Financial reform is working:
Dodd-Frank Financial Reform Is Working, by Paul Krugman, Commentary, NY Times: ...The Dodd-Frank reform bill ... is working a lot better than anyone listening to the news media would imagine. Let’s talk, in particular, about two important pieces of Dodd-Frank: creation of an agency protecting consumers from misleading or fraudulent financial sales pitches, and efforts to end “too big to fail.”
The decision to create a Consumer Financial Protection Bureau shouldn’t have been controversial, given what happened during the housing boom. ...
Of course, that obvious need didn’t stop the U.S. Chamber of Commerce, financial industry lobbyists and conservative groups from going all out in an effort to prevent the bureau’s creation or at least stop it from doing its job, spending more than $1.3 billion in the process. Republicans in Congress dutifully served the industry’s interests...
At this point, however, all accounts indicate that the bureau is in fact doing its job, and well... But what happens if a crisis occurs anyway?
The answer is that, as in 2008, the government will step in to keep the financial system functioning; nobody wants to take the risk of repeating the Great Depression.
But how do you rescue the banking system without rewarding bad behavior? ...
The answer is that the government should seize troubled institutions when it bails them out, so that they can be kept running without rewarding stockholders or bondholders who don’t need rescue. In 2008 and 2009, however, it wasn’t clear that the Treasury Department had the necessary legal authority to do that. So Dodd-Frank filled that gap, giving regulators Ordinary Liquidation Authority, also known as resolution authority, so that in the next crisis we can save “systemically important” banks and other institutions without bailing out the bankers.
Bankers, of course, hate this idea; and Republican leaders like Mitch McConnell tried to help their friends with the Orwellian claim that resolution authority was actually a gift to Wall Street, a form of corporate welfare, because it would grease the skids for future bailouts. ...
Did reform go far enough? No. In particular, while banks are being forced to hold more capital, a key force for stability, they really should be holding much more. But Wall Street and its allies wouldn’t be screaming so loudly, and spending so much money in an effort to gut the law, if it weren’t an important step in the right direction. For all its limitations, financial reform is a success story.
Posted by Mark Thoma on Monday, August 4, 2014 at 12:24 AM in Economics, Financial System, Regulation |
Posted by Mark Thoma on Monday, August 4, 2014 at 12:06 AM in Economics, Links |
Anti-intellectualism: The question in the title of this post - What Are Academics Good For? - was meant to be rhetorical. I took it for granted that as a collective academic economists did know rather more about economic policy than business leaders or city economists, and the point of my post was to ask why this often appeared not to be recognised by some journalists or some politicians. I included some quotes from a journalist suggesting otherwise because I found them rather shocking. It serves me right of course. What I got almost universally in comments was a discussion of all things wrong with academic economists. Even the estimable Chris Dillow joined in. So what I should have done first is establish what academic economists are good for, and then complained about those who do not recognise this. But better to do things in the wrong order than not at all. First a point on scope that I did make but is worth repeating...
Posted by Mark Thoma on Sunday, August 3, 2014 at 11:26 AM in Economics |
Posted by Mark Thoma on Sunday, August 3, 2014 at 12:06 AM in Economics, Links |
Shattering Myths to Help the Climate, by Robert Frank: Each new climate-change study seems more pessimistic than the last. This May and June, for example, were the hottest ones on record for the planet. Storms and droughts occur with increasing frequency. Glaciers are rapidly retreating, portending rising seas that could eventually displace hundreds of millions of people.
Effective countermeasures now could actually ward off many of these threats at relatively modest cost. Yet despite a robust scientific consensus that greenhouse gas emissions are at the root of the problem, legislation to curb them has gone nowhere in Congress. In response, President Obama has proposed stricter regulations on electric utilities, which some scientists warn may be too little, too late.
Why aren’t we demanding more forceful action? One reason may be the frequent incantation of a motley collection of myths, each one rooted in bad economics...
Posted by Mark Thoma on Saturday, August 2, 2014 at 08:52 AM in Economics, Environment |
Posted by Mark Thoma on Saturday, August 2, 2014 at 12:06 AM in Economics, Links |
July Employment Report, by Tim Duy: The overall tenor of the July employment report was consistent with the song that Yellen and Co. are singing. Labor markets are generally improving at a moderate pace, yet despite relatively low unemployment, there is plenty of reason to believe considerable slack remains in the economy.
The headline nonfarm payroll number was a ho-hum gain of 209K with some small upward revisions for the previous two months. Steady above 200k gains this year are lifting the 12-month moving average of jobs higher:
In the context of the range of indicators that Fed Chair Janet Yellen has drawn specific attention to:
Consistent with the consensus of the FOMC as revealed at the conclusion of this week's FOMC meeting, measures of underutilization of labor remain elevated. Notable is the flat wage growth - clearly a ball in Yellen's court. Moreover, these numbers should override any enthusiasm over yesterday's ECI report, which is obviously overtaken by events.
In other news, inflation remains below target:
although pretty much right at target over the past three months:
Numbers like these gave the Fed reason to upgrade its inflation outlook this week. If these numbers can hold up for the next several months, you will see the year-over-year number gradually converge to the Fed's target, clearing the way for the Fed's first rate hike in the middle of next year (my preference remains the second quarter over the third).
On the whole, these data continue to argue for a very gradual pace of tightening. The Fed will be in rush to normalize policy until labor underutilization approaches normal levels and wage growth accelerates. Since it's Friday and everyone is looking forward to the weekend, we can avoid re-inventing the wheel on this topic and just refer to Binyamin Appelbaum's report on the FOMC meeting, in which he quotes some random commentator:
The Fed’s chairwoman, Janet L. Yellen, and her allies have taken a more cautious view, arguing that the decline in the unemployment rate appears to overstate the improvement in the labor market, because it counts only people who are looking for work. Ms. Yellen has said she expects some people who dropped out of the labor force to return as the economy continues to improve, and she has pointed to tepid wage growth as evidence that it remains easy to find workers.
“The recovery is not yet complete,” she told Congress this month.
The statement suggested that the committee continued to back Ms. Yellen’s view, said Tim Duy, a professor of economics at the University of Oregon.
“The committee as a whole is still willing to give Yellen the benefit of the doubt,” Mr. Duy said. “And honestly they have good reason. Until you get upward pressure on wages, it is terribly difficult to say that she’s wrong.”
In recent conversations with Oregon businesses, Mr. Duy said, he heard repeatedly that it was becoming harder to hire workers, but also that businesses were unwilling to offer higher wages as an inducement, because they doubted their ability to recoup the cost through increased sales or higher prices.
Bottom Line: Nothing here to change the outlook for monetary policy.
Posted by Mark Thoma on Friday, August 1, 2014 at 11:34 AM in Economics, Fed Watch, Monetary Policy |
Job Growth Slows in July, by Dean Baker, CEPR Data Bytes: Wage growth slowed slightly in the last quarter to 1.8 percent from 2.0 percent in the last year.
The economy added 209,000 jobs in July, a sharp slowing from its 277,000 average over the prior three months. The slowdown was widely spread across sectors, although temporary help -- which added just 8,500 jobs -- and health care -- which added just 7,000 -- were notably weak. Construction -- which added 22,000 jobs -- and manufacturing -- which added 28,000 jobs -- were surprisingly strong.
The unemployment rate was essentially unchanged at 6.2 percent, as there was little change in either the size of the labor force or the number of unemployed. Involuntary part-time employment edged down slightly, reversing part of a jump in June. It is now 669,000 below its year-ago level. Voluntary part-time employment decreased modestly, but is still 502,000 above its year-ago level. This would be consistent with some workers opting to work part-time now that they no longer need to get health insurance through their job as a result of the Affordable Care Act.
There was little change in employment or unemployment rates for most demographic groups, although the employment-to-population ratio for African Americans edged up to 54.6 percent -- its highest level since January of 2009. Workers over age 55 accounted for all the reported employment growth in July, with an increase in employment of 159,000 compared to 131,000 overall. However, their 43.4 percent share of employment growth over the last year is considerably less than it had been earlier in the recovery.
The duration measures showed little change, with average duration of unemployment falling back 1.1 weeks to 32.4 weeks, while both the median duration and share of long-term unemployed increased slightly. The share of unemployment due to people voluntarily quitting their jobs was essentially unchanged from the prior two months at 8.9 percent. This is up from 8.5 percent last July, but still well below the 11-12 percent shares in the years before the downturn.
In the establishment survey, the goods-producing sector was surprisingly strong, adding 58,000 jobs. However, the pace of growth is likely to slow in the month ahead. The 22,000 job growth reported in construction is likely faster than can be supported by the modest pace of spending growth in the sector. The 28,000 rise in manufacturing employment was driven largely by a 14,600 increase in jobs in the auto industry. This, in turn, was likely due in part to the timing of shutdowns for retooling and will be partially reversed next month. The average workweek actually fell in manufacturing and the one-month diffusion index plunged from 63.0 to 53.7, so we are likely to see weaker growth going forward. Nonetheless, it is worth noting that employment in the auto sector reached its highest level since July, 2008.
In contrast to autos, jobs in the motion picture industry continue to disappear. They fell 3,500 in July and are down by 56,300 (15.7 percent) over the last year. The temp sector also showed weakness, adding just 8,500 jobs, compared to an average of 17,000 over the last year. Similarly, health care added just 7,000 jobs, down from an average of 19,000 over the last year. A high-side anomaly in the July data was a jump in employment in private social assistance of 18,400. This is certain to be reversed, at least partially, in coming months.
This report provides little evidence of any pick-up in wage growth. The average hourly wage rose at a 1.82 percent annual rate over the last three months compared with the prior three months. This compares to a 2.0 percent increase over the last year. While a tightening labor market should eventually allow workers to see some gains in real wages, the economy does not appear to be at this point yet.
Overall, this should be seen as a modestly positive report. The slower pace of job growth is not surprising given how out of line recent job growth has been with the modest GDP growth we have been seeing. (First half growth averaged 1.0 percent.) It is likely that future months will see weaker growth as manufacturing and construction will see slower job gains. We are still far from the point where the labor market is strong enough that workers will be able to get wage gains in line with economic growth.
Posted by Mark Thoma on Friday, August 1, 2014 at 08:09 AM in Economics, Unemployment |
"Are we as societies even capable of taking good policy advice?":
Knowledge Isn’t Power, by Paul Krugman, Commentary, NY Times: ...I’ve been looking at surveys from the Initiative on Global Markets, based at the University of Chicago. For two years, the initiative has been regularly polling a panel of leading economists... It usually turns out that there is much less professional controversy about an issue than the cacophony in the news media might have led you to expect.
This was certainly true of the most recent poll, which asked whether the American Recovery and Reinvestment Act — the Obama “stimulus” — reduced unemployment. All but one of those who responded said that it did, a vote of 36 to 1. ...
As it happens, the odd man out — literally — in that poll on stimulus was Professor Alberto Alesina of Harvard. He has claimed that cuts in government spending are actually expansionary, but relatively few economists agree... Nonetheless, back when European leaders were making their decisive and disastrous turn toward austerity, they brushed off warnings that slashing spending in depressed economies would deepen their depression. Instead, they listened to economists telling them what they wanted to hear. It was, as Bloomberg Businessweek put it, “Alesina’s hour.”
Am I saying that the professional consensus is always right? No. But when politicians pick and choose which experts — or, in many cases, “experts” — to believe, the odds are that they will choose badly. Moreover, experience shows that there is no accountability in such matters. Bear in mind that the American right is still taking its economic advice mainly from people who have spent many years wrongly predicting runaway inflation and a collapsing dollar.
All of which raises a troubling question: Are we as societies even capable of taking good policy advice? ...
The only piece of our system that seemed to have learned anything from history was the Federal Reserve, and the Fed’s actions under Ben Bernanke, continuing under Janet Yellen, are arguably the only reason we haven’t had a full replay of the Depression. ... Sure enough, there are moves afoot in Congress to take away the Fed’s freedom of action. Not a single member of the Chicago experts panel thinks this would be a good idea, but we’ve seen how much that matters.
And macroeconomics, of course, isn’t the only challenge we face. In fact, it should be easy compared with many other issues that need to be addressed with specialized knowledge, above all climate change. So you really have to wonder whether and how we’ll avoid disaster.
Posted by Mark Thoma on Friday, August 1, 2014 at 12:24 AM in Economics |
Posted by Mark Thoma on Friday, August 1, 2014 at 12:06 AM in Economics, Links |
Tim Duy (see Dean Baker too):
On That ECI Number: The employment cost index is bearing the blame for today's market sell-off. Sam Ro at Business Insider reports:
...traders agree that today's sell-off is probably due to one stat: the 0.7% jump in the employment cost index (ECI) in the second quarter.
This number, which crossed at 8:30 a.m. ET, was a bit higher than the 0.5% expected by economists. And it represents a year-over-year growth rate of over 2%.
It's a big deal, because it's both a sign of inflation and labor market tightness, two forces that put pressure on the Federal Reserve to tighten monetary policy sooner than later.
The ECI gain was driven by the private sector (compensation for the public sector was up just 0.5%, same as the first quarter), and I would be cautious about reading too much into those numbers. The Fed will take the Q2 reading in context of the low Q1 reading:
The first two quarters averaged a just 0.46% increase, pretty much the same as recent trends of the past five years. And look at the year-over-year-trend:
Nothing to see here, folks. Move along. Benefit costs for private sector workers also accelerated, but I think the Fed will likely interpret this as an anomaly:
Again, not out-of-line with readings both before and after the recession.
Bottom Line: I understand why market participants might be a little hypersensitive to anything related to wages. Indeed, wage growth is the missing link in the tight labor market story. But I don't think the Fed will react much to these numbers; they will place them in context of recent behavior, and in that context they are not much different than current trends. Watch the upcoming employment reports for signs of diminishing underutilization of labor - that is where the Fed will be looking.
Posted by Mark Thoma on Thursday, July 31, 2014 at 01:29 PM in Economics, Fed Watch, Inflation, Monetary Policy, Unemployment |
What are academics good for?: A survey of US academic economists, which found that 36 thought the Obama fiscal stimulus reduced unemployment and only one thought otherwise, led to this cri de coeur from Paul Krugman. What is the point in having academic research if it is ignored, he asked? At the same time I was involved in a conversation on twitter, where the person I was tweeting with asked ... why should we take any more notice of what academic economists say about economics than, well, City economists or economic journalists?
Here is a very good example of why. ...
Posted by Mark Thoma on Thursday, July 31, 2014 at 08:09 AM in Economics, Macroeconomics |
Curb Your Enthusiasm: One Percent GDP Growth Is Nothing to Get Excited Over: The Washington Post went a bit overboard with its lead article reporting on the second quarter GDP data. ...
Actually the 4.0 growth figure reported for the second quarter implies the economy is on a very slow growth path when averaged in with the -2.1 growth in the first quarter. Taken together, the economy grew at less than a 1.0 percent annual rate in the first half of 2014. That is hardly cause for celebration.
And it is important to understand that the strong growth in the second quarter was directly related to the weak growth in the first quarter. Inventory growth was very weak in the first quarter, subtracting 1.16 percentage points from the quarter's growth. This meant that the return to a more normal pace of inventory accumulation in the second quarter was a strong boost to growth, adding 1.66 percentage points. Final sales grew at just a 2.3 percent annual rate in the second quarter.
Even that rate was likely inflated to some extent by the weakness from the first quarter. In particular, a sharp jump in car sales 0.42 percentage points to growth for the quarter. That will not be repeated in future quarters.
The report, taken together with the first quarter numbers, implies an underlying rate of growth close to 2.0 percent, the same as the rate for 2011-2013. This pace is at best keeping even with the economy's potential growth rate, meaning that it is making up none of the ground lost during the recession. ...
Posted by Mark Thoma on Thursday, July 31, 2014 at 08:09 AM in Economics |
Behind the Fed's promise about short-term rates, by Mark Thoma: Can promises about the future have an effect today? That's the theory behind the Federal Reserve's statement following Wednesday's monetary policy meeting.
The Fed said it "currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."
How is this supposed to work? How can a promise about the future course of interest rates have a stimulative effect on the economy today? ...
Posted by Mark Thoma on Thursday, July 31, 2014 at 07:40 AM in Economics, Monetary Policy |
Posted by Mark Thoma on Thursday, July 31, 2014 at 12:06 AM in Economics, Links |
FOMC Statement, by Tim Duy: At the conclusion of this week's FOMC meeting, policymakers released yet another statement that only a FedWatcher could love. It is definitely an exercise in reading between the lines. The Fed cut another $10 billion from the asset purchase program, as expected. The statement acknowledged that unemployment is no longer elevated and inflation has stabilized. But it is hard to see this as anything more that describing an evolution of activity that is fundamentally consistent with their existing outlook. Continue to expect the first rate hike around the middle of next year; my expectation leans toward the second quarter over the third.
The Fed began by acknowledging the second quarter GDP numbers:
Information received since the Federal Open Market Committee met in June indicates that growth in economic activity rebounded in the second quarter.
With the new data, the Fed's (downwardly revised) growth expectations for this year remain attainable, but still requires an acceleration of activity that has so far been unattainable:
Despite all the quarterly twists and turns, underlying growth is simply nothing to write home about:
That slow yet steady growth, however, has been sufficient to support gradual improvement in labor markets, prompting the Fed to drop this line from the June statement:
The unemployment rate, though lower, remains elevated.
and replace it with:
Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources.
While the unemployment rate is no longer elevated, this is a fairly strong confirmation that Federal Reserve Chair Janet Yellen has the support of the FOMC. As a group, they continue to discount the improvement in the unemployment rate. And as long as wage growth remains tepid, this group will continue to have the upper hand.
The inflation story also reflects recent data. This from June:
Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable...The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.
Inflation has moved somewhat closer to the Committee's longer-run objective. Longer-term inflation expectations have remained stable...The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat.
Rather than something to worry over, I sense that the majority of the FOMC is feeling relief over the recent inflation data. It is often forgotten that the Fed WANTS inflation to move closer to 2%. The reality is finally starting to look like their forecast, which clears the way to begin normalizing policy next year. Given the current outlook, expect only gradual normalization.
Finally, we had a dissent:
Voting against was Charles I. Plosser who objected to the guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for "a considerable time after the asset purchase program ends," because such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee's goals.
We probably should have seen this coming; Philadelphia Fed President Charles Plosser raised this issue weeks ago. Clearly he is not getting much traction yet among his colleagues. I doubt they want to change the language before they have settled on a general exit strategy (which was probably the main topic of this meeting and will be the next). Somewhat surprising is that Dallas Federal Reserve President Richard Fisher did not join Plosser given Fisher's sharp critique of monetary policy in Monday's Wall Street Journal. Note to Fisher: Put up or shut up.
Bottom Line: Remember that we should see the statement shift in response to the data relative to the outlook. In short, the statement needs to remain consistent with the reaction function. The changes in the July statement reflect that consistency. The data continues to evolve in such a way that the Fed can remain patient in regards to policy normalization. We will see if that changes with the upcoming employment report; focus on the underlying numbers, as the Fed continues to discount the headline numbers.
Posted by Mark Thoma on Wednesday, July 30, 2014 at 01:19 PM in Economics, Fed Watch, Monetary Policy |
Unemployment and the “Skills Mismatch” Story: Overblown and Unpersuasive, by Gary Burtless, Brookings: The jobless rate has dipped to 6.1 percent, and businesses are already complaining about a skills shortage. ... To an economist, the most accessible and persuasive evidence demonstrating a skills shortage should be found in wage data. ...
Where is the evidence of soaring pay for workers whose skills are in short supply? We frequently read anecdotal reports informing us some employers find it tough to fill job openings. What is harder to find is support for the skills mismatch hypothesis in the wage data..., there is little evidence wages or compensation are increasing much faster than 2% a year [i.e. outpacing inflation]. Even though unemployment has declined, there are still 2.5 times as many active job seekers as there are job vacancies. At the same time, there are between 3 and 3½ million potential workers outside the labor force who would become job seekers if they believed it were easier to find a job. The excess of job seekers over job openings continues to limit wage gains, notwithstanding the complaints of businesses that cannot fill vacancies. ...
It is cheap for employers to claim qualified workers are in short supply. It is a bit more expensive for them to do something to boost supply. Unless managers have forgotten everything they learned in Econ 101, they should recognize that one way to fill a vacancy is to offer qualified job seekers a compelling reason to take the job. Higher pay, better benefits, and more accommodating work hours are usually good reasons for job applicants to prefer one employment offer over another. When employers are unwilling to offer better compensation to fill their skill needs, it is reasonable to ask how urgently those skills are really needed. ...
Posted by Mark Thoma on Wednesday, July 30, 2014 at 08:01 AM in Economics, Unemployment |
Bill McBride at Calculated Risk:
BEA: Real GDP increased at 4.0% Annualized Rate in Q2, by Bill McBride: From the BEA: Gross Domestic Product: Second Quarter 2014 (Advance Estimate) Annual Revision: 1999 through First Quarter 2014
Real gross domestic product ... increased at an annual rate of 4.0 percent in the second quarter of 2014... In the first quarter, real GDP decreased 2.1 percent (revised).
The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.
The advance Q2 GDP report, with 4.0% annualized growth, was above expectations of a 2.9% increase. Also Q1 was revised up.
Personal consumption expenditures (PCE) increased at a 2.5% annualized rate - a decent pace. Private investment rebounded with residential investment up 7.5% annualized, and equipment up 5.3%. Change in private inventories added 1.66 percentage points to growth after subtracting 1.16 in Q1.
Overall this was a solid report. I'll have more later on the report and revisions.
Update: Dean Baker:
Economy Rebounds in Second Quarter Based on Inventories and Cars: GDP grew at a 4.0 percent annual rate in the second quarter after shrinking at a 2.1 percent rate in the first quarter. Much of the shift was due to a considerably more rapid pace of inventory accumulation. Inventory changes which had subtracted 1.16 percentage points from first quarter growth added 1.66 percentage points to growth in the second quarter. New car sales added another 0.42 percentage points to growth, after adding just 0.13 percentage points in the first quarter. Equipment investment, which grew at a 7.0 percent rate, added another 0.4 percentage points to growth for the quarter.
Another positive item in this report was continued slow growth in health care costs. After a reported drop in the first quarter, health care costs grew at a 2.6 percent annual rate. They stand just 3.0 percent above their year-ago level.
On the negative side, the trade deficit expanded again last quarter rising to an annual rate of $564.0 billion. It subtracted 0.61 percentage points from growth in the quarter.
While the 4.0 percent growth is a sharp turnaround, it was very much in line with expectations. It means that for the first half of the year, the economy the economy grew at less than a 1.0 percent annual rate. The economy will have to sustain a growth rate of more than 3.0 percent over the second half of the year just to reach 2.0 percent growth for the year as a whole. This means 2014 will likely be another disappointing year for growth.
Posted by Mark Thoma on Wednesday, July 30, 2014 at 07:44 AM in Economics |
Posted by Mark Thoma on Wednesday, July 30, 2014 at 12:06 AM in Economics, Links |
If minimum wages, why not maximum wages?: I was in a gathering of academics the other day, and we were discussing minimum wages. The debate moved on to increasing inequality, and the difficulty of doing anything about it. I said why not have a maximum wage? To say that the idea was greeted with incredulity would be an understatement. So you want to bring back price controls was once response. How could you possibly decide on what a maximum wage should be was another.
So why the asymmetry? Why is the idea of setting a maximum wage considered outlandish among economists?
The problem is clear enough. All the evidence, in the US and UK, points to the income of the top 1% rising much faster than the average. ...
So why not consider a maximum wage? One possibility is to cap top pay as some multiple of the lowest paid, as a recent Swiss referendum proposed. That referendum was quite draconian, suggesting a multiple of 12, yet it received a large measure of popular support (35% in favour, 65% against). The Swiss did vote to ban ‘golden hellos and goodbyes’. One neat idea is to link the maximum wage to the minimum wage, which would give CEOs an incentive to argue for higher minimum wages! Note that these proposals would have no disincentive effect on the self-employed entrepreneur.
If economists have examined these various possibilities, I have missed it. One possible reason why many economists seem to baulk at this idea is that it reminds them too much of the ‘bad old days’ of incomes policies and attempts by governments to fix ‘fair wages’. But this is an overreaction, as a maximum wage would just be the counterpart to the minimum wage. I would be interested in any other thoughts about why the idea of a maximum wage seems not to be part of economists’ Overton window.
Posted by Mark Thoma on Tuesday, July 29, 2014 at 03:39 PM in Economics, Income Distribution |
I have a new column:
Why the Rich Should Call for Income Redistribution: After the craze over Thomas Piketty’s Capital in the Twenty First Century, nobody should be surprised to learn that inequality has been increasing over the last several decades. The question is what to do about it.
One answer is to do nothing and hope the problem fixes itself, or to deny it is a problem at all. But that is a dangerous approach. - See more at: http://www.thefiscaltimes.com/Columns/2014/07/29/Why-Rich-Should-Call-Income-Redistribution#sthash.V51AksZQ.dpuf
One answer is to do nothing and hope the problem fixes itself, or to deny it is a problem at all. But that is a dangerous approach. ...
Posted by Mark Thoma on Tuesday, July 29, 2014 at 07:42 AM in Economics, Income Distribution |
Me, at CBS MoneyWatch:
Is it worth spending to make workers happy?: Numerous studies have found a correlation between employee satisfaction and company success. Does this mean happy employees are also the most productive workers? Should firms spend money to make workers happier with their jobs?
Answering these questions is trickier than it might seem at first glance. ...
Posted by Mark Thoma on Tuesday, July 29, 2014 at 07:42 AM in Economics, MoneyWatch |
Posted by Mark Thoma on Tuesday, July 29, 2014 at 12:06 AM in Economics, Links |
Alan Blinder and Mark Watson:
Presidents and the U.S. Economy: An Econometric Exploration, by Alan S. Blinder and Mark W. Watson, NBER Working Paper No. 20324 [open link]: The U.S. economy has grown faster—and scored higher on many other macroeconomic metrics—when the President of the United States is a Democrat rather than a Republican. For many measures, including real GDP growth (on which we concentrate), the performance gap is both large and statistically significant, despite the fact that postwar history includes only 16 complete presidential terms. This paper asks why. The answer is not found in technical time series matters (such as differential trends or mean reversion), nor in systematically more expansionary monetary or fiscal policy under Democrats. Rather, it appears that the Democratic edge stems mainly from more benign oil shocks, superior TFP performance, a more favorable international environment, and perhaps more optimistic consumer expectations about the near-term future. Many other potential explanations are examined but fail to explain the partisan growth gap.
Posted by Mark Thoma on Monday, July 28, 2014 at 07:50 AM in Academic Papers, Econometrics, Economics, Politics |
Congress should do something about "ever-more-aggressive corporate tax avoidance":
Corporate Artful Dodgers, by Paul Krugman, Commentary, NY Times: In recent decisions, the conservative majority on the Supreme Court has made clear its view that corporations are people, with all the attendant rights. ...
There is, however, one big difference between corporate persons and the likes of you and me: On current trends, we’re heading toward a world in which only the human people pay taxes.
We’re not quite there yet: The federal government still gets a tenth of its revenue from corporate profits taxation. But it used to get a lot more — a third of revenue came from profits taxes in the early 1950s... Part of the decline since then reflects a fall in the tax rate, but mainly it reflects ever-more-aggressive corporate tax avoidance — avoidance that politicians have done little to prevent.
Which brings us to the tax-avoidance strategy du jour: “inversion.” This refers to a legal maneuver in which a company declares that its U.S. operations are owned by its foreign subsidiary, not the other way around, and uses this role reversal to shift reported profits out of American jurisdiction to someplace with a lower tax rate.
The most important thing to understand about inversion is that it does not in any meaningful sense involve American business “moving overseas.” ... All they’re doing is dodging taxes on those profits.
And Congress could crack down on this tax dodge...
Opponents of a crackdown on inversion typically argue that instead of closing loopholes we should reform the whole system by which we tax profits, and maybe stop taxing profits altogether. They also tend to argue that taxing corporate profits hurts investment and job creation. But these are very bad arguments against ending the practice of inversion. ...
As for reforming the system: Yes, that would be a good idea. But..., there are big debates about the shape of reform, debates that would take years to resolve... Why let corporations avoid paying their fair share for years, while we wait for the logjam to break?
Finally, none of this has anything to do with investment and job creation. If and when Walgreen changes its “citizenship,” it will get to keep more of its profits — but it will have no incentive to invest those extra profits in its U.S. operations.
So this should be easy. By all means let’s have a debate about how and how much to tax profits. Meanwhile, however, let’s close this outrageous loophole.
Posted by Mark Thoma on Monday, July 28, 2014 at 12:24 AM in Economics, Politics, Taxes |
Posted by Mark Thoma on Monday, July 28, 2014 at 12:06 AM in Economics, Links |
I have said this before. But I seem to need to say it again…
The very intelligent and thoughtful David Beckworth, Simon Wren-Lewis, and Nick Rowe are agreeing on New Keynesian-Market Monetarist monetary-fiscal convergence. Underpinning all of their analyses there seems to me to be the assumption that all aggregate demand shortfalls spring from the same deep market failures. And I think that that is wrong. ...[continue]...
Posted by Mark Thoma on Sunday, July 27, 2014 at 10:15 AM in Economics, Macroeconomics |
Posted by Mark Thoma on Sunday, July 27, 2014 at 12:06 AM in Economics, Links |
Uwe E. Reinhardt:
The Illogic of Employer-Sponsored Health Insurance, by Uwe E. Reinhardt, NY Times: ... Persuaded by both theory and empirical research, most economists believe that employer-based health insurance... ostensibly paid by employers ... is recovered from employees through commensurate reductions in take-home pay.
Evidently the majority of Supreme Court justices who just ruled in Burwell v. Hobby Lobby case do not buy the economists’ theory. These justices seem to believe that the owners of “closely held” business firms buy health insurance for their employees out of the kindness of their hearts and with the owners’ money. On that belief, they accord these owners the right to impose some of their ... religious beliefs ... on their employee’s health insurance. ...
The Supreme Court’s ruling may prompt Americans to re-examine whether the traditional, employment-based health insurance ... is really the ideal platform for health insurance coverage in the 21st century. The public health insurance exchanges established under the Affordable Care Act are likely to nibble away at this system....
In the meantime, the case should help puncture the illusion that employer-provided health insurance is an unearned gift bestowed on them by the owners and paid with the owners’ money, giving those owners the moral right to dictate the nature of that gift.
Posted by Mark Thoma on Saturday, July 26, 2014 at 10:52 AM in Economics, Health Care |
Why are so many of the rich and powerful so callous and indifferent to the struggles of those who aren't so fortunate?:
Are the Rich Coldhearted?, by Michael Inzlicht and Sukhvinder Obhi, NY Times: ... Can people in high positions of power — presidents, bosses, celebrities, even dominant spouses — easily empathize with those beneath them?
Psychological research suggests the answer is no. ...
Why does power leave people seemingly coldhearted? Some, like the Princeton psychologist Susan Fiske, have suggested that powerful people don’t attend well to others around them because they don’t need them in order to access important resources; as powerful people, they already have plentiful access to those.
We suggest a different, albeit complementary, reason from cognitive neuroscience. On the basis of a study we recently published with the researcher Jeremy Hogeveen, in the Journal of Experimental Psychology: General, we contend that when people experience power, their brains fundamentally change how sensitive they are to the actions of others. ...
Does this mean that the powerful are heartless beings incapable of empathy? Hardly..., the bad news is that the powerful are, by default and at a neurological level, simply not motivated to care. But the good news is that they are, in theory, redeemable.
Posted by Mark Thoma on Saturday, July 26, 2014 at 10:52 AM in Economics, Income Distribution, Politics, Social Insurance |
Here are the myths described by Vivien Labaton:
1. The pay gap is closing rapidly. ...
2. Women earn less because they work in industries that pay less. ...
3. Women earn less because they don’t negotiate well. ...
4. Women earn less because mothers choose to work less. ...
5. To close the pay gap, we should focus on deterring discrimination. ...
Posted by Mark Thoma on Saturday, July 26, 2014 at 09:53 AM in Economics |
Larry Summers on why he supports (conditionally) the Export-Import bank (from a longer interview):
Danny Vinik: I want to turn to your op-ed in the Financial Times on July 6 on the U.S. global stance on economic issues. In particular, you expressed support for the Export-Import bank and said that eliminating it would be an act of unilateral disarmament. Can you explain that?
Larry Summers: Probably at this moment, the greatest threat to open market capitalism comes from state-driven mercantilism capitalism, often carried on by authoritarian governments. They do not seek a level playing field. They seek a playing field that is tilted in their favor through the use of a variety of kinds of subsidized credits. The best and most credible way of deterring and limiting that behavior is to have a capacity to respond so that it does not produce commercial advantages. That’s what the Ex-Im bank enables us to do.
There are some who believe that it is good for everybody globally to subsidize exports. I’m not among them. I’m in favor of negotiations that would move towards a system where you didn’t have every country racing to compete with subsidies. But unilaterally renouncing our subsidies would be a source of great satisfaction in important parts of the world with which we compete and I do not think would be a productive way to bring about a more rules-based system.
Posted by Mark Thoma on Saturday, July 26, 2014 at 08:58 AM
Posted by Mark Thoma on Saturday, July 26, 2014 at 12:06 AM in Economics, Links |
In case you missed this in today's links, it's worth noting explicitly:
Devolution Number Nine, by MaxSpeak: Rep. Paul Ryan (R-Crazy) has a new plan to fight poverty..., the common theme throughout the report is to convert Federal programs into block grants. A block grant is a fixed pot of money provided to a state or local government for broadly-defined purposes. Ryan’s report is at pains to assert that the conversion would not entail spending cuts. This could not be further from the truth.
The story goes back to the days of Richard Nixon. I told it here. ... The short version is that a program or programs converted to a block grant is being set up to wither away. Block grants are designed through formulas to grow slowly or not at all, despite the likelihood that whatever the included programs were aimed at typically costs more to deal with every year. There are also two malignant political dynamics at work. One is that ... block grants transfer control to state governments. They have the fun of spending the money, Congress has the fun of raising the taxes to pay for it. The other is that the more vague — “flexible” — the purposes of the grant, the less focused is its political support. ...
The transfer of program responsibility from the Federal government to the states is known as devolution. It is the standard way of attacking domestic spending for social purposes, going back to Richard Nixon’s dismantling of the original, more interesting War on Poverty launched by Lyndon Johnson. ...
Posted by Mark Thoma on Friday, July 25, 2014 at 10:10 AM in Economics, Politics, Social Insurance |
How ignoring climate change could sink the U.S. economy, by Robert E. Rubin: ...When it comes to the economy, much of the debate about climate change ... is framed as a trade-off between environmental protection and economic prosperity. Many people argue that moving away from fossil fuels and reducing carbon emissions will impede economic growth, hurt business and hamper job creation.
But from an economic perspective, that’s precisely the wrong way to look at it. The real question should be: What is the cost of inaction? In my view — and in the view of a growing group of business people, economists, and other financial and market experts — the cost of inaction over the long term is far greater than the cost of action.
I recently participated in a bipartisan effort to measure the economic risks of unchecked climate change in the United States. We commissioned an independent analysis, led by a highly respected group of economists and climate scientists, and our inaugural report, “Risky Business,” was released in June. The report’s conclusions demonstrated the ... U.S. economy faces enormous risks from unmitigated climate change. ...
We do not face a choice between protecting our environment or protecting our economy. We face a choice between protecting our economy by protecting our environment — or allowing environmental havoc to create economic havoc. ...
Posted by Mark Thoma on Friday, July 25, 2014 at 08:28 AM in Economics, Environment, Market Failure |
Beware of "anti-government propaganda":
Left Coast Rising, by Paul Krugman, Commentary, NY Times: The states, Justice Brandeis famously pointed out, are the laboratories of democracy. And it’s still true. For example, one reason we knew or should have known that Obamacare was workable was the post-2006 success of Romneycare in Massachusetts. More recently, Kansas went all-in on supply-side economics, slashing taxes on the affluent in the belief that this would spark a huge boom; the boom didn’t happen, but the budget deficit exploded, offering an object lesson to those willing to learn from experience.
And there’s an even bigger if less drastic experiment under way in the opposite direction. California has long suffered from political paralysis, with budget rules that allowed an increasingly extreme Republican minority to hamstring a Democratic majority; when the state’s housing bubble burst, it plunged into fiscal crisis. In 2012, however, Democratic dominance finally became strong enough to overcome the paralysis, and Gov. Jerry Brown was able to push through a modestly liberal agenda of higher taxes, spending increases and a rise in the minimum wage. California also moved enthusiastically to implement Obamacare.
I guess we’re not in Kansas anymore. (Sorry, I couldn’t help myself.)
Needless to say, conservatives predicted doom. A representative reaction: Daniel J. Mitchell of the Cato Institute declared that by voting for Proposition 30, which authorized those tax increases, “the looters and moochers of the Golden State” (yes, they really do think they’re living in an Ayn Rand novel) were committing “economic suicide.” ...
What has actually happened? There is ... no sign of the promised catastrophe. If tax increases are causing a major flight of jobs from California, you can’t see it in the job numbers. Employment is up 3.6 percent in the past 18 months, compared with a national average of 2.8 percent...
And, yes, the budget is back in surplus.
Has there been any soul-searching among the prophets of California doom, asking why they were so wrong? Not that I’m aware of. ...
So what do we learn from the California comeback? Mainly, that you should take anti-government propaganda with large helpings of salt. Tax increases aren’t economic suicide; sometimes they’re a useful way to pay for things we need. Government programs, like Obamacare, can work if the people running them want them to work, and if they aren’t sabotaged from the right. In other words, California’s success is a demonstration that the extremist ideology still dominating much of American politics is nonsense.
Posted by Mark Thoma on Friday, July 25, 2014 at 12:24 AM in Economics, Politics |
Posted by Mark Thoma on Friday, July 25, 2014 at 12:06 AM in Economics, Links |
Me, at MoneyWatch:
Should the Fed have to play by a rule?: What if the U.S. Federal Reserve Board had to implement monetary policy according to a specific rule that would require specific policy actions depending on the circumstances?
That's the intent of a bill Republicans in the House of Representatives recently proposed. The Federal Reserve Accountability and Transparency Act would force the Fed's conduct of monetary policy to follow a prescribed rule...
Economists have long debated whether specific rules are better than giving central bankers the discretion to set monetary policy as they see fit. Here are the arguments for and against policy rules, and a compromise position that many economists advocate. ...
Posted by Mark Thoma on Thursday, July 24, 2014 at 08:37 AM in Economics, Monetary Policy |
Meritocracy won’t happen: the problem’s with the ‘ocracy’, by Andrew Gelman, Monkey Cage: I’ve written about this before but I think the topic is worth returning to, because it comes up a lot in our political discourse.
For example, consider this recent post by Robert Reich (link from Mark Thoma):
The “self-made” man or woman, the symbol of American meritocracy, is disappearing. Six of today’s ten wealthiest Americans are heirs to prominent fortunes. . . . We don’t have to sit by and watch our meritocracy be replaced by a permanent aristocracy . . .
I don’t disagree with Reich on the data..., the data seem to support Reich’s point that lots of rich people come from rich families.
But I want to dispute Reich’s other statement, which is that this is somehow contrary to the spirit of “meritocracy.”
I claim the opposite: that inherited privilege is an intrinsic and central aspect of meritocracy. ...
Posted by Mark Thoma on Thursday, July 24, 2014 at 08:27 AM in Economics, Income Distribution |
Is this why prices are sticky?:
Sticky prices and behavioural indifference curves, by John Komlos, Vox EU: Many quantities fail to respond smoothly to price changes. This column stresses that the ‘endowment effect’ – a well-known behavioral economics concept – implies kinks in indifference curves at the current consumption bundle price. Such kinks may account for the stickiness of prices, wages, and interest rates.
Posted by Mark Thoma on Thursday, July 24, 2014 at 08:20 AM in Economics |
Posted by Mark Thoma on Thursday, July 24, 2014 at 12:06 AM in Economics, Links |
From James Choi:
Why the Third Pounder hamburger failed: One of the most vivid arithmetic failings displayed by Americans occurred in the early 1980s, when the A&W restaurant chain released a new hamburger to rival the McDonald’s Quarter Pounder. With a third-pound of beef, the A&W burger had more meat than the Quarter Pounder; in taste tests, customers preferred A&W’s burger. And it was less expensive. A lavish A&W television and radio marketing campaign cited these benefits. Yet instead of leaping at the great value, customers snubbed it. Only when the company held customer focus groups did it become clear why. The Third Pounder presented the American public with a test in fractions. And we failed. Misunderstanding the value of one-third, customers believed they were being overcharged. Why, they asked the researchers, should they pay the same amount for a third of a pound of meat as they did for a quarter-pound of meat at McDonald’s. The “4” in “¼,” larger than the “3” in “⅓,” led them astray. --Elizabeth Green, NYT Magazine, on losing money by overestimating the American public's intelligence.
Posted by Mark Thoma on Wednesday, July 23, 2014 at 08:25 AM in Economics |
Another false alarm on US inflation?, by Gavyn Davies: There have been a few false alarms about a possible upsurge in inflation in the US in the past few years... There is an entrenched belief among some observers that the huge rise in central bank balance sheets must eventually leak into consumer prices, and they have not been deterred by the lack of evidence in their favour so far.
Another such scare has been brewing recently. ... As so often in the past, this happened because of temporary spikes in commodity prices, especially oil. But these have usually been reversed before a generalised inflation process has been triggered. ....
It now seems probable that part of the recent jump in core inflation was just a random fluctuation in the data. There have been suggestions that seasonal adjustment may have been awry in the spring.
But the main reason for the lack of concern is that wage pressures in the economy have remained stable, on virtually all the relevant measures. ...
On today’s evidence, there has been yet another false alarm on US inflation.
Posted by Mark Thoma on Wednesday, July 23, 2014 at 08:04 AM in Economics, Inflation |
The discussion continues:
Wall Street Skips Economics Class, by Noah Smith: If you care at all about what academic macroeconomists are cooking up (or if you do any macro investing), you might want to check out the latest economics blog discussion about the big change that happened in the late '70s and early '80s. Here’s a post by the University of Chicago economist John Cochrane, and here’s one by Oxford’s Simon Wren-Lewis that includes links to most of the other contributions.
In case you don’t know the background, here’s the short version...
Posted by Mark Thoma on Wednesday, July 23, 2014 at 08:04 AM in Economics, Macroeconomics, Methodology |
Posted by Mark Thoma on Wednesday, July 23, 2014 at 12:06 AM in Economics, Links |
Running late today -- two very quick ones. First, from Scientific American:
Will Automation Take Our Jobs?: Last fall economist Carl Benedikt Frey and information engineer Michael A. Osborne, both at the University of Oxford, published a study estimating the probability that 702 occupations would soon be computerized out of existence. Their findings were startling. Advances in ... technologies could, they argued, put 47 percent of American jobs at high risk of being automated in the years ahead. Loan officers, tax preparers, cashiers, locomotive engineers, paralegals, roofers, taxi drivers and even animal breeders are all in danger of going the way of the switchboard operator.
Whether or not you buy Frey and Osborne's analysis, it is undeniable that something strange is happening in the U.S. labor market. Since the end of the Great Recession, job creation has not kept up with population growth. Corporate profits have doubled since 2000, yet median household income (adjusted for inflation) dropped from $55,986 to $51,017. ... Erik Brynjolfsson and Andrew McAfee ... call this divergence the “great decoupling.” In their view, presented in their recent book The Second Machine Age, it is a historic shift. ...
The Next Wave of Technology?, by Tim Taylor: Many discussions of "technology" and how it will affect jobs and the economy have a tendency to discuss technology as if it is one-dimensional, which is of course an extreme oversimplification. Erik Brynjolfsson, Andrew McAfee, and Michael Spence offer some informed speculation on how they see the course of technology evolving in "New World Order: Labor, Capital, and Ideas in the Power Law Economy," which appears in the July/August 2014 issue of Foreign Affairs (available free, although you may need to register).
Up until now, they argue, the main force of information and communications technology has been to tie the global economy together, so that production could be moved to where it was most cost-effective. ...
But looking ahead, they argue that the next wave of technology will not be about relocating production around the globe, but changing the nature of production--and in particular, automating more and more of it. If the previous wave of technology made workers in high-income countries like the U.S. feel that their jobs were being outsourced to China, the next wave is going to make those low-skill workers in repetitive jobs--whether in China or anywhere else--feel that their jobs are being outsources to robots. ...
If this prediction holds true, what does this mean for the future of jobs and the economy?
1) Outsourcing would become much less common. ...
2) For low-income and middle-income countries like China..., their jobs and workforce would experience a dislocating wave of change.
3) Some kinds of physical capital are going to plummet in price, like robots, 3D printing, and artificial intelligence...
4) So..., who does well in this future economy? For high-income countries like the United States, Brynjolfsson, McAfee, and Spence emphasize that the greatest rewards will go to "people who create new ideas and innovations," in what they refer to as a wave of "superstar-based technical change." ...
This final forecast seems overly grim to me. While I can easily believe that the new waves of technology will continue to create superstar earners, it seems plausible to me that the spread and prevalence of many different new kinds of technology offers opportunities to the typical worker, too. After all, new ideas and innovations, and the process of bringing them to the market, are often the result of a team process--and even being a mid-level but contributing player on such teams, or a key supplier to such teams, can be well-rewarded in the market. More broadly, the question for the workplace of the future is to think about jobs where labor can be a powerful complement to new technologies, and then for the education and training system, employers, and employees to get the skills they need for such jobs. If you would like a little more speculation, one of my early posts on this blog, back on July 25, 2011, was a discussion of "Where Will America's Future Jobs Come From?"
Posted by Mark Thoma on Tuesday, July 22, 2014 at 08:22 AM in Economics, Technology, Unemployment |
Posted by Mark Thoma on Tuesday, July 22, 2014 at 12:06 AM in Economics, Links |
Via the SF Fed:
The Wage Growth Gap for Recent College Grads, by Bart Hobijn and Leila Bengali, FRBSF Economic Letter: Starting wages of recent college graduates have essentially been flat since the onset of the Great Recession in 2007. Median weekly earnings for full-time workers who graduated from college in the year just before the recession, between May 2006 and April 2007, were $653. Over the 12 months ending in April 2014, the earnings of recent college graduates had risen to $692 a week, only 6% higher than seven years ago.
The lackluster increases in starting wages for college graduates stand in stark contrast to growth in median weekly earnings for all full-time workers. These earnings have increased 15% from $678 in 2007 to $780 in 2014. This has created a substantial gap between wage growth for new college graduates and workers overall.
In this Economic Letter we put the wage growth gap in a historical context and consider what is at its heart. In particular, we find that the gap does not reflect a switch in the types of jobs that college graduates are able to find. Rather we find that wage growth has been weak across a wide range of occupations for this group of employees, a result of the lingering weak labor market recovery. ...
Posted by Mark Thoma on Monday, July 21, 2014 at 11:58 AM in Economics, Universities |
Cecchetti & Schoenholtz:
... A well-functioning financial system is based on trust. Widespread belief in honesty and integrity are essential for intermediation. That is, when we make a bank deposit, purchase a share of stock or a bond, we need to believe that terms of the agreement are being accurately represented. Yes, the value of the stock can go up and down, but when you think you buy an equity share, you really do own it. Fraud can undermine confidence, and the result will be less saving, less investment, less wealth and less income.
Unfortunately, in a complex financial system, the possibilities for fraud are numerous and the incidence frequent. Most cases are smaller and more mundane than Madoff or Ponzi. But they are remarkably common even today, despite enormous public efforts to prevent or expose them. One website devoted to tracking financial frauds in the United States lists 67 Ponzi schemes worth an estimated $3 billion in 2013 alone. ...
See also: Four years after passage, House keeps trying to kill Dodd-Frank.
Posted by Mark Thoma on Monday, July 21, 2014 at 08:28 AM in Economics, Financial System, Politics, Regulation |
"We don’t have a debt crisis, and never did":
The Fiscal Fizzle, by Paul Krugman, Commentary, NY Times: For much of the past five years readers of the political and economic news were left in little doubt that budget deficits and rising debt were the most important issue facing America. Serious people constantly issued dire warnings that the United States risked turning into another Greece ...
I’m not sure whether most readers realize just how thoroughly the great fiscal panic has fizzled...
In short, the debt apocalypse has been called off.
Wait — what about the risk of a crisis of confidence? There have been many warnings that such a crisis was imminent, some of them coupled with surprisingly frank admissions of disappointment that it hadn’t happened yet. For example, Alan Greenspan warned of the “Greece analogy,” and declared that it was “regrettable” that U.S. interest rates and inflation hadn’t yet soared.
But that was more than four years ago, and both inflation and interest rates remain low. Maybe the United States, which among other things borrows in its own currency and therefore can’t run out of cash, isn’t much like Greece after all.
In fact, even within Europe the severity of the debt crisis diminished rapidly once the European Central Bank began doing its job, making it clear that it would do “whatever it takes” to avoid cash crises in nations that have given up their own currencies and adopted the euro. Did you know that Italy, which remains deep in debt and suffers much more from the burden of an aging population than we do, can now borrow long term at an interest rate of only 2.78 percent? Did you know that France, which is the subject of constant negative reporting, pays only 1.57 percent?
So we don’t have a debt crisis, and never did. Why did everyone important seem to think otherwise?
To be fair, there has been some real good news about the long-run fiscal prospect, mainly from health care. But it’s hard to escape the sense that debt panic was promoted because it served a political purpose — that many people were pushing the notion of a debt crisis as a way to attack Social Security and Medicare. And they did immense damage along the way, diverting the nation’s attention from its real problems — crippling unemployment, deteriorating infrastructure and more — for years on end.
Posted by Mark Thoma on Monday, July 21, 2014 at 12:33 AM in Budget Deficit, Economics |