level to its pre-depression trajectory.
                  Compare that approach to the expansion-through-austerity policy being pursued nowadays by British Prime Minister David Cameron’s government (with Chancellor of the Exchequer George Osborne leading the cheering squad). The country’s real GDP has flat-lined, and the odds are high that British real GDP is headed down again.
                  Indeed, in less than a year, if current forecasts are correct, Britain’s Cameron-Osborne Depression will not merely be the worst depression in Britain since the Great Depression, but probably the worst depression in Britain…ever. ...[continue reading]...

                    Posted by on Monday, January 30, 2012 at 10:09 AM in Economics | Permalink  Comments (19)


                    Someone Needs to Work on His Communications Strategy

                    It's weird to get email from Stephen Williamson calling me names. Not much else, just name calling.

                    How childish is this guy?

                      Posted by on Monday, January 30, 2012 at 09:20 AM in Economics | Permalink  Comments (42)


                      Paul Krugman: The Austerity Debacle

                      Austerity in recessions is a bad idea:

                      The Austerity Debacle, by Paul Krugman, Commentary, NY Times: Last week the National Institute of Economic and Social Research, a British think tank, released a startling chart comparing the current slump with past recessions and recoveries. It turns out that by one important measure — changes in real G.D.P. since the recession began — Britain is doing worse this time than it did during the Great Depression. ...
                      Nor is Britain unique. Italy is also doing worse..., and with Spain clearly headed for a double-dip recession, that makes three of Europe’s big five economies members of the worse-than club. Yes, there are some caveats and complications. But this nonetheless represents a stunning failure of policy.
                      And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years. ...
                      Thus in October 2010 David Broder, who virtually embodied conventional wisdom, praised Mr. Cameron for his boldness, and in particular for “brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession.” He then called on President Obama to “do a Cameron” and pursue “a radical rollback of the welfare state now.”
                      Strange to say, however, those warnings from economists proved all too accurate. And we’re quite fortunate that Mr. Obama did not, in fact, do a Cameron.
                      Which is not to say that all is well with U.S. policy. True, the federal government has avoided all-out austerity. But state and local governments, which must run more or less balanced budgets, have slashed spending and employment as federal aid runs out — and this has been a major drag on the overall economy. Without those spending cuts, we might already have been on the road to self-sustaining growth; as it is, recovery still hangs in the balance.
                      And we may get tipped in the wrong direction by Continental Europe, where austerity policies are having the same effect as in Britain, with many signs pointing to recession this year.
                      The infuriating thing about this tragedy is that it was completely unnecessary. Half a century ago, any economist — or for that matter any undergraduate who had read Paul Samuelson’s textbook “Economics” — could have told you that austerity in the face of depression was a very bad idea. But policy makers, pundits and, I’m sorry to say, many economists decided, largely for political reasons, to forget what they used to know. And millions of workers are paying the price for their willful amnesia.

                        Posted by on Monday, January 30, 2012 at 12:42 AM in Budget Deficit, Economics, Policy, Politics | Permalink  Comments (34)


                        Fed Watch: Europe Needs a Real Fiscal Union

                        Tim Duy:

                        Europe Needs a Real Fiscal Union, by Tim Duy: The rhetoric is heating up as we head into Monday's European Union's summit. On one hand, we see rumors circulating that a deal in the Greek debt talks is in the works. Via the Wall Street Journal:

                        But in Athens, the mood Saturday was upbeat. "We really are one step away from a final agreement [on the debt deal]," Finance Minister Evangelos Venizelos told reporters following a day of hectic talks in the Greek capital. "Next week we will be in a position to complete this procedure along with the talks we are holding on the new loan program."

                        Note, however, that these negotiations are just one piece of the puzzle. Via the New York Times:

                        Though a debt agreement may spur Greece’s next bailout installment, the deeper loss being inflicted on bondholders carries the risk that many investors, in particular hedge funds that in recent months have loaded up on cheap Greek bonds in hopes of a payday this March, will refuse to participate in the deal.

                        Greece will try to impose the terms on all investors by writing collective-action clauses into the contracts of its old bonds. By doing this, the hope is that the holdouts, estimated to sit on 10 percent to 15 percent of the 206 billion euros ($272 billion) in outstanding securities, will exchange their old bonds for new bonds — preferring the new discounted bonds to their old ones, which may become worthless.

                        Some hedge funds that have bought at rock-bottom prices may decide to pursue legal action, although such a process could take years with small certainty of success.

                        Also undecided is what the European Central Bank, which owns 55 billion euros of Greek bonds, will do. Despite public pressure that it, along with investors, accept a loss on its bonds, the bank has not budged.

                        It seems to me more accurate to state that one portion of the debt deal may be in place, but in the interest of unity on the eve of the EU summit, we will pretend that the issues of holdouts and the ECB are not relevant. In any event, given the steady deterioration of the Greek economy, I find it unlikely that this is the last word in the debt story.

                        More interesting, however, is German demands that Greece cede its budgetary authority to the Troika. Athens of course was a bit perturbed by the escalation of demands. Via the Financial Times:

                        The Greek finance minister has lashed out against a German proposal for its budget to be controlled by a eurozone commissioner as a condition for receiving a second €130bn bail-out, saying the country was already prepared to “implement tough but necessary decisions”...

                        ...The German plan, widely circulated in Athens and dubbed “the document of shame” by a local newspaper, would require Greece to pass legislation making debt repayments a budget priority, and would also give the new commissioner a veto over large-scale spending.

                        Perhaps the Greeks are not moving ahead swiftly enough with reforms, but consider that they are stuck between a rock and a hard place - anything positive in the long-run looks to be devastating in the short run. For example:

                        One main sticking point has been demands by EU and International Monetary Fund negotiators for a 25 per cent cut in the €750 minimum monthly wage and the abolition of an annual bonus paid as 13th and 14th salaries – measures that would improve competitiveness and bring Greece in line with minimum wages in Spain and Portugal.

                        George Koutromanis, labour minister, argued that the measure would reduce output by about 1.5 percentage points of gross domestic product and prolong the country’s recession, now in its fifth year.

                        Greece needs more carrots to move forward; Germany offers only the stick. Speaking of which, Germany subsequently responded to Athens indignation. Via the Wall Street Journal:

                        Germany's finance minister issued an unusually blunt warning that the euro zone might refuse to grant Greece a fresh bailout, pushing Athens into default unless it persuades Europe it can overhaul its state and economy...

                        ...Europe is "prepared to support Greece" with the new loan package, Mr. Schäuble said, but he warned: "Unless Greece implements the necessary decisions and doesn't just announce them ... there's no amount of money that can solve the problem."

                        The options for Greece are narrowing quickly - either willingly accept German rule, or exit the Euro. And perhaps plans for the latter are already well established. Via The Examiner (hat tip Ed Harrison):

                        Greece plans an orderly exit out of the Eurozone according to two sources close to Mr. Papademos, Greek Prime Minister, who spoke on condition of anonymity earlier today.

                        The sources confirmed that plans are ready to return to a legacy currency given the current circumstances and that such exit would be dealt with, quote “in as orderly a fashion as possible” unquote.

                        I am starting to wonder if Greece is going through the motions to get one more tranche of aid before they come to the conclusion that they must exit the Eurozone. Absent real transfers from Germany, staying in the Eurozone now means crushing recession under German rule. Exiting just means crushing recession. Germany, however, is playing a dangerous game testing Greek nationalism. Either outcome is bad for Greece, but I suspect pushing Greece out of the Euro is ultimately bad for Germany as well.

                        Meanwhile, other nations need to pay attention to how this all plays out, because austerity is just not working anywhere. Take Spain for example, where unemployment is at a depression-like level of 23%. A clear symbol of the failure of European economic policy, to be sure. Spain gets a pass, however, as for now it is playing the German game. Via the Wall Street Journal:

                        In an interview this week with Spain's El Pais newspaper, German Chancellor Angela Merkel noted Spain's high unemployment rate, and said her country was willing to help the region's fiscally frail countries, but that they must take steps to solve their own problems.

                        Soraya Sáenz de Santamaría, spokeswoman for Spain's new government, repeated that a sweeping overhaul of Spanish labor laws is coming in weeks. "To all those millions of people who are looking for a job, I want to tell them...we are speeding up the reforms that are necessary to turn this situation around," she told journalists after the weekly cabinet meeting.

                        The story is that high dismissal costs deter hiring. To be sure, a real issue. I would note, however, that this did not seem to be a problem a few years back when the construction boom fostered unemployment rates below 10%. While structural reforms are important, so to is demand. And where will that demand come from in the short run?

                        Even more pressing is the issue of Portugal, which will almost certainly need another bailout. Moreover, the 15.2% rate of 10 year debt calls into question the EU claim that the Greek PSI was an isolated event. Via Business Insider:

                        While on some level it is crucial for the country to sustain the idea that it is meeting its debt obligations until it has more aid in the bag, the truth might be that the gig is up; it's just unlikely that Portugal will continue to meet its debt and deficit goals amid mounting pressures, even if it complies with the troika plan.

                        This is much the same psychological development that took place in Greece last summer, as EU politicians realized that a managed default might be the best way to return Greek debt levels to sustainability.

                        Note that swift passage of an even watered-down commitment to EU-wide fiscal austerity may not be as easy as it sounds. Perhaps the Irish are no longer willing to suffer in silence, via the Financial Times:

                        The Irish government faces intense pressure to hold a referendum on the eurozone fiscal treaty after a poll that showed almost three quarters of the public want a vote on the agreement.

                        Months of uncertainty lie ahead. That said, perhaps their is some hope that Europe leaders will actually move where they need to go - true fiscal union. On the eve of the summit, we learned that EU leaders are starting to see the writing on the wall. Via the New York Times:

                        Bowing to mounting evidence that austerity alone cannot solve the debt crisis, European leaders are expected to conclude this week that what the debt-laden, sclerotic countries of the Continent need are a dose of economic growth.

                        A draft of the European Union summit meeting communiqué calls for ‘‘growth-friendly consolidation and job-friendly growth,’’ an indication that European leaders have come to realize that austerity measures, like those being put in countries like Greece and Italy, risk stoking a recession and plunging fragile economies into a downward spiral.

                        But the devil is in the details:

                        The difficulty, however, is that reaching such a conclusion is not the same as making it happen.

                        Instead, leaders will discuss long-term structural reforms and better use of E.U. subsidies, while avoiding mention of the one thing that could change the climate: a fiscal stimulus from Germany, the euro currency zone’s undisputed powerhouse.

                        Easy to say, tough to do given Europe's political makeup. At what point will Germany be willing to justify fiscal transfers to the rest of Europe. For now, the EU appears able to come up with little more than token sums of cash to support growth. According to Reuters:

                        The summit is expected to announce that up to 20 billion euros ($26.4 billion) of unused funds from the EU's 2007-2013 budget will be redirected toward job creation, especially among the young, and will commit to freeing up bank lending to small- and medium-sized companies.

                        A paltry sum when placed in context of 23 million unemployed in Europe.

                        Bottom Line: The European Central Bank's LTRO dramatically eased financial market tensions throughout Europe, revealing the important role of a lender of last resort. But underneath those tensions exist some very real and deep economic and political fractures in the European economy. And unless those fractures are quickly healed via a real fiscal union - not just an agreement to balance budgets, but a union in which rich countries transfer, not lend, resources to poor - the Euro experiment will be torn asunder.

                          Posted by on Monday, January 30, 2012 at 12:33 AM in Economics, Fed Watch, Financial System, Monetary Policy | Permalink  Comments (24)


                          "Who Cares How 'Deserving' the Poor Are?"

                          Noah Smith argues that the distinction between the deserving and the undeserving poor is "pointless":

                          Who cares how "deserving" the poor are?, Noahpinion: Bryan Caplan is apparently about to debate Karl Smith on the question of "How deserving are the poor?" I want to get my two cents in ahead of this debate, by asking the counter-question: "Who cares?"
                          The question of "How deserving are the poor" is a matter of opinion. There is no right answer, because to say someone "deserves" something is a prescriptive statement, and you can't prove those with facts. Also, it is a somewhat pointless question, because no matter what answer you decide you like, it doesn't really imply any particular policy prescription. In practice, people who say "The poor deserve to be poor" are usually just trying to push the idea that we shouldn't try to do anything about poverty other than scolding the poor for their own mistakes (I'll come back to this idea in a bit). But this doesn't really follow.
                          As I see it, there are two important questions about poverty from a policy perspective: 
                          1. Do we want to make poor people less poor?
                          2. If we do want to do that, how do we accomplish it?
                          Bryan Caplan's answer ... to the question of "How deserving are the poor" is that if people are poor mainly as a result of their own actions, then they deserve to be poor. But as I see it, whether people are poor because of their own actions doesn't really help us answer either of the two questions I posed above.
                          Regarding the first of my questions, "Do we want to make poor people less poor", it may be that your sense of morality tells you that if someone is in a condition as a direct result of their own actions, it would be wrong to try to remove that person from that condition. Fine, good for you and your sense of morality! But for my part, I simply don't care. If I am getting mugged by a poor person, I quite frankly do not give a rodent's gluteal region whether that person is poor because he made bad life choices or because the circumstances of his birth made his poverty inevitable; I want him to stop mugging me, and if making him less poor will make him stop mugging me, then maybe this would be a good thing to do, regardless of whether he "deserves" it. When I witness the urban blight, violence, drug abuse, and other social ills that poverty may be causing, as a non-poor person I have an interest in preventing these social ills from affecting me, regardless of whether the ills are "deserved."
                          Also, whether people are poor because of their own actions doesn't really tell us how to get them out of poverty. Scolding and finger-wagging does not work. Just because a person's actions got him into a situation doesn't mean that his actions can get him out of it. And even if poor people could raise themselves up out of poverty at any time, scolding and finger-wagging is not likely to induce them to suddenly do so. The conservative solution to poverty - make it really, really unpleasant to be poor, and then hope people will do the smart thing and avoid it - has failed and failed and failed again.
                          So from my point of view, asking whether or not poor people "deserve" their poverty is asking the wrong question.
                          That said, I think the Caplan definition of "deserve" is not as "uncontroversial" a moral premise as Caplan declares. The reason is that it is a partial-equilibrium definition, not a general-equilibrium one. If we live in a society in which X percent of the populace must be poor, then no matter what set of actions is taken by the population, some people will wind up in poverty. To see this, imagine that we lived in a society in which the hardest-working 50% of people get to be spectacularly rich, and the other 50% are forced to live in squalid poverty. In this society, if everyone raises their effort by 1000%, the number of people in poverty stays exactly the same. I doubt that most people would say that the lower half of the population "deserved" to stay in poverty after raising their effort by 1000%! But that is exactly what Caplan's definition implies. Also, note that in such a world, whether you "deserve" to be poor depends critically on the actions of other people (since the degree of effort required for a person to raise himself out of poverty depends on how much effort others are expending)...thus, Caplan's definition doesn't really seem to capture the notion of individual responsibility.
                          But anyway, that is a bit beside the point, because in my opinion the whole question is a bit of a pointless one.

                          Shouldn't those who complain about the undeserving poor also worry about the undeserving rich?

                            Posted by on Monday, January 30, 2012 at 12:24 AM Permalink  Comments (46)


                            Links for 2012-01-30

                              Posted by on Monday, January 30, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (5)


                              Sunday, January 29, 2012

                              Fed Watch: ZIRP and Interest Income

                              Tim Duy:

                              ZIRP and Interest Income, by Tim Duy: Edward Harrison at Credit Writedowns describes the Fed's zero interest rate policy as "toxic," noting that it is a transfer from savers and fixed-income investors to borrowers. On net, this is stimulative if the spending propensities of the latter exceeds that of the former, but the willingness of the borrowers to spend is constrained by weak household balance sheets. The Fed is thus pushing on a string, and possibly even making matters worse by reducing the income flow to households. Harrison points to the following chart to illustrate the severity of the problem:

                              If the Obama Administration takes advantage of low interest rates and is able to push forward with refinancing efforts for underwater borrowers, then we can expect an at least temporary economic boost of potentially substantial magnitude. See Joe Gagnon for estimates. I would expect more modest outcomes, as the Administration has proved itself capable of half-hearted efforts in the past. Anything, however, would be helpful at this point.

                              My question is how much of the zero interest rate environment is attributable to Fed policy directly? Or, in other words, is the Fed really just following the economy down? It seems that the banking system is awash with cash - note the trend of total checkable deposits:

                              Pcd

                              Considering the lack of take-up on the other side of the savings/borrowing equation, I have trouble seeing that interest rates would go to anywhere but down to rock bottom levels. And I certainly have trouble seeing that the Fed would improve conditions by raising interest rates.

                              That said, I fully agree with Harrison when he predicts:

                              But remember, households are still over-levered and interest rates cannot be stimulative since they are zero percent. When the next recession hits and the yield curve is still flat as a pancake, bad things are going to happen. That’s why I have to remind you how toxic this policy is.

                              We have witnessed lower interest rates with each recession since the mid-1980's, which begs the question of what happens when the next recession hits and the economy is still locked on the zero bound. Bad things, I think. From this I conclude that the Federal Reserve is clearly not taking the zero bound seriously enough. This is even more evident when one recognizes the central tendency for the Fed Funds rate forecast over the longer term is 4.0 to 4.5%, while six FOMC participants see the rate unchanged through 2014! Seems like a serious disconnect between where the economy is and where it should be. It is simply tough to disagree with Brad DeLong, who, upon reading Jim Hamilton, concludes the Federal Reserve is just plain wrong in its implementation of policy.

                              Maybe the next round of QE will do the trick, but I remain skeptical. Policy has consistently fallen short of that necessary to decisively propel the economy off the zero bound. Such policies have, in my opinion, fallen victim to fears of inflation. The Federal Reserve appears committed to a 2% target under any circumstances, with even a temporary increase considered unacceptable.

                              In short, I see the Fed's policy as toxic not so much because interest rates are locked at the zero bound, but because the Fed sees no urgency in rectifying the situation. I think this will be proven to be a serious policy failure when the next recession arrives, and I wish the Fed would make a clear objective to lift the economy off the zero bound, rather than issue a forecast that, when coupled with lack of immediate policy action, represents acceptance of the zero bound. As far as what the Fed can do to accomplish such an objective, in addition to loosening the inflation target, I tend to think they need to shift their policy framework to regular, permament additions to the balance sheet until the economy is well beyond the zero bound rather than emphasize the temporary nature of the entire monetary policy agenda.

                                Posted by on Sunday, January 29, 2012 at 12:20 PM Permalink  Comments (52)


                                Harmful Austerity

                                I noted the damage that austerity has done to the recovery here, and as Paul Krugman notes today, Jared Bernstein has been pushing the same point. As I wrote:

                                Austerity is Holding Back the Recovery: ...premature austerity -- cutting spending before the economy is ready for it -- is taking a toll on the recovery. The fall in government spending reduced fourth-quarter growth by 0.93 percent...
                                This is the opposite of what the government should be doing to support the recovery. We need a temporary increase in government spending to increase demand and employment through, for example, building infrastructure. That would help to get us out of the deep hole we are in. Instead, the government seems to be trying to make it harder to escape.
                                We do need to address our long-run budget problems once the economy is healthy enough to withstand the tax increases and program cuts that will be required. But the idea of "expansionary" austerity has failed. Austerity in the short-term simply makes it harder for the economy to recover and delays the day when you can finally address budget issues without harming the economy. The lesson is that government needs to support the recovery, not oppose it through a false promise that contraction of one sector in the economy will be expansionary. And given how far we still have to go before the economy is healthy again, it's not too late to put that lesson into practice.

                                As Jared Bernstein emphasizes, the main driving force behind the cuts in government spending has been declines at the state and local level. Here's a story from the local paper illustrating the harm this is doing not just to our present, but also to our future:

                                Eugene's Halls of Not Learning, by Susan Palmer, The Register-Guard: It’s a little after 1 p.m. at North Eugene High School and the lounge areas are filled with clusters of students. At one table, a group of junior and senior boys plays Magic, a complicated card game.
                                When asked, they say they’d rather be in class. “Don’t depict us as being lazy,” said Walker Squires, a junior. “We’re not doing it out of idleness. If I could, I would be in class.”
                                But this is the new normal at Eugene School District high schools. Students arrive late, leave early, or find something to do in the middle of the day because they can’t get all the classes they need or want.
                                Cuts that have reduced the district’s general fund budget by more than $20 million over the past three years mean fewer teachers and fewer course offerings in the high schools.
                                Michael Anderson, a junior at North, would be taking Advanced Placement physics and chemistry this term if he could, but there is no room in those classes for him.
                                “It’s frustrating when you actually want to be in school,” Anderson said. He had hoped that high school would allow him to go more deeply into the sciences that captivated him when he was younger, but there just aren’t enough classes, he said. The problem is widespread across all Eugene district high schools. ...

                                  Posted by on Sunday, January 29, 2012 at 09:40 AM in Budget Deficit, Economics | Permalink  Comments (28)


                                  Links for 2012-01-29

                                    Posted by on Sunday, January 29, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (25)


                                    Saturday, January 28, 2012

                                    Is Romney Double Taxed?

                                    Rajiv Sethi:

                                    Double Taxation, by Rajiv Sethi: The release of Mitt Romney's tax returns has drawn attention yet again to the disparity between the rates paid on ordinary income and those paid on capital gains. It is being argued in some quarters that the 15% rate on capital gains vastly underestimates the effective tax rate paid by those whose income comes largely from financial investments, on the grounds that corporations pay a rate of 35% on profits. Were it not for this tax, it is argued, dividends and capital gains would be higher, and so would the after-tax receipts of those (such as Romney and Warren Buffett) who derive the bulk of their income from such sources.

                                    Romney himself has made this argument recently, claiming that his effective tax rate is closer to 50%:

                                    One of the reasons why we have a lower tax rate on capital gains is because capital gains are also being taxed at the corporate level. So as businesses earn profits, that's taxed at 35 percent. Then as they distribute those profits in dividends, that's taxed at 15 percent more. So all total, the tax rate is really closer to 45 or 50 percent.

                                    The absurdity of this claim is clearly revealed if one considers capital gains that accrue to short sellers, who pay rather than receive dividends while their positions are open. Following the logic of the argument, one would be forced to conclude that short sellers are taxed at an effective rate of negative 20%, thereby receiving a significant subsidy due to the existence of the corporate tax. The flaw in this reasoning is apparent when one recognizes that asset prices are lower (relative to the zero corporate tax benchmark) not only when a short position is covered, but also when it is entered. ...[continue reading]...

                                      Posted by on Saturday, January 28, 2012 at 02:18 PM in Economics, Taxes | Permalink  Comments (41)


                                      The Purpose of Macroeconomic Policy?

                                      Chris Dillow is trying to figure out why the UK won't admit it's error in pursuing austerity. Perhaps the answer is that for some it wasn't an error:

                                      Macro amateurs, micro geniuses?, by Chris Dillow: Simon Wren-Lewis says the coalition’s austerity is a “major macroeconomic policy error.”
                                      It’s difficult to imagine the government ever acknowledging this. On Wednesday, Cameron resorted to immunizing strategies such as blaming the euro crisis (without noting that exports to the euro area have risen by 11.3% in the last 12 months), or celebrating the “lowest interest rates for a hundred years“, oblivious to the fact that these are a sign of economic weakness. I suspect that even if the GDP numbers had been much worse, he’d have used similar arguments.
                                      Macroeconomic policy, then, is not only made by rank amateurs - not one of the five Treasury ministers in the Commons has a postgraduate qualification in economics and only one has significant experience in financial work. It is made by amateurs who seem immune to feedback. Errors are only to be expected.
                                      Which raises a paradox. The job of running the economy is entrusted to anyone.  But the job of running companies requires people of such rare and delicate talent that only multi-million salaries will attract and motivate them.
                                      Why the inconsistency? I suppose you could argue - Robert Lucas style (pdf) - that the benefits of good macroeconomic stabilization policy are small, as are the costs of bad policy, so it doesn‘t matter much who runs macro policy. But ... the benefits of “good management” are also small. Even if Stephen Hester could raise RBS’s value by 50%, the annuity value of this to tax-payers would be only 0.03% of GDP.
                                      An alternative argument is that fiscal policy is not meant to be competent, but is instead meant to reflect the preferences of voters, and democracy is an intrinsic good, not an instrumental one.
                                      There is, though, a third possibility. The purpose of macroeconomic policy is not to stabilize the economy or to raise growth, but is instead merely an ideological cover for shrinking the state. And that justification for multi-million salaries is merely ideological cover for kleptocracy. It’s just class war.

                                      There clearly is a class of people willing to sacrifice the livelihood and well-being of others in pursuit of their ideological goal of a smaller government (so long as their own future remains secure). The notion of "expansionary austerity" was the cover, but so long as government shrinks as a result of the policy, the expansionary part is secondary. If reducing the size of government slows the recovery, that's a small price to pay for such a worthy goal -- for them anyway, the power behind this is in no danger of becoming unemployed. The main thing is to impose the small government ideology whenever there is a chance, and to use whatever argument is needed to serve that purpose, austerity is expansionary, tax cuts pay for themselves -- whatever works -- the ideologues will even embrace Keynesian economics if it allows them to argue for tax cuts that might further "starve the beast" (e.g. see Bush's argument for the first round of his tax cuts). But in the end the goal is a simple one, reduce the size and influence of government, and everything else is just a means of getting there.

                                        Posted by on Saturday, January 28, 2012 at 09:39 AM Permalink  Comments (23)


                                        Links for 2012-01-28

                                          Posted by on Saturday, January 28, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (31)


                                          Friday, January 27, 2012

                                          "Elite Wall Street Donations Jumped 700% in the Last 20 Years"

                                          Via Derek Thompson:

                                          Elite Wall Street Donations Jumped 700% in the Last 20 Years, by Derek Thompson: Banks "frankly own the place," Sen. Dick Durbin famously said of Washington during the debate over financial regulation in 2010. And when it comes to total contributions for big donors, you can see what he's talking about (FIRE = the Finance, Insurance and Real Estate sector):

                                          Contributions

                                          Most of that growth is coming from the securities and investment sector, followed by real estate, Lee Drutman writes at the Sunlight Foundation, elaborating:

                                          In 1990, 412 of the 1,091 elite donors from the finance industry came from the securities and investment industry, followed by 328 from real estate; by 2010, it was 2,178 from securities and investments, followed by 1,468 from real estate. In 1990, elite donors from securities and investments contributed $6.1 million and elite donors from real estate contributed $4.6 million. In 2010 elite donors from securities and investments contributed $84.0 million, while real estate donors contributed $44.5 million."

                                          So, in a span when the financial sector's share of the economy expanded by a third, from 6% to 8.4% of GDP, donations from this particular group increased by 700%. ...

                                            Posted by on Friday, January 27, 2012 at 04:46 PM in Economics, Politics | Permalink  Comments (26)


                                            Greenspan's Faith in Markets

                                            Antonio Fatás:

                                            A matter of faith (in markets), by Antonio Fatás: Alan Greenspan contributed yesterday to the Financial Times debate about Capitalism in Crisis. The title of his article was "Meddle with the market at your peril". Not surprisignly Greenspan presents a strong defense of capitalism and market economies by comparing its success to the failures of other systems (such as planned economies).

                                            I do not think that many disagree with that conclusion. But where the article surprised me is when he talks about the potential failure of markets:

                                            Anti-capitalist virulence appears strongest from those who confuse “crony capitalism” with free markets. Crony capitalism abounds when government leaders, usually in exchange for political support, routinely bestow favours on private-sector individuals or businesses. That is not capitalism. It is called corruption.

                                            This is the only sentence in the article where Greenspan admits that there could be some failure in a market economy. But that failure is driven by bad government behavior! Other than that, markets work fine. I hope his views are not really that extreme and that he is willing to accept some of the market failures that economists have identified in the past and that are taken care of by different forms of regulation. This is to me the interesting debate, the one that identifies market failures and then tries to address them via intervention or regulation. In that debate we might find that government intervention is not always possible or efficient. And I am sure we will find disagreement on the domains where government intervention is necessary or optimal. The other debate, the one that compares "capitalism" with the economic system of the former Soviet Union does not sound too interesting or useful at this stage. And it only leads to statements like the one above that seem to be driven by faith in one of the two systems.

                                            For awhile, Greenspan seemed to recognize that his excessive faith in markets blinded him to the dangers of the housing bubble -- his famous mea culpa. But lately he seems to be backing away from that recognition in an effort to defend his reputation and his record as Fed Chair.

                                              Posted by on Friday, January 27, 2012 at 11:06 AM in Economics, Market Failure | Permalink  Comments (67)


                                              GDP Report: Austerity is Holding Back the Recovery

                                              A few comments on the GDP report:

                                              GDP Report: Austerity is Holding Back the Recovery

                                              The government should be supporting the recovery, but it's not.

                                                Posted by on Friday, January 27, 2012 at 09:24 AM in Economics, Fiscal Policy | Permalink  Comments (19)


                                                Paul Krugman: Jobs, Jobs, and Cars

                                                Industrial clusters are more important than "heroic entrepreneurs":

                                                Jobs, Jobs and Cars, by Paul Krugman, Commentary, NY Times: Mitch Daniels,... Indiana’s governor, made the Republicans’ reply to President Obama’s State of the Union address. ... Mr. Daniels first berated the president for his “constant disparagement of people in business,” which happens to be a complete fabrication. ... He went on: “The late Steve Jobs — what a fitting name he had — created more of them than all those stimulus dollars the president borrowed and blew.” ...
                                                But ... Apple employs very few people in this country..., only 43,000..., and ... it’s not just about low wages. China also derives big advantages from the fact that so much of the supply chain is already there. A former Apple executive explained: “You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away.”
                                                This is familiar territory to students of economic geography..., companies that make a large contribution to a nation’s economy ... don’t exist in isolation. Prosperity depends on the synergy between companies, on the cluster, not the individual entrepreneur.
                                                But... From the G.O.P.’s perspective, it’s all about the heroic entrepreneur, the John Galt, I mean Steve Jobs-type “job creator” who showers benefits on the rest of us and who must, of course, be rewarded with tax rates lower than those paid by many middle-class workers.
                                                And this vision helps explain why Republicans were so furiously opposed to the single most successful policy initiative of recent years: the auto industry bailout.
                                                The case for this bailout ... rested crucially on the notion that the survival of any one firm ... depended on the survival of the broader ... cluster of producers and suppliers in America’s industrial heartland. If G.M. and Chrysler had been allowed to go under, they would probably have taken much of the supply chain with them — and Ford would have gone the same way.
                                                Fortunately, the Obama administration didn’t let that happen... And the details aside, much of Mr. Obama’s State of the Union address can be read as an attempt to apply the lessons of that success more broadly.
                                                So ... Mr. Daniels ... got his facts wrong, but he did, unintentionally, manage to highlight an important philosophical difference between the parties. One side believes that economies succeed solely thanks to heroic entrepreneurs; the other has nothing against entrepreneurs, but believes that entrepreneurs need a supportive environment, and that sometimes government has to help create or sustain that supportive environment.
                                                And the view that it takes more than business heroes is the one that fits the facts.

                                                  Posted by on Friday, January 27, 2012 at 12:34 AM in Economics | Permalink  Comments (81)


                                                  Links for 2012-01-27

                                                    Posted by on Friday, January 27, 2012 at 12:06 AM Permalink  Comments (19)


                                                    Thursday, January 26, 2012

                                                    Is President Obama a Mercantilist?

                                                    I think this is right. As I've said, I have doubts about relying upon increasing exports as our growth policy for the future, but what the president proposed in his State of the Union address is not what I think of as Mercantilism:

                                                    The mercantilist impulse, The Economist: Matthew Ygesias, writing at Slate, is perplexed by Barack Obama's plan to "boost the economy by hindering trade". He argues that in his state-of-the-union address, the president evinced "a strikingly retrograde, self-contradictory, and confused agenda of reviving American prosperity through mercantilism". ...

                                                    Others also perceived a mercantilist undertone in the president's speech, and not for no reason. The president called for the creation of a new Trade Enforcement Unit, extolled the virtues of a tariff on Chinese tires, and said the country was on track to fulfill his promise, made in 2010, to double export growth by 2015.

                                                    But mercantilism is about more than promoting exports. It also carries an implication of protectionism.... And on this count, setting the trade complaints aside for a moment, the evidence doesn't fully support the charge. Over the past three years Mr Obama has made a number of moves that effectively facilitate trade, smoothing the way for imports as well as exports. Last year, for example, he ended a ban on Mexican trucks entering the United States—a NAFTA provision that had not been previously implemented. He also signed free-trade agreements with Colombia, Panama and South Korea, which he cited in last night's speech.

                                                    My colleague at Free Exchange is also critical of the president's rhetoric on trade. He argues that it will bring us to a thankless zero-sum game, at best. The president said that "if the playing field is level, I promise you–America will always win." ... It's a sympathetic intuition on his part, but I interpreted the president's comment as a narrower critique of China's business practices. And that critique is widely shared; you hear it from Republicans, from Democrats, from business, from environmental and human-rights organisations, and so on. Mr Obama has arguably been on the dovish end of the spectrum when it comes to China. Just last month, his adminstration declined to accuse the country of manipulating its currency; Mitt Romney, by contrast, has repeatedly said that it is, and urged the president to take action.

                                                    On balance, then, I would say that Mr Obama's mercantilism is overstated, even if he has rhetorical impulses in that direction. ...

                                                    Here are what I think of as the "tenets of Mercantilism." I'll let you decide the extent to which they accord with the president's policies:

                                                    Mercantilists believed gold and silver are the most desirable forms of wealth. They also believed that the wealth of a nation depended upon the quantity of gold and silver in its possession. To maximize their holding of gold and silver, countries should maintain a positive balance of trade (with every country in the early years, but in later years they thought that an overall positive balance of payments was the goal, not a positive balance with every country you trade with).

                                                    They did not see lowering costs of production, or production in general, as creating wealth. This was a time when guilds produced most goods, and they were very inefficient. Thus, there was no notion of say, using division of labor and innovation to reduce costs and gain a competitive advantage over other producers (producers were not thought to add any value to production -- this was a big part of their beleif that economics was a zero-sum game -- when they looked at their society and history, they didn't see much in terms of productivity led growth, or much growth at all, the key was to maximize your share of the wealth that existed rather than try to gain wealth through productive innovations). The key to wealth was arbitrage and astute trading, not production. So trade -- and merchants who could win the trade battle -- were the focus of attention. Nations became strong by winning the zero-sum trade game.

                                                    They promoted nationalism. Since everyone cannot have a positive trade balance - they saw trade as a zero-sum game - a country needs to be powerful in order to compete effectively. This led to a desire for a strong military, a strong navy in particular (many advocated war on land and war at sea as ways to increase wealth).

                                                    They promoted protectionism in all its guises to maximize exports and minimize imports.

                                                    They supported colonization. This was a source of cheap raw materials, and a captive market to sell the finished goods. This essentially creates monopoly power since they did not let other countries trade with their colonies.

                                                    They believed in free trade within a country, but monopolies on external trade so as to be as powerful as possible in trade negotiations.

                                                    They favored a strong central government to enforce regulation of business (regulation was widespread and used to try to maintain the quality of goods so they would be in high demand on international markets --some regulations, e.g. for textiles, required stacks of books -- they controlled just about every aspect of production in their attempt to ensure quality and protect their reputations).

                                                    They believed a strong central government would also help with another goal, that of maintaining a large, hard-working, poorly paid labor force (e.g., they had maximum wage laws) . The point of focus was the nation, not the individual, and a productive, cheap labor force helped to keep goods cheap, made producers competitive, and hence helped with the accumulation of gold and silver. They did not tolerate idleness, and forced children into the workforce as soon as they were able (e.g. by age six or the family paid a penalty). If children (or anyone else, e.g. the unemployed) could produce something for export, then put them to work so they can help the country grow strong.

                                                      Posted by on Thursday, January 26, 2012 at 10:45 AM in Economics, International Trade | Permalink  Comments (42)


                                                      Fed Watch: Notes on the Fed Meeting

                                                      Tim Duy:

                                                      Notes on the Fed Meeting, by Tim Duy: Just a quick note today – I am swamped with classes and travel this week, and sadly cannot really do justice to the wealth of information provided today by the Fed.
                                                      The basics are well known at this point. The Fed extended its expectation for low rate out through the end of 2014, with the new hawk on the FOMC, Richmond Fed President Jeffrey Lacker, dissenting. The growth and inflation forecasts for 2012 were downgraded, while the unemployment forecast was upgraded slightly. Individual forecasts of the path of the Federal Funds rate were revealed, with six participants anticipating interest rate hikes in 2012 or 2013, in contrast to the broader expectation for low rates through 2014. The Fed now has an explicit inflation target of 2%. No new QE at this time.
                                                      Some initial thoughts:
                                                      First, the forecast for unemployment and inflation, combined with the restatement of the dual mandate with an explicit inflation target, scream for additional QE at this time. This is especially so when you realize the range of 2014 inflation forecasts remains centered on something south of the 2% target. Simply put, the Fed is clearly falling short of both mandates at this point. We need to be patient for the minutes where we can expect to learn more about QE options, and I agree with Calculated Risk that the Chairman paved the way for additional QE, assuming of course that the economy does not show immediate signs of improvement. Still, the delay is frustrating given the forecasts. That said, I think in the last minutes it was clear the Fed was moving in stages, and the communication stage is now complete. Now we can focus on the next round of QE. In addition, most participants would not see a need for immediate action given the improvement in the data flow combined with still stable inflation expectations.
                                                      Second, the unemployment forecast appears vulnerable given how quickly the rate decreased in recent months. If the rate of job growth necessary to keep with labor force growth is significantly less than the 125k-150k estimates often used, then I would expect even tepid growth would send the unemployment rate lower than the Fed’s forecast. The Fed is likely expecting a rebound in the labor force participation rates, but is that likely given the tepid growth forecasts? And how much of a decline of unemployment over the next month or two would prompt Bernanke to put a hold on QE3?
                                                      Third, I don’t read too much into the divide between the hawks and the doves regarding the timing of a rate increase. That timing is based on each participant’s individual forecasts, with the hawks likely having somewhat more optimistic forecasts for growth and employment compared to the doves. If forecasts disappoint, then the hawks will not be in a position to push for a more aggressive path of tightening. Likewise, the doves will modify their position relative to how their forecasts evolve. Which is why I am looking at that unemployment rate forecast – it seems the most vulnerable.
                                                      Bottom Line: The Fed is poised for additional easing, but the next round of QE is not quite a certainty yet. But I think we would need to see some significant upside surprises in the data in the near term to put plans for additional easing on hold. Watch the unemployment rate. We are already at 8.5%, the upper end of the Fed’s forecast. The lower end is just 8.2% - not far away, and something that is plausible at early as next week. The Fed’s forecast just doesn’t feel right given the 0.6 percentage point decline over the past four months.

                                                        Posted by on Thursday, January 26, 2012 at 01:07 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (32)


                                                        Promise in American Manufacturing?

                                                        In the State of the Union address, president Obama featured a revival of US manufacturing as one of the keys to a secure economic future. I am skeptical, but a group at MIT sees promise in this idea (and there does seem to be evidence pointing in this direction):

                                                        MIT faculty see promise in American manufacturing, by Peter Dizikes, MIT News Office: Not long ago, MIT political scientist Suzanne Berger was visiting a factory in western Massachusetts, a place that produces the plastic jugs you find in grocery stores. As she saw on the factory floor, the company has developed an innovative automation system that has increased its business: Between 2004 and 2008, its revenues doubled, and its workforce did, too. Moreover, the firm has found a logical niche: Since plastic jugs are both bulky and inexpensive, it’s not economical to produce them overseas and ship them to the United States, simply to fill them with, say, milk or syrup.

                                                        “Is this just an odd little story?” Berger asks. “Actually, no.” While the decline of American manufacturing has been widely trumpeted — manufacturing jobs in the United States have dropped from 20 million in 1979 to about 12 million today — conglomerates such as Procter & Gamble and high-tech firms such as Dow Corning have kept significant amounts of manufacturing in the country. Moreover, 3,500 manufacturing companies across the United States — not just the jug-making firm in Massachusetts — doubled their revenues between 2004 and 2008. With that in mind, Berger asks, “How can we imagine enabling these firms to branch out into more innovative activities as well?”

                                                        That is the kind of problem Berger and 19 of her faculty colleagues at MIT are now studying as part of a two-year Institute-wide research project called Production in the Innovation Economy (PIE), which is focused on renewing American manufacturing. The guiding premise of PIE is that the United States still produces a great deal of promising basic research and technological innovation; what is needed is a better sense of how to translate those advances into economic growth and new jobs.

                                                        As Berger puts it, “The single most important question in the study is: What kind of manufacturing do we need in order to get full value out of our innovation strengths?” ...

                                                        Like IT or not?

                                                        In so doing, PIE is also broadly scrutinizing a common assumption of the last quarter-century: that the information technology industry is the basic paradigm for innovation-based manufacturing in the United States. “Some people think we can just do the innovation, and then license and sell and outsource it,” Berger notes. By contrast, she says, “those of us in the PIE study think it’s an open question whether a similar model works elsewhere, particularly in the new emerging-technology areas.” ...

                                                          Posted by on Thursday, January 26, 2012 at 01:07 AM Permalink  Comments (24)


                                                          "A World with Healthy Middle-Class Societies"

                                                          Justin Fox:

                                                          Is the Next Karl Marx a Management Consultant?, by Justin Fox: Wouldn't it be nice, Francis Fukuyama writes in an article called "The Future of History" in the current issue of Foreign Affairs, if some "obscure scribbler ... in a garret somewhere" would "outline an ideology of the future that could provide a realistic path toward a world with healthy middle-class societies and robust democracies."

                                                          This ideology, Fukuyama goes on:

                                                          could not begin with a denunciation of capitalism as such, as if old-fashioned socialism were still a viable alternative. It is more the variety of capitalism that is at stake and the degree to which governments should help societies adjust to change. Globalization need be seen not as an inexorable fact of life but rather as a challenge and an opportunity that must be carefully controlled politically. The new ideology would not see markets as an end in themselves; instead, it would value global trade and investment to the extent that they contributed to a flourishing middle class, not just to greater aggregate national wealth.
                                                          It is not possible to get to that point, however, without providing a serious and sustained critique of much of the edifice of modern neoclassical economics, beginning with fundamental assumptions such as the sovereignty of individual preferences and that aggregate income is an accurate measure of national well-being.

                                                          There are other, more political, aspects of this ideology that Fukuyama goes into (and for those who have already clicked through to the article and found most of it to be behind a foreignaffairs.com wall, you can get through the wall just by registering; you don't have to pay). But reading his description of the economic side of it, I couldn't help but think to myself: This ideology already exists. Its scribblers aren't in "a garret somewhere." They're in well-appointed offices at business schools and management consulting firms.

                                                          I know this because these people are constantly submitting articles to HBR. A brief sampling: Michael Porter and Mark Kramer's "Creating Shared Value;" Christoper Meyer and Julia Kirby's "Runaway Capitalism;" Dominic Barton's "Capitalism for the Long Term;" the collected works of Umair Haque. And it's not just us: I got a press release last night from the World Economic Forum (presumably written in a Davos garret) headlined, "To Serve Society Better, Capitalism Needs a Redesign."

                                                          You could say this is just rhetoric and PR meant to stave off those truly radical scribblers in garrets — and that may be partly right. But something more fundamental is going on. ...

                                                          I hate to be Mr. Negative today, but I'm less than fully convinced that we are anywhere near embarking on a path that places the welfare of the middle class at the forefront of economic decisions.

                                                            Posted by on Thursday, January 26, 2012 at 01:07 AM in Economics | Permalink  Comments (38)


                                                            "How the Big Three Forgot Accounting 101"

                                                            The accountant's view:

                                                            How the Big Three forgot Accounting 101, EurekAlert: The Big Three were so driven by short-term profits that they forgot – or ignored – basic accounting practices that could have helped guard against production decisions with long-term damage, according to an award-winning study by Michigan State University and Maastricht University in the Netherlands.
                                                            Essentially, the domestic automakers built far more vehicles than they needed while failing to appropriately account for the costs of excess capacity or the damage the overproduction would have on their reputations. ...
                                                            Karen Sedatole, MSU associate professor of accounting ... co-authored the study with Ranjani Krishnan, MSU professor of accounting, and Alexander Bruggen, associate professor at Maastricht.
                                                            From 2005 to 2006 – several years before the auto bailouts – the researchers did field interviews with managers from one of the domestic automakers and collected a wealth of production data on the entire North American auto industry.
                                                            What they found was a culture of emphasizing short-term gain over long-term brand stability at General Motors Co., Ford Motor Co. and Chrysler Group LLC.
                                                            By building more cars than the market demanded, domestic automakers could better compete with their foreign counterparts on the hours-per-vehicle metric used in the influential Harbour Report and widely considered an indicator of automotive efficiency. Increasing production also allowed them to keep significant and rising costs of excess capacity off the Income Statement and on the Balance Sheet in the form of inventory. This practice, although acceptable for financial reporting purposes, is contrary to good accounting practices from a management decision-making perspective.
                                                            By doing this, the automakers made it appear as though their costs-per-vehicle were lower and their profits higher. Such behaviors are not uncommon for firms facing pressure from stockholders to boost operating profit and pressure from the public to justify large bonuses to executives. Sedatole characterized all these factors coming together as the "perfect storm."
                                                            Krishnan said the problem was worsened by high turnover in the management ranks. "The fact is, five years from now a certain manager may not be working here, so he needs to make his production numbers today so his analysts are happy, his investors are happy, his customers are happy and he makes his bonus," Krishnan said.
                                                            In the field interviews, many managers indicated they knew the short-term strategy would hurt their company's brand image, or reputation, in the long-term, but could not alter the culture. ...
                                                            As a result, the automakers were left with an excess supply of vehicles they had to sell by offering huge incentives to consumers, a costly endeavor that also exacerbated the decline in brand image.
                                                            Since the industry crisis of 2008-2010, which led to the bailouts, the automakers have reduced some excess capacity, the researchers said. But as long as the automakers still can exceed market demand for short-term gain, Krishnan believes they will continue to do so. ...

                                                              Posted by on Thursday, January 26, 2012 at 01:07 AM in Economics, Market Failure | Permalink  Comments (9)


                                                              Links for 2012-01-26

                                                                Posted by on Thursday, January 26, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (19)


                                                                Wednesday, January 25, 2012

                                                                The Fed will Keep Rates at "Exceptionally Low Levels" Through Late 2014

                                                                The Press Release describing the decisions of the Fed's monetary policy committee decisions was released this morning, and it is very similar to the press release from its last meeting in mid December with one notable exception. The Fed announced a commitment to "maintain a highly accommodative stance for monetary policy" by keeping the federal funds rate at "exceptionally low levels" at least through late 2014. The previous policy was to keep rates low through "at least through mid-201," so this extends the commitment by a year and a half and represents an easing of policy (I would have preferred more aggressive easing, it's not clear how much effect extending the commitment will have -- I don't expect it to be large -- but this is certainly a step in the right direction).

                                                                As for the tone of this statement relative to the statement in December, there is not much of a difference. There are a few minor changes, for example the statement about business investment is slightly more negative this time, and the committee dropped a statement about continuing to monitor inflation and inflation expectations closely (the "subdued outlook for inflation over the medium run" is one of the reasons the Fed decided to ease policy further), but beyond the change described above the two statements are very similar.

                                                                Here's the latest release:

                                                                Continue reading "The Fed will Keep Rates at "Exceptionally Low Levels" Through Late 2014" »

                                                                  Posted by on Wednesday, January 25, 2012 at 10:14 AM in Economics, Monetary Policy | Permalink  Comments (37)


                                                                  SOTU: The President's Economic Proposals

                                                                  My response to the economic policies discussed by president Obama in the State of the Union address (no link yet):

                                                                  SOTU: The president's economic proposals, Commentary, CBS News: Prior to president Obama's State of the Union address I said he should do two things, defend the administration's economic policies to date, and talk about what will be done from this point forward to solve the nation's economic problems.

                                                                  However, except for the bailout of the auto industry and a brief mention of a few other successful initiatives such as financial reform, the president didn't say much about his administration's past economic policies. In retrospect, that was probably wise. Trying to convince people that the stimulus and bailout policies were more effective than they realize simply brings these issues into the limelight. The policies were very unpopular, and arguing with the public about their success is a losing proposition. It's better to look ahead. As Obama said in the speech:

                                                                  I want to speak about how we move forward, and lay out a blueprint for an economy that's built to last -- an economy built on American manufacturing, American energy, skills for American workers, and a renewal of American values.

                                                                  The president began the discussion of his economic initiatives by outlining a proposal to revive manufacturing in the US. The plan is to use tax breaks to encourage companies to locate in the US, to keep jobs at home by eliminating tax advantages for companies that move offshore, to lower corporate taxes in the US, and to appeal to the goodwill of US companies (who should do what they can do to bring jobs back to this country).

                                                                  He also wants to boost exports. To this end, he proposed more trade agreements (and lauded those the administration has already put into place), and he highlighted the creation of a "Trade Enforcement Unit that will be charged with investigating unfair trade practices in countries like China."

                                                                  Finally, the plan to revive economic growth and employment also involves more support of small businesses, e.g. tax cuts and a reduced regulatory burden, support for research and development (particularly in energy related areas), mortgage refinancing for "responsible" homeowners," an extension of the payroll tax cut, and a plan to repair crumbling infrastructure.

                                                                  The plan the president outlined is fine as far as it goes, but I wanted a jobs plan that was big and bold. I wanted a plan that puts immediate job creation at the forefront. However, this plan is largely tax cuts, it's piecemeal, and it's mostly directed at our long-run problems. Bringing business home doesn't happen overnight, R&D takes time, so does infrastructure, and so on. Millions of people need jobs now, not later. They don't have time to wait, for example, for manufacturing to move from China back to the US, and there's no certainty that will happen in any case. What was missing from the speech is a strong, coherent plan to create jobs immediately. Don't get me wrong, we need to address our long-run problems. But we also need to get people back to work as soon as possible.

                                                                  Obama's education initiatives also deal with long-run rather than short-run issues. His call to improve education at all levels, and to make sure higher education is available to everyone is certainly welcome and it would help us in the long-run, but it won't create many jobs over the next few months. He does call for improved job retraining programs, and "a national commitment to train two million Americans with skills that will lead directly to a job," but even those programs will take time to put into place.

                                                                  He also mentioned other issues in the speech such as the budget deficit and the need to regulate markets, financial markets in particular. The most notable proposals are his plan to impose a minimum 30 percent tax rate for incomes over a million dollars per year, and the surprisingly strong commitment to pursue financial fraud. The administration will create "a Financial Crimes Unit of highly trained investigators to crack down on large-scale fraud and protect people's investments." Obama will also ask the Attorney General "to create a special unit of federal prosecutors and leading state attorneys general to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis." This is very much needed, and should have been done long ago.

                                                                  Finally, in my list of recommendations I also mentioned the need to hammer Republicans over obstructionism, and on this topic the president said "I intend to fight obstruction with action." I'm not exactly sure how that works, but at least he mentioned the issue.

                                                                  Right now, there are millions of people unemployed. That's a poor state of the union -- we have an employment crisis -- and putting people back to work ought to be treated as a national emergency. Though I am less enthusiastic than the administration about an export led strategy for economic growth, the speech hit many of the right notes where our structural problems are concerned. And there were certainly nods toward our short-run problems as well. But a strong sense of urgency about our immediate employment problem was missing from the speech. It's probably wise politically not to promise to create jobs between now and November. That could backfire if unemployment falls sluggishly or not at all (and if unemployment falls at a relatively fast pace, the administration can still claim credit). Nevertheless, I would have preferred a more concerted and detailed effort to deal with our immediate employment problems.

                                                                    Posted by on Wednesday, January 25, 2012 at 02:07 AM in Economics, MoneyWatch, Politics | Permalink  Comments (53)


                                                                    Links for 2012-01-25

                                                                      Posted by on Wednesday, January 25, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (18)


                                                                      Tuesday, January 24, 2012

                                                                      "How to Save Economics"

                                                                      Robert Johnson on how to save economics:

                                                                      ...first, economists should resist overstating what they actually know. The quest for certainty, as philosopher John Dewey called it in 1929, is a dangerous temptress. In anxious times like the present, experts can gain great favor in society by offering a false resolution of uncertainty. Of course when the falseness is later unmasked as snake oil, the heroic reputation of the expert is shattered. ...

                                                                      Second, economists have to recognize the shortcomings of high-powered mathematical models, which are not substitutes for vigilant observation. Nobel laureate Kenneth Arrow saw this danger years ago when he exclaimed, “The math takes on a life of its own because the mathematics pushed toward a tendency to prove theories of mathematical, rather than scientific, interest.” ...

                                                                      The third remedy for repairing economics is to reintroduce context. More research on economic history and evidence-based studies are needed to understand the economy and overcome ... mechanistic bare-bones models...

                                                                      Fourth, we must acknowledge the intimate, inseparable relationship between politics and economics. Modern debates about who caused the financial crisis—­government or the private financial sector—are almost ­nonsensical. We are living in an era of money politics and large powerful interests that influence the laws and regulations and their enforcement. In order to catalyze the evolution of economics, research teams would benefit from multidisciplinary interaction with politics, psychology, anthropology, sociology and history.

                                                                      Such interdisciplinary communication would also benefit another neglected area of economics: the study of macroeconomic systems. Psychologists mock what economists call the micro­foundations of consumer behavior.... That this framework is suitable for aggregate systems in a globalized economy simply because the tribe called economics has agreed to adhere to these ad hoc assumptions makes no sense. Increased interactions with disciplines that economists have often mocked as unscientific would greatly improve economists’ understanding of the real world and would be more truly scientific. ...

                                                                      Curious to hear your thoughts on this, the last point in particular.

                                                                        Posted by on Tuesday, January 24, 2012 at 04:41 PM in Economics, Methodology | Permalink  Comments (68)


                                                                        Cochrane and Stimulus

                                                                        Noah Smith is surprised:

                                                                        Cochrane: Just don't call it "stimulus"!, Noahpinion: John Cochrane has a long blog post up, the first half of which is a general discussion of the idea of fiscal stimulus, and the second half of which is a rant about how mean Paul Krugman and Brad DeLong are. I'm going to talk about the first half.

                                                                        Cochrane writes:

                                                                        Let's be clear what the "fiscal stimulus" argument is and is not about. 
                                                                        It is not about the proposition that governments should run deficits in recessions. They should, for simple tax-smoothing, consumption-smoothing, and social-insurance reasons, just as governments should finance wars with debt. That doesn't justify all deficits -- one can still argue that our government used the recession to radically increase permanent spending. But disliking "stimulus" is not the same thing as calling for an annually balanced budget. 
                                                                        Nor is it about debt financing of "infrastructure" or other genuine investments. If the project is valuable, do it. And recessions, with low interest rates and available workers, are good times to do it. That doesn't justify all "infrastructure" roads and rails to nowhere, of course... 
                                                                        The "stimulus" proposition is that additional spending -- whether needed or not -- raises output and general welfare.  Pay people $1 to dig ditches and fill them up again, and the whole economy gains $1.5. (emphasis mine)

                                                                        So Cochrane:

                                                                        1. Is against austerity during recessions, and

                                                                        2. Is in favor of increased public investment during recessions.

                                                                        But countercyclical deficits and countercyclical public investment do not, in his terminology, represent "stimulus"; that term is reserved for the Old Keynesian hole-filling sort of spending. And what does Cochrane think about that sort of stimulus?

                                                                        Stimulus still an economically interesting proposition, and there is a great deal of uncertainty about whether, when, and how well it might work. There is a huge academic literature being produced right now... 
                                                                        Here are the facts. Some economic models do predict a fiscal stimulus effect. Some don't...The facts are far from decisive...So, there is a lot of uncertainty and a lot we don't know about how the macroeconomy works.
                                                                        And my response to this is:

                                                                        !!! o_O !!!   <-- (this is an "emoticon" that indicates surprise)

                                                                        If I told you that a famous economist thought that austerity is a bad idea in recessions, that recessions are a great time to boost debt-financed infrastructure investment, and that additional Keynesian stimulus spending was an "economically interesting proposition" about which the jury was still out, would you guess that the economist was John Cochrane? Before I read this post, I would not have. But hey, that's cool! ...

                                                                        So why doesn't Cochrane stand up and loudly advocate a  massive debt-financed program of road and bridge repair? Is it because the public might get the wrong idea, and start believing in "stimulus" of the hole-filling variety? Is it because infrastructure investment must be politically sacrificed in order to "starve the beast" and fight against creeping socialism? Is it just because Paul Krugman and Brad DeLong are mean mean meanies?

                                                                        For crying out loud!

                                                                        I may be wrong, but it seems to me that politics and/or personal feuds have contaminated the public debate over fiscal policy.

                                                                          Posted by on Tuesday, January 24, 2012 at 10:23 AM in Economics, Fiscal Policy | Permalink  Comments (15)


                                                                          SOTU: Obama Must Make the Case for His Economic Agenda

                                                                          What should Obama say about his economic policies in the State of the Union address?:

                                                                          SOTU: Obama must make case for his economic agenda

                                                                          I like the longer version better, but there is also a shorter version here.

                                                                          Update: Don't like some of the tweaks from an editor onthis one -- here's the unedited version:

                                                                          SOTU: Obama Must Make the Case for His Economic Agenda: Since this is an election year, the annual State of the Union address provides Obama with the opportunity to convince voters that his economic policies have helped to bring about the recovery that is currently underway, and to highlight his plans for the economy from this point forward.

                                                                          What does Obama need to do to defend his economic policies?

                                                                          First, he needs to convince voters that his economic policies have been directed first and foremost at the problems the recession has caused for working class households. The perception is that saving the bankers came first, some see the financial bailout as little more than a way to make the already rich even richer, and with Wall Street recovering much faster than Main Street that sentiment is understandable. Why weren't job creation, mortgage relief, and other policies to help those struggling due to the recession higher priorities for the administration?

                                                                          I think Obama can answer the question about why a financial bailout was necessary. The situation would have been much worse for the working class if the financial system had been allowed to meltdown entirely, and the financial bailout prevented that from happening. A harder question is why it was necessary to bailout the very people who caused the problems in the first place. Why weren't the high rollers in the financial sector asked to pay a higher price? Why couldn't we, for example, have nationalized troubled banks temporarily, kicked out the financial executives, repackaged the assets, and then resold them back to the private sector? That's what we do, in essence, when traditional banks go bad so why not do it here too?

                                                                          Here again there's an answer, the administration did not feel it had the legal authority to do the bailout any other way -- the troubled institutions were non-traditional "shadow" banks and they did not have the necessary legal powers -- and not doing it at all would have been a disaster. There is disagreement about what they had the authority to do, but I think the administration is sincere in making this argument. In any case, Obama should take this opportunity to point out that the Dodd-Frank legislation fixes the problem of not having the legal authority to do anything but throw money at troubled too big to fail institutions, and that some of the key provisions of the Dodd-Frank legislation required time to implement and are just now coming online. But the main point to emphasize is that the recovery we are finally starting to see took a long time to get here, in part due to the political obstacles the administration faced, but it would have been even worse had the administration been less aggressive in its attempts to save and reregulate the financial sector.

                                                                          But if the point was to help the middle class rather than bankers, what evidence is there that this has happened? This brings up the second thing Obama needs to do, explain how his stimulus package helped working class households -- the general perception is that it didn't do much at all -- and explain his plans to get people back to work as soon as possible. What does he plan to do between now and November?

                                                                          The case for the stimulus package is a tough one, and it's partly the administration's own fault. The administration's initial projection for the severity of the recession was far, far too rosy, and this caused them to predict levels of unemployment that were much lower than they would actually be able to attain. When the actual economy turned out to be much worse than predicted, actual levels of employment fell short of projections making it appear that the stimulus did little or nothing. For example, suppose the prediction is that the unemployment rate will be 8 percent with no stimulus, and 6 percent if you put a stimulus in place. Thus, you tell everyone exactly that, the economy is likely to go to 8 percent unemployment if we do nothing, and 6 percent with the stimulus package. However, if the actual no-stimulus outcome is 10 percent rather than 8 percent, then even if the stimulus brings unemployment down to 8 percent it will look like it did nothing. You predicted 8 percent without the stimulus, and 8 percent was the outcome.

                                                                          Thus, even though there is lots of evidence from both academic and business economists that the stimulus policies worked (e.g. 1, 2, 3), the president is in a tough spot making the case. I think the answer is to say exactly what happened, the original projections were far too optimistic and so on, and emphasize that things would have been much worse without the stimulus package.

                                                                          But more important politically is what the president plans to do next, in particular between now and November, and the president must emphasize a strong commitment to job creation. The chances that a Republican Congress will go along with the president's proposals are very low, and he should not be shy about pointing to the political barriers that stand in the way of his policy initiatives. But he must make it clear that he won't stop trying to do whatever he can on behalf of the working class -- that he'll keep pounding Congress on this issue at every opportunity. The actual performance of the economy around election time is what will matter most, if things are improving that will make a big difference in November. But it's very unlikely our problems will be completely over by the time the election rolls around, and whatever Obama can do to make it clear that he is doing his best to help working class households despite the obstruction he faces will aid his election chances.

                                                                            Posted by on Tuesday, January 24, 2012 at 10:22 AM in Economics, Politics | Permalink  Comments (16)


                                                                            Summers and Stimulus: More or Less?

                                                                            Jared Bernstein defends Larry Summers:

                                                                            Summers and Stimulus, by Jared Bernstein: Ryan Lizza has a great piece out on President Obama’s decision making processes though many of the toughest issues he’s faced. ... He even links to one of key economic memos, and here, on one specific point, I’d like to offer a different, and I think more accurate, angle to Lizza’s take.

                                                                            Throughout the article, Lizza supports the view that economic adviser Larry Summers was on the side of doing less in terms of stimulus against those of us who argued for doing more. Not so. ... Rather than discouraging the President from doing more, I recall his position as being much like he describes in the memo...:

                                                                            “The rule that it is better to err on the side of doing too much rather than too little should apply forcefully to the overall set of economic proposals.”

                                                                            I’m not saying we did enough, but I am saying Larry was among those who recognized the urgency of the Keynesian imperative. And not just in January of 2009, but for the duration of his tenure. ...

                                                                            What about the charge that, as Krugman puts it:

                                                                            [Summers et al believed that] if the stimulus is too big, we’ll have trouble scaling it back, but if it’s too small, we can always go back to Congress for more. That was deeply naive — and I said so in real time.

                                                                            The reply is:

                                                                            And yes, Larry was wrong, as was I and many others, that it would be easier to add than subtract. In fact, the evolution of that view is at the heart of the Lizza’s trenchant analysis, which at its core is an anatomy of the level of partisanship with which we are currently stuck. 
                                                                            It’s fair to say that too few of us recognized that dynamic coming out of the gate. It’s also fair to say that such die-hard, mindless opposition by those whose primary goal is to defeat the President is…um…antithetical to good government, to put it nicely.

                                                                            The fact that they'd face "die-hard, mindless opposition" from Republicans shouldn't have come as a surprise. Krugman and others warned about that as well.

                                                                              Posted by on Tuesday, January 24, 2012 at 01:19 AM in Economics, Fiscal Policy, Politics | Permalink  Comments (32)


                                                                              Links for 2012-01-24

                                                                                Posted by on Tuesday, January 24, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (33)


                                                                                Monday, January 23, 2012

                                                                                Surowiecki: Private Equity

                                                                                Here's an explanation of how private equity works from James Surowiecki of the New Yorker:

                                                                                Private Equity, by James Surowiecki: ...the people who run America’s private-equity funds must be ruing the day Mitt Romney decided to run for President. His fellow Republican candidates, of all people, have painted a vivid picture of private-equity firms ... as job-destroying vultures, who scavenge the meat from American companies and leave their carcasses by the side of the road. ...

                                                                                But the real problem with leveraged-buyout firms isn’t their impact on jobs, which studies suggest isn’t that substantial one way or the other. ... The real reason that we should be concerned about private equity’s expanding power lies in the way these firms have become increasingly adept at ... deriving enormous wealth not from management or investing skills but, rather, from the way the U.S. tax system works. Indeed, for an industry that’s often held up as an exemplar of free-market capitalism, private equity is surprisingly dependent on government subsidies for its profits. ...

                                                                                In the past decade,... Having already piled companies high with debt in order to buy them, many private-equity funds had their companies borrow even more, and then used that money to pay themselves huge “special dividends” ... to recoup their initial investment while keeping the same ownership stake. Before 2000, big special dividends were not that common. But between 2003 and 2007 private-equity funds took more than seventy billion dollars out of their companies. These dividends created no economic value—they just redistributed money from the company to the private-equity investors.

                                                                                As a result, private-equity firms are increasingly able to profit even if the companies they run go under—an outcome made much likelier by all the extra borrowing—and many companies have been getting picked clean. ...

                                                                                As if this weren’t galling enough, taxpayers are left on the hook. Interest payments on all that debt are tax-deductible; when pensions are dumped, a federal agency called the Pension Benefit Guaranty Corporation picks up the tab; and the money that the dealmakers earn is taxed at a much lower rate than normal income would be, thanks to the so-called “carried interest” loophole. ... It’s a very cozy arrangement.

                                                                                If private-equity firms are as good at remaking companies as they claim, they don’t need tax loopholes to make money. ... Time to change them.

                                                                                Paul Krugman adds:

                                                                                Summers and Shleifer argued back in 1988 that buyouts are often aimed at “value redistribution” rather than “value creation”; specifically, a lot of the gains to the buyout specialists come from breaking implicit contracts with “workers, suppliers, and other corporate stakeholders.”

                                                                                They make one especially keen point: if it were really about adding efficiency, why do the same people lead takeovers in many industries, instead of people with specific expertise in each industry doing the job? Their answer is that these specialists are specialists in deal-breaking, not value creation.

                                                                                  Posted by on Monday, January 23, 2012 at 05:40 PM in Economics, Financial System | Permalink  Comments (34)


                                                                                  Is Newt a Bubble?

                                                                                  As I'm watching political scientists squirm in their chairs trying to answer the question of whether Newt is for real or a temporary blip in Romney's path, and answer why they didn't see the latest Newt bubble coming, it brings back memories.

                                                                                  So what do you think? Is Newt a bubble? Will his support collapse suddenly and spectacularly, or is he here for the long haul?

                                                                                    Posted by on Monday, January 23, 2012 at 12:32 PM in Economics, Politics | Permalink  Comments (42)


                                                                                    "The Food Stamp Speaker"

                                                                                    If you look into why food stamp enrollment has increased so much during the recession, it turns out that Newt Gingrich played a key role. This is from David Dayen at FDL:

                                                                                    The “Food Stamp Speaker” is Actually Newt Gingrich, by David Dayen: ...Gingrich never tires of calling Barack Obama a food stamp President, saying that the food stamp rolls increased by the highest amount in history under this Administration. As a technical matter, this is not true. George W. Bush actually put more people on food stamps than any President in American history... But that doesn’t totally get at who is responsible for the increase in food stamp benefits. ...
                                                                                    As Brooks Jackson points out, the economic downturn that began in December 2007 made 4.4 million Americans newly eligible for food stamp benefits. The Obama Adminstration included increased benefit levels in the 2009 stimulus... But there’s a reason that the food stamp program, or SNAP, became a vehicle for direct benefits to poor Americans. It can be traced back to a guy named Newt Gingrich.
                                                                                    In 1996, Gingrich succeeded as House Speaker in passing welfare “reform,” which decimated the welfare program, particularly its ability to respond during times of economic stress. ... The 1996 welfare reform made cuts to SNAP, most of which remain. But it’s still expandable during a downturn, unlike TANF. In 2010, 40% of single mothers received food stamps, while only 10% received TANF funds. And this is why SNAP costs increased by 102% during the Great Recession.
                                                                                    In other words, without the “end of welfare as we know it,” nobody would likely have become a food stamp President. ... I suppose the other option is to let the poor starve, which Gingrich must be advancing. But when he talks about “food stamp Presidents,” recognize that he’s responsible.
                                                                                    And he should be thrilled to take the credit! The US Department of Agriculture estimates that $1 spent on food stamps generates $1.79 for the economy, creating economic activity with one of the best multipliers of any federal program. Census data from 2011 shows that SNAP kept 5.1 million Americans out of poverty, including substantial numbers of women and children. It’s a great program... Almost all of the benefits get directly to people with a tiny administrative overhead.

                                                                                    This part is important:

                                                                                    Of course, whether or not SNAP is a good program has little to do with the racial overtones of Gingrich’s remarks. He and his allies can object all they want, but he clearly is painting a picture of a “food stamp king” as a mirror to Ronald Reagan’s “welfare queens.” This is ridiculous, primarily because the plurality of food stamp beneficiaries – 36% – are white. ...

                                                                                    I'm not sure what Newt is supposed to get credit for here. He squeezed the balloon at one end -- cutting welfare as we knew it -- and is disappointed that it inflated somewhere else. As he makes clear, he is not at all pleased that the people kicked off of welfare have been able to find a way to eat through food stamps. If he gets the chance, he'll fix that.

                                                                                    Finally, I have to add that it's pretty disappointing that the press will not go after Newt (or anyone else on the right) for the clear racial undertones of his remarks on this and other issues. Newt and his followers believe that most of our problems can be blamed on poor minorities and the government's attempt to help them -- if the poor only had Newt's morals (ahem) they wouldn't have these problems -- despite very clear evidence to the contrary. Admitting the truth about what caused our problems would mean placing blame on key powers within the conservative cabal, and it would require them to accept regulations and other restricitions on their ability to make unimaginably high profits. That is to be avoided at all costs.

                                                                                      Posted by on Monday, January 23, 2012 at 10:56 AM in Economics, Politics, Social Insurance | Permalink  Comments (22)


                                                                                      Paul Krugman: Is Our Economy Healing?

                                                                                      The economy is looking a bit better, but that could change if policymakers make the wrong decisions:

                                                                                      Is Our Economy Healing?, by Paul Krugman, Commentary, NY Times: How goes the state of the union? Well, the state of the economy remains terrible. ... But there are reasons to think that we’re finally on the (slow) road to better times. And we wouldn’t be on that road if Mr. Obama had given in to Republican demands that he slash spending, or the Federal Reserve had given in to Republican demands that it tighten money.
                                                                                      Why am I letting a bit of optimism break through the clouds? Recent economic data have been a bit better... More important, there’s evidence that the two great problems at the root of our slump — the housing bust and excessive private debt — are finally easing. ...
                                                                                      There are, of course, still big risks — above all, the risk that trouble in Europe could derail our own incipient recovery. And thereby hangs a tale — a tale told by a recent report from the McKinsey Global Institute.
                                                                                      The report tracks progress on “deleveraging,” the process of bringing down excessive debt levels. It documents substantial progress in the United States, which it contrasts with failure to make progress in Europe. And while the report doesn’t say this explicitly, it’s pretty clear why Europe is doing worse than we are: it’s because European policy makers have been afraid of the wrong things.
                                                                                      In particular, the European Central Bank has been worrying about inflation ... rather than worrying about how to sustain economic recovery. And fiscal austerity ... has depressed the economy, making it impossible to achieve urgently needed reductions in private debt. The end result is that for all their moralizing about the evils of borrowing, the Europeans aren’t making any progress against excessive debt — whereas we are.
                                                                                      Back to the U.S. situation: my guarded optimism should not be taken as a statement that all is well. We have already suffered enormous, unnecessary damage because of an inadequate response to the slump. We have failed to provide significant mortgage relief, which could have moved us much more quickly to lower debt. And ... it will be years before we get to anything resembling full employment.
                                                                                      But things could have been worse; they would have been worse if we had followed the policies demanded by Mr. Obama’s opponents. For as I said at the beginning, Republicans have been demanding that the Fed stop trying to bring down interest rates and that federal spending be slashed immediately — which amounts to demanding that we emulate Europe’s failure.
                                                                                      And if this year’s election brings the wrong ideology to power, America’s nascent recovery might well be snuffed out.

                                                                                        Posted by on Monday, January 23, 2012 at 12:30 AM in Economics | Permalink  Comments (44)


                                                                                        Links for 2012-01-23

                                                                                          Posted by on Monday, January 23, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (17)


                                                                                          Sunday, January 22, 2012

                                                                                          Who Should Pay for Deficit Reduction?

                                                                                          Richard Green makes an argument for progressive taxes:

                                                                                          The banal moderateness of Thomas Friedman, by Richard Green: In his paean to conventional wisdom this morning, the ever so serious Mr Friedman writes:

                                                                                          Second, I want to vote for a candidate who is committed to reforming taxes, and cutting spending, in a fair way. The rich must pay more, but everyone has to pay something. We are all in this together.

                                                                                          But how over the past decades have we all been in this together? In 2007, those in the bottom quintile had the same income they had in 1998, and a bump of little more than 11 percent since 1969; those in the top five percent have seen incomes rise by 74 percent since then.

                                                                                          GreenSource: Alan De Smet plot of  US Census, Historical Income Tables - Families, Table F-1.

                                                                                          Sure, if everyone had benefitted from the policies of the past 40 years, then everyone should sacrifice now.

                                                                                          But for the time being, lets begin by asking for sacrifice from those with the means to do so.

                                                                                          When we measure who pays for bringing the long-run deficit under control, we should remember that deficit reduction is likely to include both cuts to spending and tax increases. We should also remember the complaint from the wealthy that most of the benefits of government spending go to lower income classes. According to this argument, the cost of reducing the budget deficit through cuts to government spending -- and Republicans will push for this option as much as they can -- will fall mainly on the less fortunate.

                                                                                            Posted by on Sunday, January 22, 2012 at 05:00 PM in Budget Deficit, Economics, Income Distribution, Taxes | Permalink  Comments (24)


                                                                                            Do Republicans Want to Win the Presidential Election?

                                                                                            It's been puzzling so far, but I think I figured out the Republican strategy for the presidential election. Obama is already giving them everything they want in terms of policy, pretty much, and there's no reason to think he'll change after the election. Centrism is not an act for Obama, it's who he really is and when you compromise from the middle, and do so poorly -- i.e. give up most demands for one or two centrist bits in the final legislation -- the outcome leans heavily to the right. Given that, it's not at all clear that Republicans would be able to reach more of their goals if they controlled the presidency and faced united opposition from the left rather than the fractured opposition they face under a Democratic president.

                                                                                            And the right certainly has nothing to complain about when it comes to war mongering, domestic spying, and the like. Republicans are getting everything they want, more than they ever could have dreamed of with a Democrat in power, with little outcry from the leftists that usually make such a fuss over these types of activities.

                                                                                            Plus, the president is taking the blame for the lousy economy, and they are able to make headway in their long held goal of discrediting Keynesian economics. Having a president who only half-heartedly at best supports Keynesian policies -- witness the pivot to deficit reduction at the drop of a hat when it looked politically convenient -- means that the outcome of the policies will be as lackluster as Obama's commitment to them. So long as Republicans can block more effective policy, and so long as the president acquiesces and doesn't blame Republicans for obstructionism, etc., Republicans can win this war. That socialist, Keynesian (or is it Kenyan?) president tried it his way, and it failed!

                                                                                            If a Republican takes the presidency, that blame will fall on them. Sure, it's possible that the economy will take off over the next four years, but more realistically it's looking like more of the same sluggishness, a slow, agonizing, "are we there yet," recovery that won't be helped at all by the deficit reduction that lies ahead (thanks to one of those wonderful compromises by the administration). Who wants to preside over that? Instead, why not put up some weak candidates, very, very weak, and give the win to Obama? He's already done a lot of their work for them, why not let him take the lead in dismantling social welfare in the name of deficit reduction (e.g. Obama has often cited Social Security as a target).

                                                                                            I realize that Republicans really do want to win, they hate having Obama in power, but from their perspective would it really be so bad if they lost?

                                                                                              Posted by on Sunday, January 22, 2012 at 12:40 PM in Economics, Politics | Permalink  Comments (80)


                                                                                              "Five Things You Probably Don’t Know About Food Stamps"

                                                                                              While I look around for something to post, here's the latest attempt to counter Republican attacks on the social safety net. This time conservatives have food stamps in the cross-hairs:

                                                                                              Supplemental Nutrition Assistance Program (SNAP), formerly known as the Food Stamp Program, is in the news these days because of comments made by some Republican presidential candidates. Below are five things you probably don’t know about the program.

                                                                                              SNAP Working Households Have Risen

                                                                                              1. A large and growing share of SNAP households are working households (see chart). ...

                                                                                                One reason why SNAP is serving more working families is that, for a growing share of the nation’s workers, having a job has not been enough to keep them out of poverty.

                                                                                              2. SNAP responded quickly and effectively to the recession. ... That’s precisely what SNAP was designed to do: respond quickly to help more low-income families during economic downturns...

                                                                                                Economists consider SNAP one of the most effective forms of economic stimulus, so SNAP’s quick response to the recession ... helped the broader economy. ...

                                                                                              3. Today’s large SNAP caseloads mostly reflect the extraordinarily deep and prolonged recession and the weak recovery. ...Workers who are unemployed for a long time are more likely to deplete their assets, exhaust unemployment insurance, and turn to SNAP for help...

                                                                                              4. SNAP has one of the most rigorous quality control systems of any public benefit program. ...

                                                                                              5. SNAP’s recent growth is temporary. CBO predicts that SNAP spending will ... return nearly to pre-recession levels as a share of the economy.

                                                                                                Over the long term, SNAP is not growing faster than the economy. So, it is not contributing to the nation’s long-term fiscal problems.

                                                                                              The question shouldn't be whether a particular program is "contributing to the nation’s long-term fiscal problems." When overall revenues fall short of spending, any program funded out of general revenue can be accused of causing the deficit problem. Instead, we should compare the costs and the benefits of each program, then find a way to pay for those that pass and reduce the scale or eliminate those that fail. Even though spending on SNAP has increased quite a bit during the recession, as you'd expect if the program is working, I have no doubt that this program passes the cost-benefit test.

                                                                                                Posted by on Sunday, January 22, 2012 at 11:30 AM in Economics, Social Insurance | Permalink  Comments (8)


                                                                                                Links for 2012-01-22

                                                                                                  Posted by on Sunday, January 22, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (28)


                                                                                                  Saturday, January 21, 2012

                                                                                                  Running on Empty

                                                                                                  Do I really live in a country where I have to ask myself whether Newt Gingrich actually has a chance to be nominated for president, and perhaps even win?

                                                                                                    Posted by on Saturday, January 21, 2012 at 06:19 PM in Politics | Permalink  Comments (79)


                                                                                                    "The Ongoing Debt Transformation"

                                                                                                    Via Paul Krugman:

                                                                                                    The Ongoing Debt Transformation, by Paul Krugman: A follow-up on my note about US deleveraging. It turns out that if you measure debt as a percentage of potential GDP (as estimated by the CBO) and use a stacked-area graph, you get a pretty clear picture. Here it is, using nonfinancial debt (for reasons explained in the previous post):

                                                                                                    All data from FRED.

                                                                                                    What we see here is that there was an explosion of total debt during the Bush years; since then debt has stabilized relative to potential output. But there has been a redistribution, with private debt falling while public debt rises.
                                                                                                    Arguably, this is exactly what needs to happen: the federal deficit is sustaining the economy while balance-sheet constrained private actors deleverage. ...
                                                                                                    Once balance sheets are sufficiently repaired, private demand should recover, and the federal government will no longer need deficit spending to keep the economy afloat.
                                                                                                    Obviously (at least to me) we should have been stabilizing things at a higher level, with less unemployment. But this is a picture not of runaway borrowing, but of progress being made in dealing with an excessive level of private debt.

                                                                                                    Let me just add one note. So long as household balance sheets are still being repaired, demand will be too low and the economy will struggle to recover. Restoring balance sheets takes time -- the fall in housing values and the crash of financial markets took their toll on household finances and the damage is still being repaired. One of the biggest threats to household balance sheets is the loss of a job. Losing a job devastates household finances, and balance sheet repair is all but impossible for the unemployed. Thus, job creation is the first problem that needed to be addressed, and we have not done nearly enough to help to create job opportunities. More jobs could have saved many, many household balance sheets from disaster, and helped other households repair the damage at a much faster rate (and it would have also avoided the permanent costs to individuals and the economy associated with long-term unemployment).

                                                                                                    But job creation is not the only way the government could have helped household balance sheets, and this could have been accomplished without increasing total debt. Imagine, for example, that the federal government had done more to help households that are struggling to pay their mortgages and are in danger of foreclosure. Private sector debt reduction -- mortgage, student loan, or credit card writedowns -- would have made the blue area in the graph fall even faster, and the red area would have increased faster to compensate as the government took this debt onto its balance sheet. But, importantly, the total amount of debt need not have changed. This simply transfers debt from the private to the public sector. (Note: This says nothing about the optimal level of public debt -- more public debt used for job creation programs and private sector debt reduction would have helped the economy recover even faster -- this is about the best mix of public and private debt for a given level of total debt).

                                                                                                    The transfer of private sector debt to the public sector increases the rate at which households repair their balance sheets, and thus helps households return to normal (non-bubble) patterns of consumption faster. This helps GDP to recover faster as well and, since income would be higher but debt the same, allows us to pay off the same total debt, both public and private, from a higher income base (one could argue that the increase in household confidence from balance sheet repair would be offset by a decrease in confidence from higher public debt, but there's little evidence to support the latter effect, especially since our overall debt doesn't change). Thus, even though households will ultimately pay off the public debt, transferring some of the debt to the public sector temporarily allows them to wait until their situation improves before the tax bills for the debt come due (and some of the burden can be redistributed across income classes if that is desirable). That allows households to devote more of their income to consumption rather than bill paying -- which is important for households who are barely getting by as it is -- and the extra demand this creates helps the economy recover faster making it easier to pay off both the public and private debt.

                                                                                                    Higher income, higher employment, and no change in total debt seems like a deal we ought to take, but fear from the wealthy that they might be asked to pay a larger share of the bills than others, or any share for that matter, the insistence from moralists that people should not be allowed to escape their debts (even if their problems were caused by the popping of a bubble that the experts told them wouldn't pop, or by other factors that they had no control over), and ideological opposition from conservatives to government programs of any kind are standing in the way.

                                                                                                      Posted by on Saturday, January 21, 2012 at 12:13 PM in Economics, Financial System, Fiscal Policy, Housing | Permalink  Comments (23)