Category Archive for: Politics [Return to Main]

Monday, August 03, 2015

'Are All Tax Increases a Bad Thing?'

I have time for one more... This is John Whitehead at Environmental Economics:

Are all tax increases a bad thing?: Not necessarily. And yet, Greg Mankiw:

As long-time readers of this blog know, I have long advocated greater use of Pigovian taxes, such as taxes on carbon emissions. Such taxes can correct incentives by aligning private and social costs, and the revenue from such taxes can be used to reduce other, distortionary taxes.

Skeptics of Pigovian taxes on the right sometimes argue that such taxes are good in principle but in practice the left will co-opt them and, rather than using the revenue to reduce other taxes, will use it to fund ever larger government.

Sadly, that point of view is getting some support in Washington state.  The headline above from The Seattle Times reads 'Green' alliance opposes petition to tax carbon.  Why the opposition?  Because the ballot measure is revenue-neutral. Some environmentalists want to use the revenue from the proposed carbon tax to increase spending instead.

I believe that a carbon tax could someday win bipartisan support.  But before it does so, those on the left will need to convince those on the right that the tax would be a tax shift, not a tax increase.  The carbon tax needs to be evaluated on its own merits and should not be a stalking horse for a broader, big-government agenda.

The standard textbook treatment of a Pigouvian tax is agnostic on what happens to the revenue. It could be used efficiently to finance other projects..., reduce distortionary taxes or reduce government debt...

Mankiw's last paragraph strays far from the economics and is one-sided in its condemnation of those on the political left. A bipartison paragraph would read more like this:

I believe that a carbon tax could someday win bipartisan support.  But before it does so, those on the left will need to convince those on the right that the tax would be a tax shift, not a tax increase.  And those on the right will need to convince those on the left that the tax is not trojan horse for a tax cut for the rich. The carbon tax needs to be evaluated on its own merits. and should not be a stalking horse for a broader, big-government agenda.

The carbon tax needs to be evaluated on its own merits. Period. ...

I know of no empirical evidence to suggest that there is only one efficient use for Pigouvian tax revenue. 

'Is Deficit Fetishism Innate or Contextual?'

A quick one before hitting the road. Is deficit fetishism bullshit? This is from Simon Wren-Lewis:

Is deficit fetishism innate or contextual?: In a couple of interesting posts, Jonathan Hopkin and Ben Rosamond, political scientists from the LSE and Copenhagen respectively, talk about ‘political bullshit’. They use ‘bullshit’ as a technical term due to Princeton philosopher Harry Frankfurt. Unlike lying, bullshit tells false stories that pay no heed to the truth. Their appeal is more to common sense, or what Tyler Cowen calls common sense morality. At a primitive level it is the stuff of political sound bites, but at a slightly more detailed level it is the language of what Krugman ironically calls ‘Very Serious People’.
The implication which can then be drawn is that because bullshit does not reside in the “court of truth”, trying to combat it with facts, knowledge or expertise may have limited effectiveness. The conditions under which this might be true, and the extent to which information technology impacts on this, are fascinating issues...
In the case of fiscal policy, deficit fetishism as bullshit involves appeals to ‘common sense’ by invoking simple analogies with households, often coupled with an element of morality - it is responsible to pay down debts. The point in calling it bullshit (in this technical sense) is that attempts to counter it by appeals to facts or knowledge (e.g. the government is not like a household, as every economist knows) may have limited effectiveness. Instead it might be better to fight bullshit with bullshit...
I want to ask whether deficit fetishism will always be powerful bullshit, or whether its force is a symptom of a particular time, and what is more a time that may by now have passed. ...
At first sight deficit fetishism seems to be innate...

'The Revolt Against the Ruling Class'

Robert Reich:

The Revolt Against the Ruling Class: “He can’t possibly win the nomination,” is the phrase heard most often when Washington insiders mention either Donald Trump or Bernie Sanders.
Yet as enthusiasm for the bombastic billionaire and the socialist senior continues to build within each party, the political establishment is mystified.
They don’t understand that the biggest political phenomenon in America today is a revolt against the “ruling class” of insiders that have dominated Washington for more than three decades.
In two very different ways, Trump and Sanders are agents of this revolt. I’ll explain the two ways in a moment.  
Don’t confuse this for the public’s typical attraction to candidates posing as political outsiders who’ll clean up the mess, even when they’re really insiders who contributed to the mess.
What’s new is the degree of anger now focused on those who have had power over our economic and political system since the start of the 1980s.
 ...
Yet despite the growing revolt against the ruling class, it seems likely that the nominees in 2016 will be Jeb Bush and Hillary Clinton. After all, the ruling class still controls America.
But the revolt against the ruling class won’t end with the 2016 election, regardless. 
Which means the ruling class will have to change the way it rules America. Or it won’t rule too much longer.

Friday, July 31, 2015

Paul Romer: Freshwater Feedback on Mathiness

More from Paul Romer:

Freshwater Feedback Part 1: “Everybody does it”: You can boil my claim about mathiness down to two assertions:

1. Economist N did X.
2. X is wrong because it undermines the scientific method.

#1 is a positive assertion, a statement about “what is …”#2 is a normative assertion, a statement about “what ought …” As you would expect from an economist, the normative assertion in #2 is based on what I thought would be a shared premise: that the scientific method is a better way to determine what is true about economic activity than any alternative method, and that knowing what is true is valuable.

In conversations with economists who are sympathetic to the freshwater economists I singled out for criticism in my AEA paper on mathiness, it has become clear that freshwater economists do not share this premise. What I did not anticipate was their assertion that economists do not follow the scientific method, so it is not realistic or relevant to make normative statements of the form “we ought to behave like scientists.”

In a series of three posts that summarize what I have learned since publishing that paper, I will try to stick to positive assertions, that is assertions about the facts, concerning this difference between the premises that freshwater economists take for granted and the premises that I and other economists take for granted.

In my conversations, the freshwater sympathizers generally have not disagreed with my characterization of the facts in assertion #1–that specific freshwater economists did X. In their response, two themes recur:

a) Yes, but everybody does X; that is how the adversarial method works.
b) By selectively expressing disapproval of this behavior by the freshwater economists that you name, you, Paul, are doing something wrong because you are helping “those guys.”

In the rest of this post, I’ll address response a). In a subsequent post, I’ll address response b). Then in a third post, I’ll observe that in my AEA paper, I also criticized a paper by Piketty and Zucman, who are not freshwater economists. The response I heard back from them was very different from the response from the freshwater economists. In short, Piketty and Zucman disagreed with my statement that they did X, but they did not dispute my assertion that X would be wrong because it would be a violation of the scientific method.

Together, the evidence I summarize in these three posts suggests that freshwater economists differ sharply from other economists. This evidence strengthens my belief that the fundamental divide here is between the norms of political discourse and the norms of scientific discourse. Lawyers and politicians both engage in a version of the adversarial method, but they differ in another crucial way. In the suggestive terminology introduced by Jon Haidt in his book The Righteous Mind, lawyers are selfish, but politicians are groupish. What is distinctive about the freshwater economists is that their groupishness depends on a narrow definition of group that sharply separates them from all other economists. One unfortunate result of this narrow groupishness may be that the freshwater economists do not know the facts about how most economists actually behave. ...[continue]...

'U.S. Paychecks Grow at Record-Slow Pace'

Martin Feldstein says that when it comes to income inequality, you're all a bunch of whiners:

...we should not lose sight of how well middle-income families have actually done over the past few decades. Unfortunately, the political debate is distorted by misleading statistics that grossly understate these gains..., the US middle class has been doing much better than the statistical pessimists assert. ...

So it's yet another another round of "inequality has not grown as much as Democrats claim." Thought we had gotten beyond that. Today's news:

U.S. wages and benefits grew in the spring at the slowest pace in 33 years, stark evidence that stronger hiring isn't lifting paychecks much for most Americans. The slowdown also likely reflects a sharp drop-off in bonus and incentive pay for some workers.
The employment cost index rose just 0.2 percent in the April-June quarter after a 0.7 increase in the first quarter, the Labor Department said Friday. The index tracks wages, salaries and benefits. Wages and salaries alone also rose 0.2 percent.
Both measures recorded the smallest quarterly gains since the second quarter of 1982.
Salaries and benefits for private sector workers were unchanged, the weakest showing since the government began tracking the data in 1980. ...
The employment cost index figures now match the sluggish pace of growth reported in the average hourly pay data that's part of the monthly jobs report. ...

Paul Krugman: China’s Naked Emperors

What can we learn from the response of the Chinese government to the problems in China's stock market?:

China’s Naked Emperors, by Paul Krugman, Commentary, NY Times: ... We’ve seen ... strange goings-on in China’s stock market. In and of itself, the price of Chinese equities shouldn’t matter all that much. But the authorities have chosen to put their credibility on the line by trying to control that market — and are in the process of demonstrating that, China’s remarkable success over the past 25 years notwithstanding, the nation’s rulers have no idea what they’re doing. ...
China is at the end of an era — the era of superfast growth... Meanwhile, China’s leaders appear to be terrified — probably for political reasons — by the prospect of even a brief recession. ... China’s response has been an all-out effort to prop up stock prices. Large shareholders have been blocked from selling; state-run institutions have been told to buy shares; many companies with falling prices have been allowed to suspend trading. ...
What do Chinese authorities think they’re doing?
In part, they may be worried about financial fallout. It seems that a number of players in China borrowed large sums with stocks as security, so that the market’s plunge could lead to defaults. This is especially troubling because China has a huge “shadow banking” sector that is essentially unregulated and could easily experience a wave of bank runs.
But it also looks as if the Chinese government, having encouraged citizens to buy stocks, now feels that it must defend stock prices to preserve its reputation. And what it’s ending up doing, of course, is shredding that reputation at record speed.
Indeed, every time you think the authorities have done everything possible to destroy their credibility, they top themselves. Lately state-run media have been assigning blame for the stock plunge to, you guessed it, a foreign conspiracy against China, which is even less plausible than you may think: China has long maintained controls that effectively shut foreigners out of its stock market, and it’s hard to sell off assets you were never allowed to own in the first place.
So what have we just learned? China’s incredible growth wasn’t a mirage, and its economy remains a productive powerhouse. The problems of transition to lower growth are obviously major, but we’ve known that for a while. The big news here isn’t about the Chinese economy; it’s about China’s leaders. Forget everything you’ve heard about their brilliance and foresightedness. Judging by their current flailing, they have no clue what they’re doing.

Wednesday, July 29, 2015

'Second-best Macroeconomics'

Paul Krugman wonders if he has been advocating for the right type of policies:

Second-best Macroeconomics: The ... economic problems facing both the United States and Europe have been quite straightforward and comprehensible. ... So no worries: just hit the big macroeconomic That Was Easy button, and soon the troubles will be over.
Except that all the natural answers to our problems have been ruled out politically. Austerians not only block the use of fiscal policy, they drive it in the wrong direction; a rise in the inflation target is impossible given both central-banker prejudices and the power of the goldbug right. Exchange rate adjustment is blocked by the disappearance of European national currencies, plus extreme fear over technical difficulties in reintroducing them.
As a result, we’re stuck with highly problematic second-best policies like quantitative easing and internal devaluation. ... In case you don’t know, “second best” ... comes from a classic 1956 paper by Lipsey and Lancaster, which showed that policies which might seem to distort markets may nonetheless help the economy if markets are already distorted by other factors. ...
The problems with second best as a policy rationale are familiar. For one thing, it’s always better to address existing distortions directly, if you can — second best policies generally have undesirable side effects... There’s also a political economy concern,... in a complicated world you can come up with a second best rationale for practically anything. ...
But here we are, with anything resembling first-best macroeconomic policy ruled out by political prejudice, and the distortions we’re trying to correct are huge — one global depression can ruin your whole day. So we have quantitative easing, which is of uncertain effectiveness, probably distorts financial markets at least a bit, and gets trashed all the time by people stressing its real or presumed faults; someone like me is then put in the position of having to defend a policy I would never have chosen if there seemed to be a viable alternative. ...
Which makes me ask myself the question: Do people like me spend too much time being limited by what is presumed to be politically practical? Should we devote more time to trying to widen the range of options, to pointing out that we really would be much better off if we threw off the fetters of conventional deficit fears, the 2 percent inflation target, and the extremely ill-advised euro project?

Tuesday, July 28, 2015

The Politics of Economics and ‘Very Serious People’

New column:

The Politics of Economics and ‘Very Serious People’: The latest debate in the economics blogosphere is about the true meaning of the term “Very Serious People,” a term of derision initially used to describe some supporters of the Iraq war. It was later broadened to describe people who advocate for the tough position on any issue – budget cuts and entitlement reform to ease debt worries, increases in interest rates to prevent inflation, and so on – despite evidence contrary to their policy proposals.
Very Serious People often embrace unpopular policies; they adopt the tough and serious route they believe is needed to ensure the US remains on solid footing, and they ridicule the opposition as softies unwilling to accept that there is no easy way to overcome our economic problems. Gain requires pain, but we should note that the tough policies Very Serious People embrace usually impose the pain on other people -- often the poor and disadvantaged. When they are asked to step up and pay more taxes to reduce the deficit, for example, their tune generally changes.
Henry Farrell, an Associate Professor of Political Science at George Washington University says, “Being a Very Serious Person is about occupying a structural position that tends to reinforce, rather than counter, one’s innate biases and prejudices.” I’m not sure that fully captures the desire to appear tough and disciplined, to be seen as the one willing to say what needs to be done no matter how hard it is, but it did lead me to think about the degree to which I, and other economists, are influenced by our political leanings. To what extent do our politics determine our economics? ...

'Should Central Bankers Stick to Talking about Monetary Policy?'

Simon Wren-Lewis on whether "central bankers need to keep quiet about policy matters that are not within their remit":

Should central bankers stick to talking about monetary policy?: Few disagree that the recent remarks on corporate governance and investment made by Andy Haldane (Chief Economist at the Bank of England) are interesting, and that if they start a debate on short-termism that would be a good thing. As Will Hutton notes, Hillary Clinton has been saying similar things in the US. The problem Tony Yates has (and which Duncan Weldon, the interviewer, alluded to in his follow-up question) is that this is not obviously part of the monetary policy remit.
Haldane gave an answer to that, which Tony correctly points out is somewhat strained. ...
I have in the past said very similar things to Tony...
However I am beginning to have second thoughts about my own and Tony’s views on this. First, it all seems a bit British in tone. Tony worked at the Bank, and I have been involved with both the Bank and Treasury on and off, so we are both steeped in a British culture of secrecy. I do not think either of us are suggesting that senior Bank officials should never give advice to politicians, so what are the virtues of keeping this private? In trying to analyse how policy was made in 2010, it is useful to have a pretty good idea of what advice the Bank’s governor gave politicians because of what he said in public, rather than having to guess. ...
It is often said that central bankers need to keep quiet about policy matters that are not within their remit as part of an implicit quid pro quo with politicians, so that politicians will refrain from making public their views about monetary policy. Putting aside the fact that the ECB never got this memo, I wonder whether this is just a fiction so that politicians can inhibit central bankers from saying things politicians might find awkward (like fiscal austerity is making our life difficult). In a country like the UK with a well established independent central bank, it is not that clear what the central bank is getting out of this quid pro quo. And if it stops someone with the wide ranging vision of Haldane from raising issues just because they could be deemed political, you have to wonder whether this mutual public inhibition serves the social good.

The danger is that the Fed will become politicized as a result of taking sides on hotly debated political/policy questions. This is from a post in February of 2007:

...Should the Federal Reserve Chair talk only about matters directly related to monetary policy, or is it okay to discuss broader issues such as inequality, minimum wages, and Social Security without making the direct connection to monetary policy evident?...:

Willem Buiter: Martin's Column "Why America will need some elements of a welfare state", refers extensively to a recent speech by Ben Bernanke...

I believe it is a serious mistake for central bankers to express public views on politically contentious issues outside their mandates. The mistake is no less serious for being made so commonly by central bankers all over the world.

Central bank Governors have a lengthy and unfortunate track record of holding forth in public on matters that are outside the domains of their mandate (in the case of the Fed, monetary policy and financial stability)... With the exception of the Governors of the Bank of England and the Reserve Bank of New Zealand, every Governor on the block appears to want to share his or her views on necessary or desirable fiscal, structural and social reforms. Examples are social security reform and the minimum wage, subjects on which Alan Greenspan liked to pontificate when he was Chairman of the Board of Governors of the Federal Reserve System. Jean-Claude Trichet cannot open his mouth without some exhortation for fiscal restraint or structural reform rolling out. In the case of Chairman Bernanke's speech, equality of opportunity, income distribution, teenage pregnancy and welfare dependency are clearly not part of the (admittedly broad) three-headed mandate of the Fed: maximum employment, stable prices and moderate long-term interest rates. ...

When the Head of a central bank becomes a participant, often a partisan participant, in public policy debates on matters beyond the central bank's mandate..., the institution of the central bank itself is politicised and put at risk of becoming a partisan-political football. This puts at risk the central bank's operational independence in the management of monetary policy and in securing financial stability.

Central bankers, Mr. Bernanke included, should 'stick to their knitting' (if I may borrow Alan Blinder's phrase). Being the head of an institution with the national and global visibility of the Fed or the ECB gives one an unparalleled platform for addressing whatever one considers the great issues of the time. The temptation to climb that unique pulpit must be near-irresistible. Nevertheless, unless the text for the sermon concerns monetary policy or financial stability, that temptation is to be resisted in the interest of the institutional integrity and independence of the central bank.

As I've said before, I agree.

Fiscal policy has a clear connection to monetary policy through the government budget constraint, and there are also times -- e.g. recently -- when monetary policy needs the help of fiscal policy (if the Fed is forced to shoulder the entire burden, it can bring other risks). So I have no problem with the Fed chair raising fiscal policy issues (as Bernanke did, though not forcefully enough perhaps). I have a bit more trouble when the topic is inequality (e.g. Yellen's big speech on this -- and the subsequent reaction from the right). It's harder to see how that is connected to the Fed's policy mandate, and with Republicans already out to take away as much of the Fed's powers as they can, it was a bad time to tick them off.

Maybe this is too cautious. Perhaps Federal Reserve officials should feel free to address whatever topic they'd like. But the Fed's independence was instrumental during the Great Recession -- without it, monetary policy would have been as terrible as fiscal policy and things would have been much worse -- and I'd rather not take any risks.

Monday, July 27, 2015

Paul Krugman: Zombies Against Medicare

Despite what you might hear from conservatives, Medicare is "eminently sustainable":

Zombies Against Medicare, by Paul Krugman, Commentary, NY Times: Medicare turns 50 this week, and it has been a very good half-century. Before the program went into effect, Ronald Reagan warned that it would destroy American freedom; it didn’t, as far as anyone can tell. What it did do was provide a huge improvement in financial security for seniors and their families, and in many cases it has literally been a lifesaver as well.
But the right has never abandoned its dream of killing the program. So it’s really no surprise that Jeb Bush recently declared that while he wants to let those already on Medicare keep their benefits, “We need to figure out a way to phase out this program for others.” ...
The ... reason conservatives want to do away with Medicare has always been political: It’s the very idea of the government providing a universal safety net that they hate, and they hate it even more when such programs are successful. But ... they usually shy away from making their real case...
What Medicare’s would-be killers usually argue, instead, is that the program as we know it is unaffordable — that we must destroy the system in order to save it... And the new system they usually advocate is ... vouchers that can be applied to the purchase of private insurance.
The underlying premise here is that Medicare as we know it is incapable of controlling costs, that only the only way to keep health care affordable going forward is to rely on the magic of privatization.
Now, this was always a dubious claim. .... In fact, Medicare costs per beneficiary have consistently grown more slowly than private insurance premiums... Indeed, Medicare spending keeps coming in ever further below expectations...
Right now is, in other words, a very odd time to be going on about the impossibility of preserving Medicare, a program whose finances will be strained by an aging population but no longer look disastrous. One can only guess that Mr. Bush is unaware of all this, that he’s living inside the conservative information bubble, whose impervious shield blocks all positive news about health reform.
Meanwhile, what the rest of us need to know is that Medicare at 50 still looks very good. It needs to keep working on costs, it will need some additional resources, but it looks eminently sustainable. The only real threat it faces is that of attack by right-wing zombies.

Friday, July 24, 2015

'Raise the Gas Tax Already'

James Surowiecki:

Raise the Gas Tax Already: Senate Majority Leader Mitch McConnell is a conservative Republican. Senator Barbara Boxer is a liberal Democrat. So the fact that they’ve worked together to come up with a plan to fund highway spending for the next three years might seem like a good thing, a rare moment of bipartisanship in a Congress riven by ideological hostility. And, in fact, you could see the thousand-page bill they’ve produced as, in the words of the Times, “real progress,” except for one thing: their complicated, jury-rigged plan is only necessary because of the continued refusal by Congress to embrace the obvious, economically sensible solution to highway funding, namely raising the gas tax. ...
The fundamental problem, of course, is that raising taxes, no matter how economically sensible those taxes might be, is anathema to a huge swath of the Republican Party. ... Opposition to higher income taxes has some theoretical justification: higher marginal rates discourage people from working more and investing. ... But no such argument exists against the gas tax: all it does, in essence, is ask drivers to pay for the roads they use. It’s not even fair to say that keeping this tax at its current level is a check on big government, since most federal highway spending now goes toward rebuilding and repairing roads—maintenance that even conservatives recognize we must do.
Highway revenue has to be raised somehow. Congress should show some political spine, discard the Rube Goldberg funding schemes, and stop treating all taxes as bad ones.

As noted in the article, there are also, of course, environmental benefits from an increase in gas taxes.

Wednesday, July 22, 2015

'Annoying Euro Apologetics'

My response to this argument that economists don't get the politics of the euro was simply "I think we get the underlying political motivations. But whether the euro was politically motivated for the most part, or not, economics matters for the sustainability of a political union." Paul Krugman has more to say:

Annoying Euro Apologetics, by Paul Krugman: Are there good arguments against the proposition that the creation of the euro was an epic mistake? Maybe. But the arguments I’ve been hearing lately are really bad. And they’re also deeply annoying.
One argument I keep seeing is that economist critics like myself don’t understand that the euro was a political and strategic project, not merely a matter of economic costs and benefits. Yes, I’m a dumb uncouth economist, completely unaware of the role of politics and international strategy in policy decisions, who never heard of the European project and its origins in the effort to put Europe’s legacy of war behind it, not to mention strengthen democracy in the Cold War.
Well, actually I do know all about that. The point, however, is that while the European project has at every stage combined economic objectives with broader political goals – it’s about peace and democracy through integration and prosperity – the project can’t be expected to work unless the economic measures are a good idea in and of themselves, or at least a non-catastrophic idea. What happened in the march to the euro was that European elites, in love with the symbolism of a single currency, closed their minds to warnings that currency union – unlike the removal of trade barriers – was at best ambiguous in its economic logic, and arguably, even ex ante, a very bad idea indeed.
An alternative argument, which we’re hearing from depressed European economies like Finland, is that the short-term costs of inflexibility are outweighed by the supposedly huge gains from greater integration. But where’s the evidence for these huge gains? ...
As I said, maybe there are good arguments against the proposition that the euro was a mistake. But pointing out that politics matters, and economies grow, doesn’t cut it; these aren’t the factoids you’re looking for.

Tuesday, July 21, 2015

'This is What Economists Don’t Understand About the Euro Crisis – or the U.S. Dollar'

One of those "economists don't understand" thingies:

This is what economists don’t understand about the euro crisis – or the U.S. dollar, by Kathleen McNamara, Monkey Cage: Prominent American economists are weighing in on the Greek debt crisis, with more than a hint of schadenfreude. The title of a New York Times op-ed by Gregory Mankiw says it all in one smarmy sentence. “They told you so: Economists were Right To Doubt the Euro.” Economists are condescendingly scolding the Europeans for venturing into a single currency without the proper underlying economic conditions. Paul Krugman has relentlessly excoriated the leaders of Europe for being what he calls “self-indulgent politicians” who have “spent a quarter-century trying to run Europe on the basis of fantasy economics.” The conventional wisdom seems to be that the problems of the euro zone are, as economist Martin Feldstein once put it, “the inevitable consequence of imposing a single currency on a very heterogeneous group of countries.”
What this commentary gets wrong, however, is that single currencies are never the product of debates about optimal economic solutions. Instead, currencies like the U.S. dollar itself are the result of political battles, where motivated actors try to centralize power. This has most often occurred “through iron and blood,” as Otto van Bismarck, the unifier of Germany put it, as a result of catastrophic wars. Smaller geographic units were brought together to build the modern nation state, with a unified fiscal system, a common national language that was often imposed by force, a unified legal system, and, a single currency. Put differently (with apologies to sociologist Charles Tilly), war makes the state, and the state makes the currency. ...
European leaders weren’t stupid or self indulgent when they decided to move ahead with the euro, without fiscal union or strong Europe-level democracy. They just cared more about politics and international security than economics. They wanted to build a Europe that had transcended the divisions of the Cold War, and bind together Germany, which was reunited and much more powerful, with the rest of Europe. When they did think about economics, they hoped that a strong euro, anchored in an independent European Central Bank located in Frankfurt and built on a commitment to protecting the stability of the currency, would help resolve the problems of currency depreciation, spiraling inflation and economic instability that came with the weak currencies of the “Club Med” countries to the south of Europe.
European leaders, the IMF and the European Commission have done a terrible job at handling the Greek debt crisis. However, criticizing the euro because it doesn’t meet the ideal economic conditions for a single currency is missing the point. ...

I think we get the underlying political motivations. But whether the euro was politically motivated for the most part, or not, economics matters for the sustainability of a political union.

Monday, July 20, 2015

'AIIB: The First International Financial Institution of the 21st Century'

Cecchetti & Schoenholtz:

AIIB: The first international financial institution of the 21st century: ...What happens when official international financial institutions (IFIs) fail to respond to a changing environment? The same thing that happens to firms that stop innovating. New, more competitive institutions (firms) arise that compel them to change or – like dinosaurs – become extinct.
We may be witnessing this process of creative destruction right now. Last month, a group of 57 founding nations led by China signed the articles of agreement to establish the Asian Infrastructure Investment Bank (AIIB) with an initial subscribed capital of $100 billion. While most of the G20 nations, including the big European states, Australia, and South Korea, are among the founding members, the United States, Japan, and Canada are noticeably not.
No one disputes the need for more official infrastructure funding... What we find the most interesting is that the AIIB founders didn’t ask member countries to approve an expansion of either the World Bank or the ADB. Instead, they opted for a new organization altogether.
Why? The problem is institutional legitimacy arising from issues of power and governance. ...
The most glaring problem with the 20th century IFI’s – the BIS, IMF, World Bank and the regional development banks – is representation. ... Perhaps most important are the veto rights. ...
Is the AIIB likely to do better? There are reasons to be hopeful. ...
Of course, the proof will be in the pudding. When the AIIB begins operations, observers will be watching closely whether these ideals are realized. ...
As economists, we like competition. If the AIIB meets the high standards its leaders espouse, it will heighten the pressure on the existing IFIs’ political masters to change with the times. In addition, in light of numerous potential areas of conflict between China and the United States (think cyberspace and the South China Sea for starters), wouldn’t we all benefit from having these two leading economies and governments instead focus their competitive energies on improving global infrastructure finance?
From this perspective, we see a powerful argument for the United States to do two things.  First, the U.S. Congress should belatedly approve the IMF’s 2010 Quota and Governance Reforms to signal its support for continued global economic and financial cooperation in coming decades. And second, after failing to stop the AIIB, and refusing to participate as a founding member, the United States should join the institution as soon as it can, participating actively in holding it to the highest 21st century standards.

Paul Krugman: Europe’s Impossible Dream

Why did Europe ignore the "euroskeptics"?:

Europe’s Impossible Dream, by Paul Krugman, Commentary, NY Times: ... To someone who didn’t know much economics, or chose to ignore awkward questions, establishing a unified European currency sounded like a great idea. It would make doing business across national borders easier, while serving as a powerful symbol of unity. Who could have foreseen the huge problems the euro would eventually cause?
Actually, lots of people. ... The only big mistake of the euroskeptics was underestimating just how much damage the single currency would do.
The point is that it wasn’t at all hard to see, right from the beginning, that currency union without political union was a very dubious project. So why did Europe go ahead with it?
Mainly, I’d say, because the idea of the euro sounded ... forward-looking, European-minded, exactly the kind of thing that appeals to the kind of people who give speeches at Davos. Such people didn’t want nerdy economists telling them that their glamorous vision was a bad idea...
And the euro came. For a decade after its introduction a huge financial bubble masked its underlying problems. But now ... all of the skeptics’ fears have been vindicated.
Furthermore, the story doesn’t end there. When the predicted and predictable strains on the euro began, Europe’s policy response was to impose draconian austerity on debtor nations — and to deny the simple logic and historical evidence indicating that such policies would inflict terrible economic damage while failing to achieve the promised debt reduction.
It’s astonishing even now how blithely top European officials dismissed warnings that slashing government spending and raising taxes would cause deep recessions...
What should Europe do now? There are no good answers — but the reason there are no good answers is because the euro has turned into a Roach Motel, a trap that’s hard to escape. If Greece still had its own currency, the case for devaluing that currency, improving Greek competitiveness and ending deflation, would be overwhelming.
The fact that Greece no longer has a currency, that it would have to create one from scratch, vastly raises the stakes. My guess is that euro exit will still prove necessary. And in any case it will be essential to write down much of Greece’s debt.
But we’re not having a clear discussion of these options, because European discourse is still dominated by ideas the continent’s elite would like to be true, but aren’t. And Europe is paying a terrible price for this monstrous self-indulgence.

Saturday, July 18, 2015

'Show Some Mercy'

Greg Mankiw:

... In an earlier era, Greece could have devalued the drachma, making its exports more competitive on world markets. Easy monetary policy would have offset some of the pain from tight fiscal policy. Mr. Friedman and Mr. Feldstein were right: The euro has turned into an economic liability that has exacerbated political tensions. For this, the European elites who pushed for the currency union bear some responsibility.
As creditor nations and international institutions sort through the wreckage, it is worth bearing in mind the lessons from Mr. Keynes. A nation can only withstand so much economic pain before the political fallout becomes ugly. And that fallout can extend beyond the border of the problem nation.
Yes, the Greeks have every reason to be contrite. But it might also be wise for the rest of the world to show some mercy.

'Variable Geometry Bites Back: Schäuble’s Motives'

Fabio Ghironi  in Vox EU:

Variable geometry bites back: Schäuble’s motives, by Fabio Ghironi: Success of the German-inspired solution for the latest Greek crisis is far from assured. If it fails, the Eurozone may be changed forever. This column argues that the failure would lead to an outcome that has been favoured for decades by Germany’s Finance Minister, Wolfgang Schäuble. Perhaps the package the Eurozone agreed is just a backdoor way of getting to the ‘variable geometry’ and monetary unification for the core that the Maastricht criteria had failed to achieve.

The Greek crisis risks shattering the Eurozone as we know it. Germany’s Finance Minister Wolfgang Schäuble has been leading a coalition of hawks who appear determined to make Grexit an unavoidable outcome. If not immediately then at least once it becomes clear (or clearer) that it is impossible for Greece to satisfy the conditions it is being asked to meet.

As one ponders Mr. Schäuble’s possible motives for insisting on such demanding (many would say infeasible) targets, it is instructive to recall his political and intellectual history in the run-up to the euro.

How Schäuble viewed the Eurozone

Mr. Schäuble was Minister of the Interior of the Federal Republic of Germany between 1989 and 1991. In this capacity, he played a central role in the negotiations that led to German reunification. The same period saw the negotiations leading up to the Maastricht Treaty, which established the foundation for the Eurozone.

A widely held view at the time was that Germany agreeing to give up the deutschmark and to participate in a European monetary union was the quid pro quo for British and French acquiescence to German reunification – an event of monumental implications, given Europe’s history.[1]

Germans were understandably reluctant to give up a very successful currency for the uncertainty of monetary union with less rigorous partners. Thus, at their insistence, the Maastricht Treaty included convergence criteria that would have to be fulfilled for euro membership. In effect, those conditions were intended to keep unreliable Southern European countries out of the monetary union.

In those years, Mr. Schäuble – heir apparent to Chancellor Helmut Kohl at the time – championed a ‘variable geometry’ approach to the Eurozone. A key implication of this ‘variable geometry’ was that that monetary unification should be restricted to a set of ‘core’ countries that shared Germany’s preference for austerity.

Mr. Schäuble originally made his argument explicit in a blueprint for the Eurozone co-authored with Karl Lamers and released by Germany’s Christian Democratic Union in the late summer of 1994 (Lamers and Schäuble 2014). Responding to critics less than two weeks later, Mr. Schäuble stated that “We cannot set the pace of European integration according to the slowest ship in the convoy.”[2] Speed was clearly defined relative to the German benchmark, as enshrined in the Maastricht convergence criteria. Chancellor Kohl described the Schäuble-Lamers document as a ‘discussion paper,’ but he did not explicitly distance himself from it, and he defended the plan of a ‘core’ Europe.[3]

Schäuble after German and France flouted the Maastricht criteria

In August of 2014, Mr. Schäuble and Mr. Lamers reiterated their plea for ‘variable geometry’ in a Financial Times article 20 years after their original paper (Lamers and Schäuble 2014). They conclude: “In order to make progress […], we should keep using the approach that proved its mettle back in 1994: to establish cores of co-operation within the EU that enable smaller, willing groups of member states to forge ahead.” Importantly, the article acknowledges the crucial role of Germany (and France) in scuttling the credibility of the Stability Pact’s fiscal policy rules in 2003.

Mr. Schäuble’s commitment to European integration is unquestioned, and no better description can be found than the remarks by IMF Managing Director Christine Lagarde when Mr. Schäuble was awarded the Charlemagne Prize in 2012 (Lagarde 2012). But Mr Schäuble’s history shows that his commitment to ‘variable geometry’ is just as strong -- to the point that his most recent statements on support for Grexit within the German government are creating a rift with Chancellor Angela Merkel.[4]

As it turned out, the Maastricht criteria that were meant to implement Mr Schäuble’s vision failed to keep Southern European countries out of the euro, and through steps that we all became more or less familiar with, we have gotten to the start of the crisis in 2010, and the current situation.

The cost of Schäuble’s strategy

If Greece exits the euro it will become evident to everyone that irreversibility of euro membership is an illusion as long as the countries involved retain their essential sovereignty.

  • Markets will likely test the resolve of countries’ governments to stay in the euro, and costly trade-offs will provide additional fuel for populism and nationalism.

While government commitment and ECB firepower may prevent a domino effect, the balance of market and political forces may well result in other Mediterranean countries leaving the euro.

At that point, Germany would be left in a Eurozone that would consist of Mr Schäuble’s early 1990s ‘core,’ plus partners to the East and Baltic countries who have been renewing their historical economic ties with Germany since joining the EU.

Concluding remarks

All this raises the following question: Is Mr Schäuble’s position simply intended to find a backdoor way to return to the ‘variable geometry’ and monetary unification for the ‘core’ that the Maastricht criteria had failed to achieve?

History will be the judge, but if this was the way to revive ‘variable geometry,’ it was better to leave it resting. ...

Wednesday, July 15, 2015

'An Unsustainable Position'

Paul Krugman:

An Unsustainable Position: Everyone is talking about the IMF’s new update to its debt sustainability analysis, which says that Greece’s attempt to surrender is doomed to failure without massive debt relief. That’s surely the right conclusion.
However, it’s hard to accept the document’s claim that this is a new development...
The point, surely, is that the plan for Greece was never feasible. No matter how willing a nation is to suffer, no matter how willing to run primary surpluses on a scale that is very rare in history, trying to pay off high debt through austerity without any kind of monetary offset is basically a recipe for debt deflation and failure. This is, in fact, what the IMF’s own research has said. ...
So it’s good to see the IMF being realistic here, but the institution remains unwilling to face up fully to past errors — which matters, because these past errors are prologue to the doom that faces any attempt to stay the course.

Tuesday, July 14, 2015

Who Should Pay for Recessions?

I have a new column:

Who Should Pay for Recessions?: Over the last several hundred years, financial panics have repeatedly caused severe economic turmoil. For example, there were financial panics every 10 to 20 years in the late 1700s, 1800s, and early 1900s, many of which resulted in severe recessions. 
To combat this instability, new rules and regulations were imposed on the financial sector after the Great Recession, and for approximately 50 years this seemed to be very successful. The bank panics that had caused so much trouble appeared to be over. But in recent years there has been a return of financial instability in the relatively unregulated shadow banking system, and a “Great Recession” associated with a financial meltdown. 
The conclusion seems obvious. No matter what we do in terms of regulating the financial sector, the risk of a financial collapse and subsequent recession is always present. Given this, a question to ask is who should pay the costs of the inevitable meltdown? That is, when the financial sector gets into trouble, as it surely will at some point in the future, who should shoulder the burden? ...

Monday, July 13, 2015

'Negotiating with Germany is a Waste of Time'

Kevin O'Rourke:

...I don’t suppose that any other left wing party that may come to power in the future seeking to challenge the current European economic policy mix will be as feckless as Syriza. The lesson that they will draw from this debacle is: negotiating with Germany is a waste of time; be willing to act unilaterally, be willing to default unilaterally, have a plan for achieving primary surplus if you haven’t already achieved it, have a hard default and euro exit (now possible, thanks to the Germans) option in your back pocket, and be willing to use it at the first sign of hassle from the ECB. A deal could have been done today that would have strengthened the Eurozone, but instead it has just become a lot more fragile.

Paul Krugman: The Laziness Dogma

The economy is no longer providing "good jobs to ordinary workers". Jeb Bush thinks that means workers are lazy:

The Laziness Dogma, by Paul Krugman, Commentary, NY Times: Americans work longer hours than their counterparts in just about every other wealthy country... Not surprisingly, work-life balance is a big problem for many people.
But Jeb Bush — who is still attempting to justify his ludicrous claim that he can double our rate of economic growth — says that Americans “need to work longer hours and through their productivity gain more income for their families.”
Mr. Bush’s aides have tried to spin away his remark... It’s obvious from the context, however, that ... he was talking about ... the “nation of takers” dogma... — the insistence that a large number of Americans, white as well as black, are choosing not to work, because they can live lives of leisure thanks to government programs. ...
Where does Jeb Bush fit into this story? Well before his “longer hours” gaffe, he had professed himself a great admirer of the work of Charles Murray, a conservative social analyst most famous for his 1994 book “The Bell Curve,” which claimed that blacks are genetically inferior to whites. What Mr. Bush seems to admire most, however, is a more recent book, “Coming Apart,” which notes that over the past few decades working-class white families have been changing in much the same way that African-American families changed in the 1950s and 1960s, with declining rates of marriage and labor force participation.
Some of us look at these changes and see them as consequences of an economy that no longer offers good jobs to ordinary workers. This happened to African-Americans first, as blue-collar jobs disappeared from inner cities, but has now become a much wider phenomenon thanks to soaring income inequality. Mr. Murray, however, sees the changes as the consequence of a mysterious decline in traditional values, enabled by government programs which mean that men no longer “need to work to survive.” And Mr. Bush presumably shares that view. ...
There’s now an effective consensus among Democrats ... that workers need more help... Republicans, however, believe that American workers just aren’t trying hard enough..., and that the way to change that is to strip away the safety net while cutting taxes on wealthy “job creators.”
And while Jeb Bush may sometimes sound like a moderate, he’s very much in line with the party consensus. If he makes it to the White House, the laziness dogma will rule public policy.

Sunday, July 12, 2015

'Disaster In Europe'

Paul Krugman:

Disaster In Europe: ...all the wise heads saying that Grexit is impossible, that it would lead to a complete implosion, don’t know what they are talking about. When I say that, I don’t mean that they’re necessarily wrong — I believe they are, but anyone who is confident about anything here is deluding himself. What I mean instead is that nobody has any experience with what we’re looking at. It’s striking that the conventional wisdom here completely misreads the closest parallel, Argentina 2002. The usual narrative is completely wrong: de-dollarization did *not* cause economic collapse, but rather followed it, and recovery began quite soon.
There are only terrible alternatives at this point, thanks to the fecklessness of the Greek government and, far more important, the utterly irresponsible campaign of financial intimidation waged by Germany and its allies. And I guess I have to say it: unless Merkel miraculously finds a way to offer a much less destructive plan than anything we’re hearing, Grexit, terrifying as it is, would be better.

Saturday, July 11, 2015

'Jeb and the Nation of Takers'

Paul Krugman:

Jeb and the Nation of Takers: Maybe we were unfair to Mitt Romney; Jeb “people should work longer hours” Bush is making him look like a model of empathy for the less fortunate. ...
But I think it’s also important to understand where this is coming from. Partly it’s Bush trying to defend his foolish 4 percent growth claim; but it’s also, I’m almost certain, coming out of the “nation of takers” dogma that completely dominates America’s right wing.
At my adventure in Las Vegas, one of the questions posed by the moderator was, if I remember it correctly, “What would you do about America’s growing underclass living off welfare?” When I said that the premise was wrong, that this isn’t actually happening, there was general incredulity — this is part of what the right knows is happening. ...
As I asked a few months ago, where are these welfare programs people are supposedly living off? TANF is tiny;... overall spending on “income security” has shown no trend at all as a share of GDP, with all the supposed growth in means-tested programs coming from Medicaid...
But isn’t there an epidemic of people declaring themselves disabled? Actually, no..., if you look at age-adjusted disability rates, they have been flat or even declining...
But none of this will, of course, make any dent in the right-wing narrative: they just know that the rising number of bums on welfare is a problem, even though there basically isn’t any welfare and there are no more bums than there ever were.

'Are we Sure that Tsipras Caved In?'

Gloomy European Economist Francesco Saraceno:

Are we Sure that Tsipras Caved In?: Germany did not speak yet, and until then nothing is certain. But it looks like the new Tsipras proposal may turn into an agreement between Greece and its creditors. ..
At first sight, this does not look good for Tsipras..., in fact the new package is even more “austerian” than the Juncker plan, as it contains deficit reduction for 12 billions instead of 8.
This said, if Tsipras manages to link the package to the obtention of a new loan (plus unblocking of structural funds) for a duration of three years, he will have obtained what he has been asking so far in vain, and what had been refused to Papandreou in 2011: Time and money. ...
In this light the referendum was very important. By asking the Greek people the mandate to negotiate while remaining in the euro, he succeeded in throwing the ball in the creditors camp. Those speaking of betrayal of the people’s will probably did not pay attention to the Greek debate in the week of July 5th. This is why Syriza keeps climbing in the polls, by the way.
Tsipras had to pay the price of a stricter austerity than he would have wished for. But he gains breathing space, which is orders of magnitude more valuable. No surprise that Germany is hesitant. If a deal is not reached, as of now, it will be clear to all who will have kicked Greece out.

Friday, July 10, 2015

Paul Krugman: Greece’s Economy Is a Lesson for Republicans in the U.S.

The real lessons of Greece:

Greece’s Economy Is a Lesson for Republicans in the U.S., by Paul Krugman, Commentary, NY Times: ...Greece has ... played an outsized role in U.S. political debate, as a symbol of the terrible things that will supposedly happen — any day now — unless we stop helping the less fortunate and printing money to fight unemployment. And Greece does indeed offer important lessons to the rest of us. But they’re not the lessons you think...
To understand the real lessons of Greece, you need to be aware of two crucial points.
The first is that the “We’re Greece!” crowd has a truly remarkable track record when it comes to economic forecasting: They’ve been wrong about everything, year after year, but refuse to learn from their mistakes. ...
The second is that the story you’ve heard about Greece — that it borrowed too much, and its excessive debt led to the current crisis — is seriously incomplete. Greece did indeed run up too much debt (with a lot of help from irresponsible lenders). But its debt, while high, wasn’t that high by historical standards. What turned Greek debt troubles into catastrophe was Greece’s inability, thanks to the euro, to do what countries with large debts usually do: impose fiscal austerity, yes, but offset it with easy money. ...The result was an economic implosion that ended up making the debt problem even worse. Greece’s formula for disaster, in other words, didn’t just involve austerity; it involved the toxic combination of austerity with hard money.
So who wants to impose that kind of toxic policy mix on America? The answer is, most of the Republican Party.
On one side, just about everyone in the G.O.P. demands that we reduce government spending, especially aid to lower-income families. (They also, of course, want to reduce taxes on the rich — but that wouldn’t do much to boost demand for U.S. products.)
On the other side, leading Republicans like Representative Paul Ryan incessantly attack the Federal Reserve for its efforts to boost the economy, delivering solemn lectures on the evils of “debasing” the dollar... Oh, and many Republicans hanker for a return to the gold standard, which would effectively put us into a euro-like straitjacket.
The point is that if you really worry that the U.S. might turn into Greece, you should focus your concern on America’s right. Because if the right gets its way on economic policy — slashing spending while blocking any offsetting monetary easing — it will, in effect, bring the policies behind the Greek disaster to America.

Wednesday, July 08, 2015

'Policy Lessons From The Eurodebacle'

Paul Krugman:

Policy Lessons From The Eurodebacle: ...there’s a broader lesson from Greece that is relevant to all of us — and it’s not the usual one about mending our free-spending ways lest we become Greece, Greece I tell you. What we learn, instead, is that fiscal austerity plus hard money is a deeply toxic mix. The fiscal austerity depresses the economy, and pushes it toward deflation; if it’s accompanied by hard money (in Greece’s case the euro, but a fixed exchange rate, a gold standard, or any kind of obsessive fear of inflation would do the trick), the result is not just a depression and deflation, but quite likely a failure even to reduce the debt ratio. ...
So, how does this play into U.S. policy debates? Well, Republicans love to warn that America might turn into Greece any day now. But look at the policy mix that is now de facto GOP orthodoxy: sharp cuts in government spending (maybe offset by tax cuts for the rich, but these won’t provide much stimulus), combined with a monetary policy obsessed with fears of dollar “debasement”. That is, the conservative side of the US political spectrum, while holding up Greece as a cautionary tale, is actually demanding that we emulate the policy mix that turned Greek debt into a complete disaster.

Tuesday, July 07, 2015

'Why Germany Wants Rid of Greece'

Simon Wren-Lewis:

Why Germany wants rid of Greece: When I recently visited Berlin, it quickly became clear the extent to which Germany had created a fantasy story about Greece. It was an image of Greeks as a privileged and lazy people, who kept on taking ‘bailouts’ while refusing to do anything to correct their situation. I heard this fantasy from talking to people who were otherwise well informed and knowledgeable about economics.
So powerful has this fantasy become, it is now driving German policy (and policy in a few other countries as well) in totally irrational ways. ... What is driving Germany’s desperate need to rid itself of the Greek problem? ...
 Germany is a country where the ideas of Keynes, and therefore mainstream macroeconomics in the rest of the world, are considered profoundly wrong and are described as ‘Anglo-Saxon economics’. Greece then becomes a kind of experiment to see which is right: the German view, or ‘Anglo-Saxon economics’.
The results of the experiment are not to Germany’s liking. ... Confronting this reality has been too much for Germany. So instead it has created its fantasy, a fantasy that allows it to cast its failed experiment to one side, blaming the character of the patient.
The only thing particularly German about this process is the minority status of Keynesian economics within German economic policy advice. In the past I have drawn parallels between what is going on here and the much more universal tendency for poverty to be explained in terms of the personal failings of the poor. These attempts to deflect criticism of economic systems are encouraged by political interests and a media that supports them, as we are currently seeing in the UK. So much easier to pretend that the problems of Greece lie with its people, or culture, or politicians, or its resistance to particular ‘structural reforms’, than to admit that Greece’s real problem is of your making.

Monday, July 06, 2015

Paul Krugman: Ending Greece’s Bleeding

What should Greece do now?:

Ending Greece’s Bleeding, by Paul Krugman, Commentary, NY Times: Europe dodged a bullet on Sunday. Confounding many predictions, Greek voters strongly supported their government’s rejection of creditor demands. ...
A “yes” vote in Greece would have condemned the country to years more of suffering under policies that haven’t worked and in fact, given the arithmetic, can’t work: austerity probably shrinks the economy faster than it reduces debt, so that all the suffering serves no purpose. The landslide victory of the “no” side offers at least a chance for an escape from this trap.
But how can such an escape be managed? Is there any way for Greece to remain in the euro? And is this desirable...?
The most immediate question involves Greek banks. In advance of the referendum, the European Central Bank cut off their access to additional funds... The central bank now faces an awkward choice: if it resumes normal financing it will as much as admit that the previous freeze was political, but if it doesn’t it will effectively force Greece into introducing a new currency.
Specifically, if the money doesn’t start flowing..., Greece will have no choice but to start paying wages and pensions with i.o.u.s, which will de facto be a parallel currency — and which might soon turn into the new drachma.
Suppose, on the other hand, that the central bank does resume normal lending, and the banking crisis eases. That still leaves the question of how to restore economic growth. ...
Imagine, for a moment, that Greece had never adopted the euro... What would basic economic analysis say it should do now? The answer, overwhelmingly, would be that it should devalue ... to encourage exports and to break out of the cycle of deflation. ...
Would Greek exit from the euro work...? Maybe not — but consider the alternatives. Unless Greece receives really major debt relief, and possibly even then, leaving the euro offers the only plausible escape route from its endless economic nightmare.
And let’s be clear: if Greece ends up leaving the euro, it won’t mean that the Greeks are bad Europeans. Greece’s debt problem reflected irresponsible lending as well as irresponsible borrowing, and in any case the Greeks have paid for their government’s sins many times over. If they can’t make a go of Europe’s common currency, it’s because that common currency offers no respite for countries in trouble. The important thing now is to do whatever it takes to end the bleeding.

Saturday, July 04, 2015

'Professor Hubbard’s Claim about Wage and Compensation Stagnation Is Not True'

Larry Mishel:

Professor Hubbard’s Claim about Wage and Compensation Stagnation Is Not True: ...A New York Times editorial points out ... that Glenn Hubbard, a leading conservative economist and key adviser to GOP candidate Jeb Bush, does not seem to believe there is a wage stagnation problem. As an earlier New York Times article pointed out: “Mr. Hubbard argued that ‘compensation didn’t stagnate,’ citing large increases that employers have paid out in health and pension benefits.”

Hubbard is definitely mistaken, as the New York Times indicates and as I demonstrate below by examining actual wage and benefit trends. Shifting the discussion from wages to compensation (wages and benefits) does not alter any of the salient facts about stagnant pay in recent years, especially for the typical worker or for low-wage workers, and not even for the ‘average’ worker (including high wage as well as low and middle-wage workers). In fact, there has been an even greater growth of inequality in total compensation than there has been in wages alone.

The intuition behind Hubbard’s claim is that the costs of benefits provided by employers–especially those for health care insurance–have risen rapidly, suggesting that compensation has risen far more quickly than wages. What this ignores, of course, is that many workers in the bottom half receive very few health or pension benefits and employers provide fewer and fewer workers with health insurance and pension benefits each year. Hubbard’s intuition also ignores that employers have actually cut back on some benefits, particularly pensions, with a concomitant decline in the quality of those benefits (such as by providing defined contribution rather than defined benefit plans). ...

Friday, July 03, 2015

Paul Krugman: Europe’s Many Economic Disasters

Was the creation of the euro a mistake? Should it be eliminated?:

Europe’s Many Economic Disasters, by Paul Krugman, Commentary, NY Times:  ... Why are there so many economic disasters in Europe? Actually, what’s striking at this point is how much the origin stories of European crises differ. Yes, the Greek government borrowed too much. But the Spanish government didn’t — Spain’s story is all about private lending and a housing bubble. And Finland’s story doesn’t involve debt at all. It is, instead, about weak demand for forest products, still a major national export, and the stumbles of Finnish manufacturing, in particular of its erstwhile national champion Nokia.
What all of these economies have in common, however, is that by joining the eurozone they put themselves into an economic straitjacket. ...
Does this mean that creating the euro was a mistake? Well, yes. But that’s not the same as saying that it should be eliminated now that it exists. The urgent thing now is to loosen that straitjacket. This would involve action on multiple fronts...
But there are many European officials and politicians who are opposed to anything and everything that might make the euro workable, who still believe that all would be well if everyone exhibited sufficient discipline. And that’s why there is even more at stake in Sunday’s Greek referendum than most observers realize.
One of the great risks if the Greek public votes yes — that is, votes to accept the demands of the creditors, and hence repudiates the Greek government’s position and probably brings the government down — is that it will empower and encourage the architects of European failure. The creditors will have demonstrated their strength, their ability to humiliate anyone who challenges demands for austerity without end. And they will continue to claim that imposing mass unemployment is the only responsible course of action.
What if Greece votes no? This will lead to scary, unknown terrain. Greece might well leave the euro, which would be hugely disruptive in the short run. But it will also offer Greece itself a chance for real recovery. And it will serve as a salutary shock to the complacency of Europe’s elites.
Or to put it a bit differently, it’s reasonable to fear the consequences of a “no” vote, because nobody knows what would come next. But you should be even more afraid of the consequences of a “yes,” because in that case we do know what comes next — more austerity, more disasters and eventually a crisis much worse than anything we’ve seen so far.

Thursday, July 02, 2015

'Poverty & Ideology'

Chris Dillow:

... Two big facts, however, suggest that the link between child poverty and parental failure is weak. One comes from the DWP's own report:

Children  in  families where at least one adult was in work made up around 64 per cent of all children  in  low  income  [before housing costs]  in  2013/14 (p46 of this pdf).

Think what it means to be in work. It means you've impressed an employer sufficiently to get hired, and you are managing to turn up roughly on time most days. You have, in short, got your shit together. And yet you're still unable to get your family out of relative poverty.

Secondly, Andrew Dickerson and Gurleen Popli point out that there is zero correlation between material child poverty and a measure of parental involvement based upon facts such as whether parents read to their children or given them regular meal times and bed times. There is, therefore, no link between bad parenting (on this measure) and material poverty.

These two facts suggest another, bigger reason for child poverty. Quite simply, it has become harder for less skilled people to provide for their families. ...

Wednesday, July 01, 2015

'Path to Grexit Tragedy Paved by Political Incompetence'

Barry Eichengreen:

Path to Grexit tragedy paved by political incompetence: Since our last episode, the crisis in Greece has escalated further. Negotiations between the government and its creditors collapsed over the weekend, and restrictions on bank withdrawals will now follow.
The next step is for the government to issue the equivalent of IOUs to pay salaries and pensions. The country is seemingly on the slippery slope to exiting the euro.
Many of us doubted that it would come to this. In particular, I doubted that it would come to this.
Nearly a decade ago, I analyzed scenarios for a country leaving the eurozone. I concluded that this was exceedingly unlikely to happen. The probability of a Grexit, or any Otherexit, I confidently asserted, was vanishingly small.
My friend and UC Berkeley colleague Brad DeLong regularly reminds us of the need to “mark our views to market.” So where did this prediction go wrong?
Why a euro exit didn’t make sense
My analysis was based on a comparison of economic costs and benefits of a country exiting the euro. The costs, I concluded, would be severe and heavily front-loaded.
Raising the possibility, however remote, of exit from the euro would ignite a bank run in said country. The authorities would be forced to shutter the financial system. Economic activity would grind to a halt. Losing access to not just their savings but also imported petrol, medicines and foodstuffs, angry citizens would take to the streets.
Not only would any subsequent benefits, by comparison, be delayed, but they would be disappointingly small.
With the government printing money to finance its spending, inflation would accelerate, and any improvement in export competitiveness due to depreciation of the newly reintroduced national currency would prove ephemeral.
In Greece’s case, moreover, there is the problem that the country’s leading export, refined petroleum, is priced in dollars and relies on imported oil, which is also priced in dollars. So much for the advantages of a depreciated currency.
Agricultural exports for their part will take several harvests to ramp up. And attracting more tourists won’t be easy against a drumbeat of political unrest.
What went wrong?
How did Greece end up in this pickle? Some say that the specter of a bank run was no longer a deterrent to exit once that bank run started anyway due to the deep depression into which the Greek economy had sunk.
But what is remarkable is how the so-called bank run remained a jog – it was still perfectly manageable until the Greek government called its referendum on the terms of the bail out deal offered by international creditors, negotiations broke down and exit became a real possibility.
Nonperforming loans — ones that are in default or close to it — were already rising, to be sure, but the banks still had all the liquidity they needed. The European Central Bank supported the Greek banking system with emergency liquidity assistance (ELA) right up to the very end of June. Only when Greece stopped negotiating did the Central Bank stop increasing ELA. And only then did a full-fledged bank run break out.
So I stand by the economic argument. Where I need to mark my views to market, however, is for underestimating the role of politics. In particular, I underestimated the extent of political incompetence – not just of the Greek government but even more so of its creditors.
In January Syriza had run on a platform of no more spending cuts or tax increases but also of keeping the euro. It should have anticipated that some compromise would be needed to square this circle. In the event, that realization was strangely late in coming.
And Prime Minister Alexis Tsipras and his government should have had the courage of its convictions. If it was unwilling to accept the creditors’ final offer, then it should have stated its refusal, pure and simple. If it preferred to continue negotiating, then it should have continued negotiating. The decision to call a referendum in midstream only heightened uncertainty. It was a transparent effort to evade responsibility. It was the action of leaders more interested in retaining office than in minimizing the cost to the country of the crisis.
A hard lesson learned
Still, this incompetence pales in comparison with that of the European Commission, the ECB and the IMF.
The three institutions opposed debt restructuring in 2010 when the crisis still could have been resolved at low cost. They continued to resist it in 2015, when a debt write-down was the obvious concession to Mr Tsipras & Company. The cost would have been small. Pretending instead that Greece’s debts could be repaid hardly enhanced their credibility.
Instead, the creditors first calculated the size of the primary budget surpluses that Greece would have to run in order to hypothetically repay its debt. They then required the government to raise taxes and cut spending sufficiently to produce those surpluses.
They ignored the fact that, in so doing, they consigned the country to an even deeper depression. By privileging their own balance sheets, they got the Greek government and the outcome they deserved.
The implication is clear. Never underestimate the ability of politicians to do the wrong thing. I will try to remember next time.

Monday, June 29, 2015

Stiglitz: Troika has 'Kind of Criminal Responsibility'

From Time:

Joseph Stiglitz to Greece’s Creditors: Abandon Austerity Or Face Global Fallout: ... “They have criminal responsibility,” he says of the so-called troika of financial institutions that bailed out the Greek economy in 2010, namely the International Monetary Fund, the European Commission and the European Central Bank. “It’s a kind of criminal responsibility for causing a major recession,” Stiglitz tells TIME in a phone interview.
Along with a growing number of the world’s most influential economists, Stiglitz has begun to urge the troika to forgive Greece’s debt – estimated to be worth close to $300 billion in bailouts – and to offer the stimulus money that two successive Greek governments have been requesting.
Failure to do so, Stiglitz argues, would not only worsen the recession in Greece – already deeper and more prolonged than the Great Depression in the U.S. – it would also wreck the credibility of Europe’s common currency, the euro, and put the global economy at risk of contagion. ...

Paul Krugman: Greece Over the Brink

Just say no:

Greece Over the Brink, by Paul Krugman, Commentary, NY Times: It has been obvious for some time that the creation of the euro was a terrible mistake. Europe never had the preconditions for a successful single currency....
Leaving a currency union is, however, a much harder and more frightening decision than never entering in the first place...
But the situation in Greece has now reached what looks like a point of no return. Banks are temporarily closed and the government has imposed capital controls... It seems highly likely that the government will soon have to start paying pensions and wages in scrip, in effect creating a parallel currency. And next week the country will hold a referendum on whether to accept the demands of the “troika” ... for yet more austerity.
Greece should vote “no,” and the Greek government should be ready, if necessary, to leave the euro.
To understand why I say this, you need to realize that most ... of what you’ve heard about Greek profligacy and irresponsibility is false. Yes, the Greek government was spending beyond its means in the late 2000s. But ... all the austerity measures ... been more than enough to eliminate the original deficit and turn it into a large surplus.
So why didn’t this happen? Because the Greek economy collapsed, largely as a result of those very austerity measures, dragging revenues down with it.
And this collapse, in turn, had a lot to do with the euro, which trapped Greece in an economic straitjacket. Cases of successful austerity ... typically involve large currency devaluations... But Greece, without its own currency, didn’t have that option. ...
It’s easy to get lost in the details, but the essential point now is that Greece has been presented with a take-it-or-leave-it offer that is effectively indistinguishable from the policies of the past five years. ...
Don’t be taken in by claims that troika officials are just technocrats explaining to the ignorant Greeks what must be done. These supposed technocrats are in fact fantasists who have disregarded everything we know about macroeconomics, and have been wrong every step of the way. This isn’t about analysis, it’s about power — the power of the creditors to pull the plug on the Greek economy, which persists as long as euro exit is considered unthinkable.
So it’s time to put an end to this unthinkability. Otherwise Greece will face endless austerity, and a depression with no hint of an end.

Sunday, June 28, 2015

'Former Finance Minister of Cyprus on the Greek Crisis'

Branko Milanovic:

Former Finance Minister of Cyprus on the Greek crisis: While on vacations in Greece, I had a chance today (Sunday 28 June) to have a long discussion with Michael Sarris who was Cypriot Minister of Finance between 2005 and 2008 when the Euro was introduced in Cyprus and then again Minister of Finance during the March 2013 crisis when Cyprus faced negotiations with “the institutions” very similar to those faced today by Greece.  Very few people in the world have as informed and first-hand knowledge of the situation as Michael Sarris does. Here are my questions and his answers. ...

Saturday, June 27, 2015

Greece: It’s the Politics, Stupid!

Gloomy European Economist Francesco Saraceno:

It’s the Politics, Stupid!: I have been silent on Greece, because scores of excellent economists from all sides commented at length...
But last week has transformed in certainty what had been a fear since the beginning. The troika, backed by the quasi totality of EU governments, were not interested in finding a solution that would allow Greece to recover while embarking in a fiscally sustainable path. No, they were interested in a complete and public defeat of the “radical” Greek government. ...
What happened...? Well, contrary to what is heard in European circles, most of the concessions came from the Greek government. On retirement age, on the size of budget surplus (yes, the Greek government gave up its intention to stop austerity, and just obtained to soften it), on VAT, on privatizations, we are today much closer to the Troika initial positions than to the initial Greek position. Much closer.
The point that the Greek government made repeatedly is that some reforms, like improving the tax collection capacity, actually demanded an increase of resources, and hence of public spending. Reforms need to be disconnected from austerity, to maximize their chance to work.  Syriza, precisely like the Papandreou government in 2010 asked for time and possibly money. It got neither.
Tsipras had only two red lines it would and it could not cross: Trying to increase taxes on the rich (most notably large coroporations), and not agreeing to further cuts to low pensions. if he crossed those lines, he would become virtually indistinguishable from Samaras and from the policies that led Greece to be a broken State.
What the past week made clear is that this, and only this was the objective of the creditors. This has been since the beginning about politics. Creditors cannot afford that an alternative to policies followed since 2010 in Greece and in the rest of the Eurozone materializes.
Austerity and structural reforms need to be the only way to go. Otherwise people could start asking questions; a risk you don’t want to run a few months before Spanish elections. Syriza needed to be made an example. You cannot  survive in Europe, if you don’t embrace the Brussels-Berlin Consensus. Tsipras, like Papandreou, was left with the only option too ask for the Greek people’s opinion, because there has been no negotiation, just a huge smoke screen. Those of us who were discussing pros and cons of the different options on the table, well, we were wasting our time.
And if Greece needs to go down to prove it, so be it. If we transform the euro in a club in which countries come and go, so be it.
The darkest moment for the EU.

Thursday, June 25, 2015

'Breaking Greece'

Paul Krugman:

Breaking Greece: I’ve been staying fairly quiet on Greece... But given reports from the negotiations in Brussels, something must be said...
This ought to be a negotiation about targets for the primary surplus, and then about debt relief that heads off endless future crises. And the Greek government has agreed to what are actually fairly high surplus targets, especially given the fact that the budget would be in huge primary surplus if the economy weren’t so depressed. But the creditors keep rejecting Greek proposals on the grounds that they rely too much on taxes and not enough on spending cuts. So we’re still in the business of dictating domestic policy.
The supposed reason for the rejection of a tax-based response is that it will hurt growth. The obvious response is, are you kidding us? The people who utterly failed to see the damage austerity would do — see the chart, which compares the projections in the 2010 standby agreement with reality — are now lecturing others on growth? Furthermore, the growth concerns are all supply-side, in an economy surely operating at least 20 percent below capacity. ...
At this point it’s time to stop talking about “Graccident”; if Grexit happens it will be because the creditors, or at least the IMF, wanted it to happen.

Monday, June 22, 2015

Paul Krugman: Slavery’s Long Shadow

Race still matters:

Slavery’s Long Shadow, by Paul Krugman, Commentary, NY Times: America is a much less racist nation than it used to be, and I’m not just talking about the still remarkable fact that an African-American occupies the White House. ...
Yet racial hatred is still a potent force in our society, as we’ve just been reminded to our horror. And I’m sorry to say this, but the racial divide is still a defining feature of our political economy, the reason America is unique among advanced nations in its harsh treatment of the less fortunate and its willingness to tolerate unnecessary suffering among its citizens. ...
Now,... you might wonder if things have changed... Unfortunately, the answer is that they haven’t, as you can see by looking at how states are implementing — or refusing to implement — Obamacare.
For those who haven’t been following this issue, in 2012 the Supreme Court gave individual states the option, if they so chose, of blocking the Affordable Care Act’s expansion of Medicaid, a key part of the plan to provide health insurance to lower-income Americans. But why would any state choose to exercise that option? After all, states were being offered a federally-funded program that would provide major benefits to millions of their citizens, pour billions into their economies, and help support their health-care providers. Who would turn down such an offer?
The answer is, 22 states at this point, although some may eventually change their minds. And what do these states have in common? Mainly, a history of slaveholding...
And it’s not just health reform: a history of slavery is a strong predictor of everything from gun control (or rather its absence), to low minimum wages and hostility to unions, to tax policy.
So will it always be thus? Is America doomed to live forever politically in the shadow of slavery?
I’d like to think not. For one thing, our country is growing more ethnically diverse, and the old black-white polarity is slowly becoming outdated. For another, as I said, we really have become much less racist, and in general a much more tolerant society on many fronts. Over time, we should expect to see the influence of dog-whistle politics decline.
But that hasn’t happened yet. Every once in a while you hear a chorus of voices declaring that race is no longer a problem in America. That’s wishful thinking; we are still haunted by our nation’s original sin.

Friday, June 19, 2015

Paul Krugman: Voodoo, Jeb! Style

 Selling tax cuts for the wealthy with unrealistic promises about growth:

Voodoo, Jeb! Style, by Paul Krugman, Commentary, NY Times: On Monday Jeb Bush — or I guess that’s Jeb!,... gave us a first view of his policy goals. First, he says that if elected he would double America’s rate of economic growth to 4 percent. Second, he would make it possible for every American to lose as much weight as he or she wants, without any need for dieting or exercise.
O.K., he didn’t actually make that second promise. But he might as well have. It would have been just as realistic as promising 4 percent growth, and considerably less irresponsible. ...
Mr. Bush ... believes that the growth in Florida’s economy during his time as governor offers a role model for the nation as a whole. Why is that funny? Because everyone except Mr. Bush knows that, during those years, Florida was booming thanks to the mother of all housing bubbles. When the bubble burst, the state plunged into a deep slump... The key to Mr. Bush’s record of success, then, was good political timing: He managed to leave office before the unsustainable nature of the boom he now invokes became obvious.
But Mr. Bush’s economic promises reflect more than self-aggrandizement. They also reflect his party’s habit of boasting about its ability to deliver rapid economic growth, even though there’s no evidence at all to justify such boasts. It’s as if a bunch of relatively short men made a regular practice of swaggering around, telling everyone they see that they’re 6 feet 2 inches tall. ...
Why, then, all the boasting about growth? The short answer, surely, is that it’s mainly about finding ways to sell tax cuts for the wealthy..., low taxes on the rich are an overriding policy priority on the right — and promises of growth miracles let conservatives claim that everyone will benefit from trickle-down, and maybe even that tax cuts will pay for themselves.
There is, of course, a term for basing a national program on this kind of self-serving (and plutocrat-serving) wishful thinking. Way back in 1980, George H.W. Bush, running against Reagan for the presidential nomination, famously called it “voodoo economic policy.” And while Reaganolatry is now obligatory in the G.O.P., the truth is that he was right.
So what does it say about the state of the party that Mr. Bush’s son — often portrayed as the moderate, reasonable member of the family — has chosen to make himself a high priest of voodoo economics? Nothing good.

Wednesday, June 17, 2015

'TPP Versus NAFTA'

Paul Krugman:

TPP Versus NAFTA: Many people — myself included — thought that TPP would, in the end, follow the model of NAFTA: a Democratic president would push the agreement through Congress, but the bulk of the votes would be Republican. But it doesn’t seem to be going that way. Why?
Lydia DePillis suggests that procedural differences and the changed political environment are what changed. Maybe. But I’d suggest three additional factors.
First, while non-trade issues like dispute settlement and intellectual property already loomed large in NAFTA, it was nonetheless more of a genuine trade agreement than TPP...
Despite this, the real case for NAFTA involved foreign policy — which is also true for TPP (administration officials tell me that it’s really about geopolitics.) But that case was much more compelling for NAFTA, which was about rewarding Mexican reformers. ...
Finally, I think it’s fair to say that the liberal intelligentsia has been somewhat radicalized by Republican extremism; making common cause with those who share your basic values matters more than it seemed to a couple of decades ago. ...
So it really is a different game, and TPP supporters need to realize that old rules no longer apply.

Monday, June 15, 2015

Paul Krugman: Democrats Being Democrats

"The Democratic Party is becoming more assertive about its traditional values":

Democrats Being Democrats, by Paul Krugman, Commentary, NY Times: On Friday, House Democrats shocked almost everyone by rejecting key provisions needed to complete the Trans-Pacific Partnership, an agreement the White House wants but much of the party doesn’t. On Saturday Hillary Clinton formally began her campaign for president, and surprised most observers with an unapologetically liberal and populist speech.
These are, of course, related events. The Democratic Party is becoming more assertive about its traditional values...
Democrats, despite defeats in midterm elections, believe — rightly or wrongly — that the political wind is at their backs. Growing ethnic diversity is producing what should be a more favorable electorate; growing tolerance is turning social issues, once a source of Republican strength, into a Democratic advantage instead. ...
But the party’s change isn’t just about politics, it’s also about policy.
On one side, the success of Obamacare and related policies — millions covered for substantially less than expected, surprisingly effective cost control for Medicare — have helped to inoculate the party against blanket assertions that government programs never work. And on the other side, the Davos Democrats who used to be a powerful force arguing against progressive policies have lost much of their credibility.
I’m referring to the kind of people — many, though not all, from Wall Street — who go to lots of international meetings where they assure each other that prosperity is all about competing in the global economy, and that this means supporting trade agreements and cutting social spending. ...
As it turns out, however,... the purported wise men blithely assured us that we had nothing to fear from financial deregulation; we did. After crisis struck, thanks in large part to that very deregulation, they warned us that we should be very afraid of bond investors, who would punish America for its budget deficits; they didn’t. So why believe them when they insist that we must approve an unpopular trade deal? ...
As I said, you can describe all of this as a move to the left, but there’s more to it than that...
Of course, changes in ideology matter only to the extent that they can influence policy. And while the electoral odds probably favor Mrs. Clinton, and Democrats could retake the Senate, they have very little chance of retaking the House. So changes in the Democratic Party may take a while to change America as a whole. But something important is happening, and in the long run it will matter a great deal.

Saturday, June 13, 2015

'Decline and Fall of the Davos Democrats'

Paul Krugman:

Decline and Fall of the Davos Democrats: OK, I didn’t see that coming: even though I have come out as a lukewarm opponent of TPP, I assumed that it would happen anyway... But no, or not so far. ...
Or to put it another way, one way to see this is as the last stand of the Davos Democrats.
If you talk to administration officials — or at least if I talk to them (they may be telling me what they think I want to hear) — they offer a fairly sophisticated defense of this deal. ...
I’m not fully convinced, but this is a reasonable discussion.
But the overall selling of TPP, to some extent by the administration and much more so by its business allies, has been nothing like this. Instead, it has been all lectures from Those Who Know How the Global Economy Works — the kind of people who go to Davos and participate in earnest panels on the skills gap and the case for putting Alan Simpson in charge of everything — to the ignorant hippies who don’t. You know, ignorant hippies like Joseph Stiglitz and Elizabeth Warren.
This kind of thing worked in the 1990s, when Davos Man actually did seem to know how the world works. But now Davos Democrats are known as the people who told us to trust unregulated finance and fear invisible bond vigilantes. They just don’t have the credibility to pull off arguments from authority any more. And it doesn’t say much for their perspicacity that they apparently had no idea that the world has changed.
TPP’s Democratic supporters thought they could dictate to their party like it’s 1999. They can’t.

Friday, June 12, 2015

Paul Krugman: Seriously Bad Ideas

Why do bad ideas prevail?:

Seriously Bad Ideas, by Paul Krugman, Commentary, NY Times: One thing we’ve learned in the years since the financial crisis is that seriously bad ideas — by which I mean bad ideas that appeal to the prejudices of Very Serious People — have remarkable staying power. ...
What makes something qualify as a seriously bad idea? In general, to sound serious it must invoke big causes to explain big events... It must also absolve corporate interests and the wealthy from responsibility for what went wrong, and call for hard choices and sacrifice on the part of the little people. ...
And the ultimate example of a seriously bad idea is the determination, in the teeth of all the evidence, to declare government spending that helps the less fortunate a crucial cause of our economic problems. In the United States, I’m happy to say, this idea seems to be on the ropes... Here in Britain, however, it still reigns supreme. In particular, one important factor in the recent Conservative election triumph was the way Britain’s news media told voters, again and again, that excessive government spending under Labour caused the financial crisis. It takes almost no homework to show that this claim is absurd...
The ... really bad news is that Britain’s leaders seem to believe their own propaganda. On Wednesday, George Osborne, the chancellor of the Exchequer and the architect of the government’s austerity policies, announced his intention to make these policies permanent. Britain, he said, should have a law requiring that the government run a budget surplus ... when the economy is growing.
It’s a remarkable proposal, and I mean that in the worst way. ... For Britain does not have a public debt problem. ... Meanwhile, Britain’s real economy is still ailing..., surely the combination of a still-weak economy, terrible productivity performance and negative borrowing costs says that this is a time to increase investment in things like infrastructure. ... Yet the Osborne proposal would kill any such initiative.
But Mr. Osborne sounds very serious, and, if history is any guide, the Labour Party won’t make any effective counterarguments.
Now, some readers are probably thinking that I’m giving the likes of Mr. Osborne too much credit for sincerity. Isn’t all this deficit obsession just an excuse to slash social programs? And I’m sure that’s part of it. But I don’t think that’s the whole story. Seriously bad ideas, I’d argue, have a life of their own. And they rule our world.

Tuesday, June 09, 2015

'The Party of Fiscal Responsibility in Action'

Paul Krugman:

The Party of Fiscal Responsibility in Action: One of the greatest confidence tricks ever pulled in American politics was the way Republicans managed, for a while anyway, to convince centrists that they were apostles of fiscal responsibility. Paul Ryan presented budgets that combined huge tax cuts for the rich with not quite as huge benefit cuts for the poor, added some magic asterisks — basically deficit-increasing redistribution from the have-nots to the haves, with added fraudulence — and received awards for fiscal responsibility.
Anyway, at this point we have evidence of what such politicians actually do in office, thanks to the many US states where Republicans control both the governor’s office and the legislature. And the result is an epidemic of fiscal crisis, despite a recovering economy. Yes, some Democrat-controlled states are also having problems. But they didn’t go around pretending to be the nation’s fiscal saviors, and the biggest state controlled by Democrats, California — which was supposed to be a basket case — is in quite good fiscal shape.
And yes, I think this observation is a lot more important than Marco Rubio’s personal financial difficulties, although those are pretty bizarre.

Monday, June 08, 2015

'Why the Mortgage Interest Tax Deduction Should Disappear, But Won't'

Cecchetti & Schoenholtz:

Why the mortgage interest tax deduction should disappear, but won't: In the run-up to the 2012 U.S. Presidential election, Planet Money asked five economists from across the political spectrum for proposals that they would like to see in the platform of the candidates. The diverse group agreed, first and foremost, on the wisdom of eliminating the tax deductibility of mortgage interest. 
The vast majority of economists probably agree. We certainly do. But it won’t happen, because politicians with aspirations for reelection find it toxic. ...
The ... tax deductibility of mortgage interest ... raises inequality and reduces economic efficiency.
The source of increased inequality is simple. The private benefits of the mortgage interest deduction rise both with a person’s income and with the cost of their house. The higher your income, the higher your marginal tax rate; and the bigger your house, the bigger the possible mortgage. When either rises, the value of the tax deduction rises, too. ...
Aside from inequality concerns, there are other powerful reasons to dislike the mortgage interest deduction. Above all, it is inefficient. By subsidizing bigger, more expensive houses, the policy misallocates scarce savings away from productive investments that raise living standards through income- and job-creating innovations. It also makes our financial system more vulnerable: as we wrote in an earlier post, it encourages people to take on risks – in the form of large, subsidized mortgages – that they are not equipped to bear. In the recent crisis, risky mortgage debt was sufficient to put the entire financial system at risk. ...
Unfortunately, the tax deductibility of mortgage interest is here to stay. Nearly 50 million U.S. households currently have mortgages, and politicians don’t wish to alienate them.  
But the borrowers are only the most obvious beneficiaries.  In fact, all homeowners would suffer if the mortgage deduction were eliminated. The reason is that the value of everyone’s house would fall...
A simple computation allows us to estimate the economy-wide impact. ... If the subsidy were eliminated, homeowners would lose ... about $4.1 trillion. ... For comparison, the plunge of real estate value from the 2006 peak to the 2011 trough was $6.4 trillion. ...
Aside from the contractionary impact on the economy, many people would see such a drop in house prices as dramatically unfair. It’s true that the biggest losers in monetary terms would be the owners of the most valuable (oversized) houses; but the less well-off would suffer, too. While it is a progressive policy, all 80 million households that own homes would take a hit.
It is tempting to just give up and admit political defeat, but there may be a way out. Our suggestion is to build on past reforms that capped the tax deduction by limiting the size of eligible mortgages. ... Since roughly 10% of U.S. homes are worth more than $500,000, our proposal is to set the limit at the interest payments on a $400,000 mortgage (indexed appropriately). This would promote both efficiency and equality. ...
Policies that provide asset owners large “rents” (payments unwarranted by the scarcity of the asset itself) are incredibly difficult to eliminate, even when they are both unfair and inefficient. Such rents create an entire ecosystem of beneficiaries (in this case, ranging from construction firms and workers, to real estate brokers, to mortgage lenders and borrowers) who constitute a powerful political constituency blocking almost any reform. ...

Sunday, June 07, 2015

'Austerity as a Knowledge Transmission Mechanism failure'

Related to the post after this one, from Simon Wren-Lewis:

Austerity as a Knowledge Transmission Mechanism failure: In this post I talked about the Knowledge Transmission Mechanism: the process by which academic ideas do or do not get translated into economic policy. I pointed to the importance of what I called ‘policy intermediaries’ in this process: civil servants, think tanks, policy entrepreneurs, the media, and occasionally financial sector economists and central banks. Here I want to ask whether thinking about these intermediaries could help explain the continuing popularity amongst policy makers of austerity during a liquidity trap, even though there is an academic consensus behind the idea that austerity now would harm output. ...

'The Economic Consequences of Austerity'

From today's links, Amartya Sen on the turn to austerity during the Great Recession (there's a lot more in the full text):

The economic consequences of austerity, by Amartya Sen: ...As it is quite common these days to blame economists for failing to see the real world, I take this opportunity to note that very few professionally trained economists were persuaded by the direction in which those in charge of European finances decided to take Europe. The European debacle demonstrated, in effect, that you do not need economists to generate a holy mess: the financial sector can generate its own gory calamity with the greatest of elegance and ease. Further, if the policy of austerity deepened Europe’s economic problems, it did not help in the aimed objective of reducing the ratio of debt to GDP to any significant extent – in fact, sometimes quite the contrary. ...
If failing to understand some basic Keynesian relations is a part of the explanation of what happened, there was also another, and more subtle, story behind the confounded economics of austerity. There was an odd confusion in policy thinking between the real need for institutional reform in Europe and the imagined need for austerity – two quite different things. There can be little doubt that Europe has needed, for quite some time, many serious institutional reforms – from the avoidance of tax evasion and the fixing of more reasonable retiring ages to sensible working hours and the elimination of institutional rigidities, including those in the labour markets. But the real (and strong) case for institutional reform has to be distinguished from an imagined case for indiscriminate austerity, which does not do anything to change a system while hugely inflicting pain. ...
An analogy can help to make the point clearer: it is as if a person had asked for an antibiotic for his fever, and been given a mixed tablet with antibiotic and rat poison. You cannot have the antibiotic without also having the rat poison. We were in effect being told that if you want economic reform then you must also have, along with it, economic austerity, although there is absolutely no reason whatsoever why the two must be put together as a chemical compound. For example, having sensible retiring ages, which many European countries do not (a much-needed institutional reform), is not similar to cutting severely the pensions on which the lives of the working poor may depend (a favourite of austeritarians). The compounding of the two – not least in the demands made on Greece – has made it much harder to pursue institutional reforms. ...

Friday, May 22, 2015

Paul Krugman: Trade and Trust

The Obama administration is risking its credibility over the trade deal:

Trade and Trust, by Pau Krugman, Commentary, NY Times: One of the Obama administration’s underrated virtues is its intellectual honesty. Yes, Republicans see deception and sinister ulterior motives everywhere, but they’re just projecting. The truth is that, in the policy areas I follow, this White House has been remarkably clear and straightforward about what it’s doing and why.
Every area, that is, except one: international trade and investment.
I don’t know why the president has chosen to make the proposed Trans-Pacific Partnership such a policy priority. Still, there is an argument to be made for such a deal, and some reasonable, well-intentioned people are supporting the initiative.
But other reasonable, well-intentioned people have serious questions about what’s going on. ...
The administration’s main analytical defense of the trade deal came earlier this month, in a report from the Council of Economic Advisers. Strangely, however, the report didn’t actually analyze the Pacific trade pact. Instead, it was a paean to the virtues of free trade, which was irrelevant to the question at hand.
First of all, whatever you may say about the benefits of free trade, most of those benefits have already been realized. ...
In any case, the Pacific trade deal isn’t really about trade. Some already low tariffs would come down, but the main thrust of the proposed deal involves strengthening intellectual property rights — things like drug patents and movie copyrights — and changing the way companies and countries settle disputes. And it’s by no means clear that either of those changes is good for America. ...
As I see it, the big problem here is one of trust.
International economic agreements are, inevitably, complex, and you don’t want to find out at the last minute ... that a lot of bad stuff has been incorporated into the text. So you want reassurance that the people negotiating the deal are listening to valid concerns, that they are serving the national interest rather than the interests of well-connected corporations.
Instead of addressing real concerns, however, the Obama administration has been dismissive, trying to portray skeptics as uninformed hacks who don’t understand the virtues of trade. But they’re not...
It’s really disappointing and disheartening to see this kind of thing from a White House that has, as I said, been quite forthright on other issues. And the fact that the administration evidently doesn’t feel that it can make an honest case for the Trans-Pacific Partnership suggests that this isn’t a deal we should support.

Thursday, May 21, 2015

'Conservatives and Keynes'

This, from Paul Krugman, is sort of a setup for the post below this one:

Conservatives and Keynes: ...the debate over business-cycle economics has always been a left-right thing. Specifically, the right has always been deeply hostile to the notion that expansionary fiscal policy can ever be helpful or austerity harmful; most of the time it has been hostile to expansionary monetary policy too... So the politicization of the macro debate isn’t some happenstance, it evidently has deep roots.
Oh, and some of us have been discussing those roots in articles and blog posts for years now. We’ve noted that after World War II there was a concerted, disgraceful effort by conservatives and business interests to prevent the teaching of Keynesian economics in the universities, an effort that succeeded in killing the first real Keynesian textbook. Samuelson, luckily, managed to get past that barrier — and many were the complaints. ...
What’s it all about, then? The best stories seem to involve ulterior political motives. Keynesian economics, if true, would mean that governments don’t have to be deeply concerned about business confidence, and don’t have to respond to recessions by slashing social programs. Therefore it must not be true, and must be opposed. ...
If you think I’m being too flip, too conspiracy-minded, or both, OK — but what’s your explanation? For conservative hostility to Keynes is not an intellectual fad of the moment. It has absolutely consistent for generations, and is clearly very deep-seated.

 

Tuesday, May 19, 2015

Restoring the Public’s Trust in Economists

I have a new column:

Restoring the Public’s Trust in Economists: The belief that economics has become politicized is a big reason the general public has lost faith in the ability of economists to give advice on important policy questions. For most issues, like raising the minimum wage, the effects of government spending, international trade, whether CEOs deserve their high compensation, etc., etc., it seems as though economists who also happen to be Republicans will mostly line up on one side of the issue, while economists who are Democrats mostly take the other. Members of the general public, not knowing who to believe and unable to rely upon the press to sort it out, either throw up their hands in frustration or follow the side that agrees with their preconceived notions and ideological beliefs.
But why is it so hard to sort out? Why can’t the press do a better job of avoiding “he said – she said” reporting and give the public direct and specific answers to these important policy questions? One reason is the “mathiness” that has infected our economic models, something economist Paul Romer recently identified as a big problem with economic theory. ...