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Tuesday, September 21, 2010

Fannie and Freddie Didn't Do It: One More Time with Gusto

Paul Krugman takes on the myth, yet again, that Fannie and Freddie caused the crisis:

Fannie Freddie Further, by Paul Krugman: OK, some readers want to know my answer to Rajan’s defense on the FF issue. So, first of all, the first time I wrote about FF, I got something wrong — I was unaware of their late in the game rush into subprime.

But Rajan’s other point, that securitization numbers — which show a much reduced role for FF at the height of the bubble — are misleading, is just wrong as a quantitative matter. Rajan makes much of the fact that the GSEs sometimes buy whole mortgages, rather than securitizing them. But as a quantitative matter, that’s just not important.

Look at the flow of funds data on mortgage holdings (pdf). You’ll see that securitization is the bulk of the story.

And let’s do one more thing: let’s look at changes in those mortgage holdings by the GSEs — securitized and not — and by asset-backed private pools. It looks like this:


Federal Reserve

During the peak of the housing bubble, Fannie and Freddie basically stopped providing net lending for home purchases, while private securitizers rushed in. Yes, very late in the game FF increased their share of subprime financing, as they tried to play catchup; but that’s really off point.* The real question is, who was financing the bubble — and it wasn’t GSEs.

Rajan asks why the government was boasting about how it was expanding low-income home ownership, if it really wasn’t. Does that really require an answer? Governments always try to take credit for stuff, and remember than in 2004 subprime was considered a good thing.

Finally, why are we so hard on Rajan? Because the central theme of his book is that the financial crisis was caused by government efforts to help low-income families — which he treats as an established, undeniable fact. But it’s by no means an established fact — on the contrary, most non-AEI analyses find government policy mainly innocent here. So his whole thesis is a structure built on foundations of sand.

*In fact, there’s much too much emphasis on subprime. The problem was the housing bubble as a whole — including the bubbles in Europe.

I've written about this so many times that I just don't have the energy to write about it again, so I am going to repeat some past posts on this topic (there are more). The "I got something wrong" Krugman mentions is evident in the first post below as the graphs he uses stop at around 2005. The subsequent point about Fannie and Freddie playing catch up, i.e. that they were followers not leaders, is covered in the next post in my reply to Russ Roberts (I think I first heard this argument in an email conversation with Dean Baker, but I don't recall for sure). So the point that Fannie and Freddie followed the private market down the tubes in an attempt to preserve market share has been known since at least September 2008, i.e. for at least three years.

Here are the posts (there are even more posts noting that "It wasn't the CRA"):

Continue reading "Fannie and Freddie Didn't Do It: One More Time with Gusto" »

    Posted by on Tuesday, September 21, 2010 at 10:25 AM in Economics, Financial System, Housing | Permalink  Comments (13) 


    Is the Recent Productivity Boom Over?

    In case you haven't yet had enough bad news about labor markets, here's a bit more:

    Is the Recent Productivity Boom Over?, by Daniel Wilson, FRBSF Economic Letter: Productivity growth has been quite strong over the past 2½ years, despite a drop in the second quarter of 2010. Many analysts believe that productivity growth must slow sharply in order for the labor market to recover robustly. However, looking at the observable factors underlying recent productivity growth and the patterns of productivity over past recessions and recoveries, a sharp slowdown appears unlikely.

    Labor productivity, defined as output per hour of labor, unexpectedly stalled in the second quarter of 2010, falling by a 1.1% annual rate in the total business sector based on data available through the end of August. This follows 2½ years of generally strong productivity growth, which started when the recession began at the end of 2007. In fact, the annualized 2.5% pace of labor productivity growth during the latest recession, which appears to have ended in mid-2009, was the fourth strongest of the 11 recessions since World War II. Post-recession, from the third quarter of 2009 to the second quarter of 2010, productivity grew at an even faster annual pace of 2.8%, even with the second-quarter drop. This strong growth is one reason for the scant downward movement in the unemployment rate despite moderate GDP gains. Businesses have been able to meet demand for their products and services without hiring new workers or increasing the hours of current staff because they are managing to get more from each hour of labor.

    Recent rapid gains in productivity beg the questions of where the growth is coming from and whether it is sustainable. They also raise the question of whether the second-quarter drop was just a temporary blip in an otherwise strong productivity trend or the start of a significant productivity slowdown. The strength of the labor market recovery hinges on the answers to these questions. Many forecasters have predicted moderate GDP growth and a reasonably strong recovery in employment over the next year or two. Such a scenario would require a sharp slowdown in productivity growth to about 1% or less.

    This Economic Letter examines the risks to this forecast, first looking at how productivity growth has fared in past recessions and recoveries. Then it considers where recent gains have come from. For example, do they reflect more physical capital relative to labor hours, increases in labor quality, or efficiency gains? The findings suggest that productivity growth for the next year or so might very well exceed forecaster expectations, which would put a damper on employment gains.

    Continue reading "Is the Recent Productivity Boom Over?" »

      Posted by on Tuesday, September 21, 2010 at 01:10 AM in Economics, Productivity | Permalink  Comments (44) 


      Monday, September 20, 2010

      links for 2010-09-20

        Posted by on Monday, September 20, 2010 at 11:01 PM in Economics, Links | Permalink  Comments (31) 


        The Depression is Over!

        Update: Comments on Twitter remind that I should have noted that my view on whether it's over is here.

          Posted by on Monday, September 20, 2010 at 04:27 PM in Economics, Video | Permalink  Comments (6) 


          Shiller: Seven More Years of Hard Times?

          Are we headed for many years of stagnation, or is this time different?:

          Seven More Years of Hard Times?, by Robert J. Shiller, Commentary, Project Syndicate: Much of the talk emerging from the August 2010 Jackson Hole Economic Symposium ... has been about a paper..., “After the Fall,”... by ... Carmen Reinhart and Vincent Reinhart. ...
          According to the Reinharts’ paper, when compared to the decade that precedes financial crises like the one that started three years ago, “GDP growth and housing prices are significantly lower and unemployment higher” in the subsequent “ten-year window.” Thus, one might infer that we face another seven years or so of bad times. ...
          The research ... found ... that median annual growth rates of real per capita GDP for advanced countries were one percentage point lower in the decade following a crisis, while median unemployment rates were five percentage points higher.
          How did this happen? They note that, in general, debt levels and leverage rose during the decade preceding these crises, propelling increases in asset prices for a long time. Reinhart and Rogoff describe a “this time is different syndrome” during the pre-crisis boom, whereby these bubbles are allowed to continue for far too long, because people think that past episodes are irrelevant.
          There seems to be the germ of a new economic theory in the work of the Reinharts and Rogoff, but it remains ill defined. It seems to have a behavioral-economics component, since the “this time is different syndrome” seems psychological rather than rational. But it is still not so sharp a theory that we can really rely on it for making confident forecasts.
          Moreover, there are reasons to suggest that this time really might be different. I hate to say so, not wanting to commit the sin defined by their “syndrome,” but this time might be different because all of the modern examples of past crises came during a time when many economists worldwide were extolling the virtues of the “rational expectations” model of the economy. This model suggested that a market economy should be left alone as much as possible, so that is what governments tended to do. ...
          But that mindset is waning, and government and business leaders now routinely warn of bubbles and adopt policies to counter them. So, this time really is at least a little different.
          In that case perhaps all of those crisis-induced bad decades are no longer relevant. But any such hopes that the aftermath of the current crisis will turn out better are still in the category of thoughts, theories, and dreams, not science.
          It is not true that if you break a mirror, you will have seven years’ bad luck. That is a superstition. But if you allow a financial market to spin wildly until it breaks down, it really does seem that you run the risk of years of economic malaise. That is a historical pattern.

          Policymakers seemed resigned to the "nothing we can do about the stagnant recovery" outcome, but why not at least try for a different outcome? Policymakers need to stop sitting on their hands, recognize the danger of extended stagnation, and avoid the mistakes of the past by taking take action now. But don't bet the house -- if you still have one -- on that happening.

          Update: I feel like a broken record on the call for more help for labor markets, but as I said back in April when I announced I'd given up any hope that policymakers would do anything more:

          I'll still complain -- there's no reason to let policymakers off the hook -- but it's time to give up the hope that anything more will be done to help the unemployed find jobs.

          Every once in awhile I can't help but get my hopes up again, e.g. the Fed is making noises it might do more after it's meeting this week, only to be disappointed when nothing comes of it. I should know better by now.

            Posted by on Monday, September 20, 2010 at 03:39 PM in Economics, Financial System | Permalink  Comments (73) 


            "How Should Economics Instruction Change?"

            The Economist asks:

            How have the financial crisis and recession affected the way economics is taught? How should economic instruction change?

            Here's my response, along with responses by Alberto Alesina, Laurence Kotlikoff, Michael Pettis, Gilles Saint-Paul, Paul Seabright, Richard Baldwin, Michael Bordo, Guillermo Calvo, Tyler Cowen, Harold James, David Laibson, and Eswar Prasad [All Responses].

            I realized I forgot to talk about the need for more economic history, but that is discussed by several others so at least the point got made.

            Update: I added some comments on how the announcement might affect the chances of either the Fed or Congress providing further help for the economy.

              Posted by on Monday, September 20, 2010 at 09:53 AM in Economics, Methodology | Permalink  Comments (50) 


              NBER: The Recession Ended in June 2009

              The NBER's Recession Dating Committee has called the end of the recession. I have some comments at MoneyWatch:

              NBER: The Recession Ended in June 2009

              The post includes a graph showing the latest recession probability index from my colleague Jeremy Piger. Although the index agrees with the recession dating committee, it does show an uptick lately that is worth keeping an eye on.

                Posted by on Monday, September 20, 2010 at 09:31 AM in Economics | Permalink  Comments (10) 


                Paul Krugman: The Angry Rich

                The "rage of the rich" is broadening and intensifying:

                The Angry Rich, by Paul Krugman, Commentary, NY Times: ...These are terrible times for many people in this country. Poverty, especially acute poverty, has soared in the economic slump; millions of people have lost their homes. Young people can’t find jobs; laid-off 50-somethings fear that they’ll never work again.
                Yet if you want to find real political rage — the kind of rage that makes people compare President Obama to Hitler, or accuse him of treason — you won’t find it among these suffering Americans. You’ll find it instead among the very privileged, people who don’t have to worry about losing their jobs, their homes, or their health insurance, but who are outraged, outraged, at the thought of paying modestly higher taxes.
                The rage of the rich has been building ever since Mr. Obama took office. At first, however, it was largely confined to Wall Street. ... When the billionaire Stephen Schwarzman compared an Obama proposal to the Nazi invasion of Poland, the proposal in question would have closed a tax loophole that specifically benefits fund managers like him.
                Now, however, as decision time looms for the fate of the Bush tax cuts ... the rage of the rich has broadened, and ... craziness has gone mainstream. It’s one thing when a billionaire rants at a dinner event. It’s another when Forbes magazine runs a cover story alleging that the president of the United States is deliberately trying to bring America down as part of his Kenyan, “anticolonialist” agenda, that “the U.S. is being ruled according to the dreams of a Luo tribesman of the 1950s.” When it comes to defending the interests of the rich, it seems, the normal rules of civilized (and rational) discourse no longer apply.
                At the same time, self-pity among the privileged has become acceptable, even fashionable. Tax-cut advocates used to pretend that they were mainly concerned about helping typical American families. Even tax breaks for the rich were justified in terms of trickle-down economics, the claim that lower taxes at the top would make the economy stronger for everyone.
                These days, however, tax-cutters are hardly even trying to make the trickle-down case. ... Instead, it has become common to hear vehement denials that people making $400,000 or $500,000 a year are rich. I mean, look at the expenses of people in that income class — the property taxes they have to pay on their expensive houses, the cost of sending their kids to elite private schools, and so on. Why, they can barely make ends meet.
                And among the undeniably rich, a belligerent sense of entitlement has taken hold: it’s their money, and they have the right to keep it. “Taxes are what we pay for civilized society,” said Oliver Wendell Holmes — but that was a long time ago.
                The spectacle of high-income Americans, the world’s luckiest people, wallowing in self-pity and self-righteousness would be funny, except for one thing: they may well get their way. Never mind the $700 billion price tag for extending the high-end tax breaks: virtually all Republicans and some Democrats are rushing to the aid of the oppressed affluent.
                You see, the rich are different from you and me: they have more influence. ... And when the tax fight is over, one way or another, you can be sure that the people currently defending the incomes of the elite will go back to demanding cuts in Social Security and aid to the unemployed. America must make hard choices, they’ll say; we all have to be willing to make sacrifices.
                But when they say “we,” they mean “you,” Sacrifice is for the little people.

                  Posted by on Monday, September 20, 2010 at 01:17 AM in Economics | Permalink  Comments (97) 


                  Older Workers: Fears of Never Working Again

                  What does this say about plans to increase the age at which Social Security recipients can retire with full benefits (as opposed to other solutions such as raising the income cap that are progressive rather than regressive)? This is a worry in normal times as well, but what will we do when there's a recession and large numbers of the elderly but not yet retired cannot find jobs no matter how hard they try?:

                  For the Unemployed Over 50, Fears of Never Working Again, NY Times: ...Since the economic collapse, there are not enough jobs being created for the population as a whole, much less for those in the twilight of their careers.

                  Of the 14.9 million unemployed, more than 2.2 million are 55 or older. Nearly half of them have been unemployed six months or longer, according to the Labor Department. ... After other recent downturns, older people who lost jobs fretted about how long it would take to return to the work force and worried that they might never recover their former incomes. But today, because it will take years to absorb the giant pool of unemployed at the economy’s recent pace, many of these older people may simply age out of the labor force before their luck changes. ...

                  Older workers who lose their jobs could pose a policy problem if they lose their ability to be self-sufficient. “That’s what we should be worrying about,” said Carl E. Van Horn, professor of public policy and director of the John J. Heldrich Center for Workforce Development at Rutgers University, “what it means to this class of the new unemployables, people who have been cast adrift at a very vulnerable part of their career and their life.”

                  Forced early retirement imposes an intense financial strain, particularly for those at lower incomes. ... But even middle-class people who might skate by on savings or a spouse’s income are jarred by an abrupt end to working life and to a secure retirement. ...

                  People need jobs, or more social support until jobs appear, and both the Congress and the Fed are failing to do all that they can do to help. Apparently, imagined fears of deficits and inflation are more important than the real struggles of the unemployed.

                    Posted by on Monday, September 20, 2010 at 01:08 AM in Economics, Social Insurance, Unemployment | Permalink  Comments (43) 


                    "GOP Aims to Erode White House Agenda"

                    Will this promise from the GOP to be as obstructionist as possible (what's new?), particularly with health care legislation, backfire? :

                    GOP Aims to Erode White House Agenda, WSJ: Eyeing a potential Congressional win in November, House Republicans are planning to chip away at the White House's legislative agenda—in particular the health-care law—by depriving the programs of cash. ... Rep. Paul Ryan (R., Wis.), who could potentially chair the House budget panel, says the GOP must show it's 'serious about limiting government.' ...
                    A vote in the House to repeal the health-care overhaul would be among the GOP's top priorities. Republican leaders are also devising legislative maneuvers that might have a bigger impact, using appropriations bills and other tactics to try to undermine the administration's overhaul of health care and financial regulations and its plans to regulate greenhouse gases. GOP leaders also hope to trim spending, return unspent stimulus funds and restore sweeping tax cuts.
                    Business groups have compiled lists of impeding regulations they hope to see stopped under a GOP House majority. ...
                    At its core, the GOP plan will focus on spending and whittling away the health-care law, the Democrats' landmark achievement, which extends insurance to 32 million Americans. House Republicans say a full repeal would pick up a few Democratic votes, but acknowledge the effort would fail in the Senate.
                    Instead, they plan other means to chip away at it, by trying to choke off appropriations funding for key pieces, since House approval is required to pass such spending.
                    Republican congressional aides and advisers say their focus would including blocking funding to hire new Internal Revenue Service agents, who are needed to enforce the law's tax increases. They also would consider barring spending for a new board that approves Medicare payment cuts as well as on research that compares the effectiveness of medical procedures.
                    Other potential targets include funds to pay for a long-term care insurance program and money to help states set up insurance exchanges where consumers will be able to use tax credits beginning in 2014.
                    "By having the capacity to block funding for it, you get to very much shape how it turns out," said Douglas Holtz-Eakin, a director of the Congressional Budget office under Mr. Bush.

                    Republicans would also bring to a vote measures that attack the law's least popular parts, including the requirement that most Americans carry health insurance and cuts to payments for privately run Medicare plans. Such other stand-alone bills would struggle to get through the Senate. But House Republicans say they will bring them to the floor anyway to pave the way for a broader attack on the health law should they recapture the White House in 2012. ...

                    There don't seem to be any new ideas here, just a promise to undo what's been done since the Republicans lost power. Why would we want to return to the policies that brought us a stagnant middle class even in the best of times, widening inequality, out of control financial markets, the biggest recession in recent memory, declining rates of health care coverage, threats to Social Security and to social insurance more generally, tax policies that reinforce trends in inequality and create big holes in the budget (amid false claims that tax cuts more than pay for themselves), and two wars whose total costs to the nation go far beyond the large budgetary costs that have brought programs such as Social Security and Medicare -- programs vital to middle and low income households -- under increasing financial pressure?

                      Posted by on Monday, September 20, 2010 at 12:24 AM in Economics, Politics | Permalink  Comments (16) 


                      Sunday, September 19, 2010

                      links for 2010-09-19

                        Posted by on Sunday, September 19, 2010 at 11:01 PM in Economics, Links | Permalink  Comments (13) 


                        Tyler Cowen: Can the Fed Offer a Reason to Cheer?

                        Tyler Cowen hopes to convince you that you need to be convinced:

                        Can the Fed Offer a Reason to Cheer?, by Tyler Cowen, Commentary, NY Times: ...Optimism, or lack thereof, may seem the province of psychology, not macroeconomics. But ... a deficit of optimism has much to do with why the United States economy remains stalled today.
                        The Federal Reserve, pondering what to do to stimulate the economy, has a number of tools at its disposal. But if it could just convince Americans that it was committed to monetary expansion and economic growth, it would help the economy pick up speed.
                        Yet that is easier said than done. ... If the Fed promises to keep increasing the money supply until prices rise by, say, 3 percent a year, people should eventually start spending. Otherwise, if they just held the money, it would be worth 3 percent less each year. ... Of course, if no one believes the Fed’s commitment to price inflation, spending and employment will not go up. The plan will fail, and people will view their skepticism as vindicated.
                        In other words, one of our economic problems can be solved, but only if we are willing to believe it can. ... Sadly, although Mr. Bernanke clearly understands the problem, the Fed hasn’t been acting with much conviction. This is understandable, because if the Fed announces a commitment to a higher inflation target but fails to establish its credibility, it will have shown impotence. It would be a long time before the Fed was trusted again, and the Fed might even lose its (partial) political independence. ...
                        The Fed lost some of its political independence during the financial crisis. It undertook major rescue operations in conjunction with the Treasury, and these bailouts proved extremely unpopular. ... When it comes to inflation, the Fed cannot easily turn to Congress and simply ask to be trusted.
                        This is the sad side story of our financial crisis: especially when it comes to financial matters, a great deal of trust has been lost. There is the prospect of a free lunch right before us, yet it is unclear that we will be able to grab it. ...
                        In failing to push harder for monetary expansion, is Mr. Bernanke a wise and prudent guardian of the limited discretionary powers of the Fed? Or is he acting like a too-hesitant bureaucrat, afraid to fail and take the blame when he should be gunning for success?
                        We still don’t know which narrative is more accurate, but the Fed is not receiving enough signals of support from Congress.
                        As high unemployment continues, more and more people, including top economists, are asking the Fed to promise a credible commitment to a more expansionary monetary policy. This approach will work only if the Fed finds a way to be bold — and if we find a way to believe in it.

                        This reminds me of an argument I made in June:

                        As for Tyler's (and others') call for monetary policy instead of fiscal policy, here's the problem. It relies upon changing expectations of future inflation (which changes the real interest rate). You have to get people to believe that the Fed will actually be willing to create inflation in the future when it comes time to do so. However, it's unlikely that it will be optimal for the Fed to cause inflation when the time comes. Because of that, the best policy is to promise that you'll create inflation, then renege on the promise when it comes time to follow through. Since people know that, and expect the Fed will not actually carry through, it's hard to get them to change their expectations now. All that credibility the Fed has built up and protected concerning their inflation fighting credentials works against them here.

                          Posted by on Sunday, September 19, 2010 at 12:48 AM in Economics, Inflation, Monetary Policy | Permalink  Comments (50) 


                          Saturday, September 18, 2010

                          links for 2010-09-18

                            Posted by on Saturday, September 18, 2010 at 11:02 PM in Economics, Links | Permalink  Comments (7) 


                            In Which Mr. Deling Responds...

                            Law Professor Todd Henderson, who has a household income of $455,000 per year, has been complaining about his taxes going up under the Obama plan (all households would keep the Bush tax cuts for income up to a $250,000 per year threshold, but any income above that amount -- and only the income above that amount -- would be taxed at the older, higher rate). He says, like most "working Americans," once his bills are paid each month, there's hardly anything left over. How can he be considered rich? Michael O'Hare called him on it, Brad DeLong reprinted excerpts from Michael O'Hare's post, and Todd Henderson emailed (I think) Brad to protest.

                            Brad's subsequent response is here, and it's well worth reading:

                            In Which Mr. Deling Responds to Someone Who Might Be Professor Todd Henderson, by Brad DeLong and Brad Deling

                              Posted by on Saturday, September 18, 2010 at 04:05 PM in Economics, Income Distribution, Taxes | Permalink  Comments (31) 


                              Kevin O'Rourke: Lessons from the Great Depression

                              Kevin O'Rourke describes how the emergence of extremism during the Great Depression led to the post WWII consensus that produced social democracies. As he notes, one reflection of this consensus was evident in the Atlantic Charter signed by Winston Churchill Franklin D. Roosevelt in 1941. The Charter was mostly a statement of war aims, but it included a provision stating that the two leaders desired "to bring about the fullest collaboration between all nations in the economic field, with the object of securing for all improved labor standards, economic advancement, and social security."

                              Have we forgotten the lessons that caused the democracies of the postwar period to transform themselves into the social democracies that provided security for citizens and protection against extremism?:

                              Lessons from the Great Depression, by Kevin O'Rourke: ...The 1920s had seen a gradual reconstruction of the international economy, and with it signs that Germany was being successfully reintegrated into the international community... The Nazis obtained just 2.6% of the vote in 1928.
                              Then, in late 1929, the Great Depression hit and everything fell apart. Thanks to Brüning’s deflationary policies, Germany’s national income fell by more than a quarter, and official unemployment rose to almost a third of the labor force. Optimism was replaced by a profound sense of insecurity. Inevitably, the extremist parties benefitted. In 1930 the Nazis increased their share of the vote to 18.3%, while in July 1932 they scored 37.8%..., and the Weimar Republic was doomed.
                              The lesson was clear: states needed to provide their citizens with the security which the gold standard and the market system, left to their own devices, had so conspicuously failed to do. The alternative was nationalism in all its guises: economic nationalism at best, but potentially something much uglier and far more dangerous. And so the democracies of the postwar period became social democracies...
                              Over the past thirty years, a backlash has swept away much of this postwar political consensus. The supposed competitive pressures of globalization were used as an excuse to undermine welfare protections, even as globalization increased the need for them...
                              Thankfully, the ... reflationary policies adopted in 2009 are the main reason we avoided a second Great Depression. However, their initial success has bred a dangerous complacency, while the right used the Greek crisis of 2010 far more effectively than the left used the disasters of 2008. The result is a variety of austerity packages which threaten the fragile Western recovery.
                              At this point, a reader might well object that the original purpose of post-1945 social democracy – to protect democracy from extremism, by protecting capitalism from itself – is no longer relevant. After all, Europe is no longer the cesspool of prejudice and nationalism that it was eighty years ago: the political consequences of recessions are no longer so dangerous.
                              I am not so sure. Anyone who believes that people are getting better has not been paying sufficiently close attention... The bestseller on amazon.de is Thilo Sarrazin’s anti-immigrant screed, which Amazon helpfully bundles with a book on young delinquents. In France, the government has been fishing in National Front waters, expelling Roma and linking immigrants with crime. The Nazi vote in 1928 is tiny compared with that of the Dansk Fokeparti in 2007 (13.9%), or Geert Wilders’ anti-Muslim party in 2006 (5.9%).
                              Our Great Recession has strengthened the political extremes. Wilders’ party received 15.5% of the vote in 2010, while Jobbik got 16.7% in the first round in Hungary. ...
                              To quote Tony Judt: “why have we been in such a hurry to tear down the dikes laboriously set in place by our predecessors? Are we so sure that there are no floods to come?”

                              With the success of the Tea Party lately, I've found myself wondering if we are headed toward a period of extremism and where that might lead us. This is one of the reasons (among others) I've been emphasizing the need for more social protections in the form of automatic stabilizers and a New and Improved New Deal.

                              Update: Just listen to the powers behind the movement try to use the Tea Party for their own gains (Kudlow evaluates the movement in terms of its ability to raise the price of stocks -- that is his national welfare function):

                              A Bullish Tea-Party Revolt, by Larry Kudlow: ...following the tea-party primary victories in Delaware, New York, and New Hampshire this week, I'm once again getting energized.
                              Free-market capitalism is on the comeback trail. That's one of the key tea-party messages. And make no mistake about it: The free-market power of the tea-party political revolt is totally bullish for stocks and the economy.
                              In short, this is a revolution.
                              The political elites in both parties don't get it. Nor do the mainstream media. But the tea-party movement is stopping Obamanomics dead in its tracks. And it will overturn the Keynesian big-government planning effort now in full force in our nation's capital. The tea parties are Reaganism reincarnate, and then some.
                              It's all there in the Contract from America: Limited government, individual liberty, economic freedom. Defund Obamacare. No tax-and-nationalize energy scheme. Stop the tax hikes and move to a flat-tax system. No special favors and subsidies. No crony capitalism. Oh, and let me underscore the tea-party revolt against runaway government spending and debt-creation. No TARP. No stimulus. No Obamacare. No Bailout Nation for GM, Fannie, Freddie, and AIG. ...
                              A few months ago I wrote about the emergence of a new free-market nucleus, motivated by tea-party ideals, in the Republican caucus of the Senate. That nucleus is set to grow. And that's exactly why I'm getting more optimistic. ...
                              This is a new transformational breed. This is a free-market revolution powered by the tea party. Along with a likely Republican takeover in the House, we could be looking at a free-market Congress, something I never dreamed possible. ... In other words, folks, tea-party economics are very bullish.

                              When members of the Tea Party realize that Social Security, Medicare, and other social protections have been tossed over the side to lighten the load and increase profit (well, there is the lifeboat in the captain's quarters paid for with the money saved on social insurance for the crew, but that's not for the common passengers), and they find themselves subsequently tossed into the bay themselves and left to tread water amidst the bales of tea -- when members of the "keep your government hands off my Medicare" crowd then find themselves unable to stay above water -- it will be too late (it's no accident that Kudlow fails to include Medicare and Social Security in his list of evil government programs). Once the foot soldiers behind this movement realize that the carpet has been pulled out from under them, and they look for scapegoats rather than acknowledging their own complicity in the outcome, it will be as much if not more dangerous than the movement itself.

                                Posted by on Saturday, September 18, 2010 at 10:17 AM in Economics, Social Insurance | Permalink  Comments (35) 


                                Friday, September 17, 2010

                                links for 2010-09-17

                                  Posted by on Friday, September 17, 2010 at 11:02 PM in Economics, Links | Permalink  Comments (17) 


                                  "Bush Tax Cuts Had Little Positive Impact on Economy"

                                  Bruce Bartlett notes that the Bush tax cuts did little to stimulate growth, and that tax cuts of this type are very poor at what we need the most right now, countercyclical stabilization:

                                  Bush Tax Cuts Had Little Positive Impact on Economy, by Bruce Bartlett, Commentary, Fiscal Times: Republicans are heavily invested in permanently extending the tax cuts enacted during the George W. Bush administration, all of which expire at the end of this year exactly as the legislation was written in the first place. To hear Republicans, one would think that the Bush tax cuts were the most powerful stimulus to growth ever enacted and only a madman would even think of allowing any of them to expire.
                                  The truth is that there is virtually no evidence in support of the Bush tax cuts as an economic elixir. To the extent that they had any positive effect on growth, it was very, very modest. Their main effect was simply to reduce the government’s revenue, thereby increasing the budget deficit, which all Republicans claim to abhor.
                                  Not sure I agree that all Republicans abhor deficits. Republicans trying to play the "starve the beast" think deficits brought about by tax cuts create the right incentives from their small government perspective (some Republicans were clearly confused about how to execute this strategy as they increased the deficit by spending increases rather than tax cuts). Anyway, back to the article:
                                  It’s worth remembering where the Bush tax cuts came from in the first place. In 1999, in the midst of one of the biggest economic booms in American history, then Texas Gov. Bush convened a group of Republican economists to draft a tax plan for him. Contrary to Ronald Reagan’s 1981 tax cut, which was a simple across-the-board marginal tax rate reduction, the Bush plan was a hodge-podge of tax gimmicks designed more to win the support of various voting blocs than stimulate growth. ...
                                  No Reaganites praised the Bush plan... Rather than defend his proposal as one that would increase growth, Bush argued that its main purpose was simply to deplete the budget surplus, which had grown under President Bill Clinton to $126 billion in 1999. Surpluses were dangerous, Bush and his advisers repeatedly warned, because Congress might spend them.
                                  By the time Bush took office in January 2001, the economy was clearly in a slowdown; diametrically opposite economic conditions from what they were when his tax plan was first proposed. ... The rational thing to do under the circumstances would have been to rethink the tax plan... Instead, Bush sent to Congress the nearly-identical proposal he had endorsed two years earlier. His one concession was to permit the addition of a one-shot tax rebate — classic Keynesian policy that was opposed by all supply-siders and most mainstream economists as well, since previous experience with rebates showed that they had no stimulative effect whatsoever.
                                  Bush’s economic advisers tried to talk him out of the rebate, but ran into a brick wall. He had made up his mind ... to support the rebate even though it was completely contrary to everything Republicans traditionally believed about taxation. ... Subsequent analysis showed that the rebate had virtually no stimulative effect, exactly as economic theory predicted. ...
                                  In 2003, the economy’s continued weakness caused the White House to propose another tax cut that was more oriented toward supply-side thinking. The key elements were a reduction in the tax rate on capital gains and dividends to 15 percent. The tax cut on dividends was especially large...
                                  Subsequent research by Federal Reserve economists has found little, if any, impact on growth from the 2003 tax cut. The main effect was to raise dividend payouts. But companies cut back on share repurchases by a similar amount, suggesting that only the form of payouts changed. (See here, here, and here.) ...
                                   Unfortunately,... we are now faced with the political reality that our only real choice is to extend all the Bush tax cuts or allow a large tax increase to take effect on Jan. 1. Under those circumstances, the tax cuts must be extended. But no one should delude themselves that continuing tax cuts that did nothing for growth over the last 10 years will do anything to stimulate growth in the future.
                                  I'm don't think that the only choice is to extend the tax cuts for all, or have them expire for all. Allowing the cuts to expire for the wealthy, and be retained for everyone else, is viable option. One reason to think the Republicans are worried about having to vote on retaining all but the tax cuts at the upper end is that they are looking for ways to get around being forced to cast a vote on this option. Paul Krugman explains:
                                  Temporary Tax Cuts For The Rich? No, by Paul Krugman: Greg Sargent notes the growing number of Republicans suggesting a “compromise” in the form of temporary extension of high-end tax breaks, and urges Democrats not to take the bait. His argument is essentially political: Republicans are obviously aware that they’re in a fix, and Democrats shouldn’t help them out.
                                  But there are reasons beyond partisan maneuvering to reject any deal here.
                                  First, temporary tax breaks for the rich are stunningly bad economic policy. As I tried to explain, basic economic theoryMilton Friedman’s theory! — tells us that affluent taxpayers are likely to save the great bulk of a transitory tax break. And bear in mind that while a 2-year extension wouldn’t increase debt as much as a permanent extension, it would still be much more expensive than measures like aid to the unemployed and to small businesses that would do far more for the economy, yet spent months held up in Congress because of alleged concerns about the deficit.
                                  Second, this is obviously — obviously — a setup. The whole point is to avoid a vote on the middle-class tax cuts while Democrats control the House; when and if Republicans regain control, they can refuse to let anything but a full extension reach the floor. So the goal is actually permanent extension; what they’re offering isn’t a compromise, it’s a trap.
                                  So just say no.

                                  Democrats could say they'd consider transferring the tax cuts from the wealthy to the not so wealthy where they will do more good, but there's no reason to give in to the compromise described above.

                                    Posted by on Friday, September 17, 2010 at 02:21 PM in Economics, Productivity, Taxes | Permalink  Comments (54) 


                                    Paul Krugman: The Tax-Cut Racket

                                    Republicans are playing a dangerous game with the economy as they attempt to preserve tax cuts for "their wealthy friends":

                                    The Tax-Cut Racket, by Paul Krugman, Commentary, NY Times: “Nice middle class you got here,” said Mitch McConnell, the Senate minority leader. “It would be a shame if something happened to it.”
                                    O.K., he didn’t actually say that. But he might as well have, because that’s what the current confrontation over taxes amounts to. Mr. McConnell, who was self-righteously denouncing the budget deficit just the other day, now wants to blow that deficit up with big tax cuts for the rich. But he doesn’t have the votes. So he’s trying to get what he wants by pointing a gun at the heads of middle-class families, threatening to force a jump in their taxes unless he gets paid off with hugely expensive tax breaks for the wealthy. ... Politics ain’t beanbag, but there’s a difference between playing hardball and engaging in outright extortion...
                                    How did we get to this point? The ... Bush administration bundled huge tax cuts for wealthy Americans with much smaller tax cuts for the middle class, then pretended that it was mainly offering tax breaks to ordinary families. Meanwhile, it circumvented Senate rules intended to prevent irresponsible fiscal actions ... by putting an expiration date of Dec. 31, 2010, on the whole bill. And the witching hour is now upon us. If Congress doesn’t act, the Bush tax cuts will turn into a pumpkin at the end of this year, with tax rates reverting to Clinton-era levels.
                                    In response, President Obama is proposing legislation that would keep tax rates essentially unchanged for 98 percent of Americans but allow rates on the richest 2 percent to rise. But Republicans are threatening to block that legislation, effectively raising taxes on the middle class, unless they get tax breaks for their wealthy friends.
                                    That’s an extraordinary step. Almost everyone agrees that raising taxes on the middle class in the middle of an economic slump is a bad idea... So the G.O.P. is, in effect, threatening to plunge the U.S. economy back into recession unless Democrats pay up.
                                    What kind of political party would engage in that kind of brinksmanship? The ... same kind of party that shut down the federal government in 1995 in an attempt to force President Bill Clinton to accept steep cuts in Medicare, and is actively discussing doing the same to Mr. Obama. So,... the tax-cut fight is ... ultimately about a radicalized Republican Party, which accepts no limits on partisanship.
                                    So should Democrats give in?
                                    On the economics..., the G.O.P. plan would add hugely to the deficit — about $700 billion over the next decade — while doing little to help the economy. On any kind of cost-benefit analysis, this is ... not worth considering. ...
                                    On the politics, the answer is also a clear no. Polls show that a majority of Americans are opposed to maintaining tax breaks for the rich. Beyond that, this is no time for Democrats to play it safe: if the midterm election were held today, they would lose badly. They need to highlight their differences with the G.O.P. — and it’s hard to think of a better place ... to take a stand than on ... big giveaways to Wall Street and corporate C.E.O.’s.
                                    But what’s even more important is the principle of the thing. Threats to punish innocent bystanders unless your political rivals give you what you want have no legitimate place in democratic politics. Giving in to such threats would be an economic and political mistake, but more important, it would be morally wrong — and it would encourage more such threats in the future.
                                    It’s time for Democrats to take a stand, and say no to G.O.P. blackmail.

                                      Posted by on Friday, September 17, 2010 at 01:05 AM in Economics, Politics | Permalink  Comments (85) 


                                      Financial Regulation: The Empire Strikes Back

                                      If banks are too big for politicians to ignore, is it possible to break them up?:

                                      The Empire strikes back, by Avinash Persaud, Vox EU: There are two remarkable aspects of the consensus around international financial regulation emerging in the run up to the November G20 meeting in Seoul. The first is that there is a consensus. International regulators are agreed that banks must set aside much more capital for risky assets; be less dependent on the whims of money markets; constrain the maturity mismatches between their assets and liabilities and set aside capital for holding complex derivatives where there may be settlement and clearing risks. They also agree that capital adequacy should move counter to the economic cycle and that banks should not be “too big to fail”. Getting an international consensus around action that is sensible – save for the emphasis on “too big to fail”- is no mean achievement.
                                      The second is that despite appearing to be down and out, the banking lobby has struck back, successfully making the case that all of these initiatives should be postponed or phased-in between 2015 and 2019. By then the pressure for regulatory reform could be a distant memory. Financial regulation veterans will be experiencing déjà vu. In each of the last seven international financial crises, plans for a radical shake up of international regulatory or monetary arrangements made surprising progress, only to be tidied away and stuffed in the bottom drawer once the economy recovered. Many of the new initiatives being proposed today have been pulled out of that same drawer, dusted down and updated.
                                      The argument that the banking system is too broken and the world economy too fragile, to support more onerous regulations, is seductive for politicians desperately trying to boost consumer demand. But it is suspect. It highlights that attempts to make banking regulation more counter-cyclical have not gone far enough. The point of counter-cyclicality is to loosen the constraints to lending in times of recession like today and to tighten them when growth and optimism have returned and the worse credit mistakes are being made. Counter-cyclicality needs to be at the heart of the new regulatory regime and not an optional extra. As Professor Charles Goodhart of the LSE and I have said before, crashes will not be avoided if we continue to feed the booms. The methodology of counter-cyclicality is complex and given that economic cycles are more national or regional than global, it makes for greater host country regulation and national ring-fencing of bankers’ operations. International banks do not like that. To counter they appeal to the “right”-sounding notion of level playing fields.
                                      The other problem of kicking regulatory initiatives into the long grass is that as long as the prospect of new profit-squeezing regulation is out there, uncertainty will limit the one thing everyone is agreed the banking system needs more of – capital from investors. It is one of those delicious fallacies of composition that what banks want individually is often not in their collective interests. I recall writing in October 2002, what the FT headline writers presciently captured as “Banks put themselves at risk in Basel”.
                                      Competitive finance is critical to the development of a robust and dynamic economy – locally and globally. But the lesson currently being repeated is that regulatory capture – subtle, sophisticated, and seductive – has the power to stops us from developing a financial industry that serves the economy rather than the other way around.
                                      Tackling regulatory capture head on is the better argument for limiting bank size. The notion that smaller institutions will make the financial system safer ignores history. The UK Secondary Banking Crisis of 1973-75, for example, had a bigger impact on property prices and the stock market than the current one. The principal avenue of financial contagion is the panic-stricken search for institutions that look similar to the one that has just failed. Moreover, a large number of small institutions doing the same dangerous thing is just as toxic, if not more so, than a small number of large institutions engaged in the same activity. But smaller institutions invest less in political lobbying. A politically less powerful financial system has a better chance of being reassuringly boring.
                                      The way to make the financial system safer is to break up institutions not by the porous boundaries of “narrow” and “wholesale” banking, but by the more fundamental boundaries of risk capacity. To create systemic resilience we need a systemic approach to capital adequacy requirements across the entire financial system, one that pushes different financial risks to wherever across the entire financial there is greater capacity for those different risks.
                                      This is simpler than it sounds. There are three major types of risk: credit risk, market risk, and liquidity risk. Their differences can be found by the different ways in which these risks can be hedged or absorbed. The capacity to absorb liquidity risk comes from having time to sell an asset because liabilities, like promises to pay a pension in twenty years, are long-term. The capacity to absorb credit risk comes from having access to a wide range of uncorrelated credit risks to pool together, like a loan to an international oil company and another to a local wind farm. A financial system in which liquidity risks were held by young pension funds because of the capital required to set aside maturity mismatches, and credit risks by large consumer banks, because of the capital required to set aside for concentrated credit risks, would be far safer than one with twice the amount of capital but where the banks fund illiquid private equity investments and pension funds hold credit derivatives because regulators and accountants treated risk as if all that mattered was price volatility not risk capacity. Limiting risk taking to risk capacity would limit the size of banking institutions. It would create opportunities for new players with different risk capacities.
                                      But the odds of a systemic approach to systemic risk appear slim. It’s politics, stupid!

                                      The last point is something I've talked about as well, but in more general terms. Essentially, if we break up the big banks into a bunch of "mini-me's," then a shock that would bring down a big bank would likely also cause widespread failure among its smaller clones. But if the small banks pursue heterogeneous strategies, e.g. as described above, then the impact of the shock may not be as wide.

                                      From an earlier post on this, I'm skeptical about how well this would work, partly because the institutions may still be highly interconnected and hence subject to cascading failure:

                                      ... One argument against breaking up large banks, one I've given myself, is that it won't necessarily eliminate systemic risk. A shock that pushes a large bank into bankruptcy could just as easily cause a large number of smaller firms engaged in the same business to fail. This could create just as much trouble for the financial system as the failure of a single bank encompassing the smaller entities. In fact, it could be even harder for regulators to figure out how to address the failure of, say, one hundred small firms rather than just one large firm. Thus, breaking up large banks may do little to reduce systemic risk, but, as the argument goes, there is a chance that efficiency will fall. If so, then this is not a good policy.
                                      But I think there are several counterarguments to this. First, there may be some shocks that would take a single, large bank down, but might not do the same to the smaller banks derived from it. The key here is that the smaller banks pursue diversified strategies so that only some of them are vulnerable to a particular type of shock. If they all do the same thing as the large bank did before it was broken up, then they will still face common risks. However, even with diversified strategies, I'd still worry that there is not that much safety from breaking banks up, i.e. that most shocks that would take down large banks will also take down enough small banks to create similar problems. ...

                                      Breaking up the big banks and then imposing heterogeneity is certainly worth a try. If nothing else it may reduce their political influence. But it's unlikely to be enough by itself, and we should also be sure to reduce system vulnerabilities through other means such as leverage limits, orderly resolution for troubled banks, improved monitoring of system/network risks, the elimination of incentives to take on excess risk, and so on.

                                      Update: I just posted something related at MoneyWatch: Will Basel III's Capital Requirements Make the Financial System Safer?.

                                        Posted by on Friday, September 17, 2010 at 12:42 AM in Economics, Financial System, Regulation | Permalink  Comments (15) 


                                        Thursday, September 16, 2010

                                        links for 2010-09-16

                                          Posted by on Thursday, September 16, 2010 at 11:02 PM in Economics, Links | Permalink  Comments (22) 


                                          Poverty and Redistribution

                                          Here are two links:

                                          And an argument for redistribution:

                                          Superstars & redistribution, by Chris Dillow: Alex Tabarrok explains how increasing inequality can be due to “winner take all” superstar effects. This raises an issue. Insofar as this is a reason for higher top incomes (and it is only part of the story), mightn’t it strengthen egalitarians’ arguments for redistribution?
                                          I mean this in three senses.
                                          1. It increases the force of Rawls’ claim that the distribution of talents is “arbitrary from a moral perspective” because “no-one deserves his place in the distribution of native endowments.” The essence of winner-take-all economics is that  small differences in skills can mean large differences in returns. Even if you think Rawls was wrong on this, and that there is a moral element in the distribution of skills - say, insofar as these arise from differences in effort - one must, surely, be inclined to think that small differences in skill are largely arbitrary.
                                          This is especially true because not all superstar earnings arise from even slightly superior skills. As Alex says, people like to read the books that others read. But this can generate Adler superstars - people who become rich simply because they arbitrarily become the focus of attention. Is Dan Brown’s superstar income really the result of him leveraging his superior intellect? Or is he just a mediocre writer who got luckier than comparable writers?
                                          2. It reduces the relevance of the self-ownership thesis. Even if we concede the Nozickian point, that people own their own talents, this does not suffice to justify leaving superstar salaries untaxed, because such salaries are a joint product. They arise from an interplay of talent (or luck) with socio-technical forces: globalization; a negligible marginal cost of production; copyright laws; and so on. No superstar can claim a right to these factors, which are an accident of history. And insofar as these are social factors, it might be reasonable for the incomes arising therefrom to be socialized.
                                          3.  It undermines Laffer curve arguments. Imagine you’re the impoverished J.K.Rowling writing her first Harry Potter novel, and that taxes on high incomes are very high. Do you think: “I’ll not bother writing, but become a waitress instead?” It’s about as likely as Wayne Rooney preferring to work in McDonalds than play football.
                                          Because only a tiny minority become superstars - and they do so at least in part through luck - hardly anyone with rational expectations would anticipate becoming a superstar. Superstar salaries, then, are not needed to induce people to become writers, musicians or sportsmen. Instead, they consist very heavily of rents. And rent is a reasonable subject for tax.
                                          Against all this stands Nozick’s famous Wilt Chamberlain story. But is this really a compelling counter-argument?

                                          I've always liked the principle of equal marginal sacrifice as a basis for progressive taxation, but it's not the only foundation for a progressive tax structure.

                                          Update: The CBPP notes that even though poverty rates hit record levels in 2009, without automatic stabilizers it could have been even worse:

                                          The headline story in today’s Census Bureau report is the large jump in the poverty rate in 2009. But an exclusive Center on Budget and Policy Priorities analysis of the new survey data shows that unemployment insurance benefits — which expanded substantially last year in response to the increased need — kept 3.3 million people out of poverty in 2009.

                                          In other words, there were 43.6 million Americans whose families were below the poverty line in 2009, according to the official poverty statistics, which count jobless benefits as part of families’ income. But if you don’t count jobless benefits, 46.9 million Americans were poor.

                                          Update: More on the poverty report from Economix:

                                          ...Race continues to play a huge factor in poverty and income inequality. Median per capita income for non-Hispanic whites was $30,941, down 0.8 percent from a year earlier. Among blacks, median per capita income was less than two-thirds of the white median income, at $18,135....

                                          Age is also a factor. Households led by someone 65 or older actually saw their median income rise 5.8 percent to $31,354. That was largely because of Social Security payments. But households maintained by someone aged 15 to 24 saw their income drop 4.4 percent, and those led by someone 35 to 44 fell 2.6 percent.

                                          One of the most striking statistics released Thursday was the number of people aged 25 to 34 who are living with their parents. That number rose 8.4 percent to 5.5 million from 5.1 million in the last two years. We knew that recent college graduates were moving back in with their parents, but the fact that even older adults are doing so because they can’t make it on their own is a sign of the difficult economic times.

                                          Had those people not been living with their parents, their poverty rate, officially reported as 8.5 percent, would have been a 42.8 percent.

                                            Posted by on Thursday, September 16, 2010 at 09:45 AM in Economics, Income Distribution, Taxes | Permalink  Comments (73) 


                                            The Distribution of Income in OECD Countries

                                            Richard Green:

                                            While Arrow showed the impossibility of a well defined ordering of social preferences... ...we tend to act as if there is one anyway. That is, we place a lot of focus on GDP per capita when evaluating economic success. By this measure, the US is, of course, successful. By a slightly different measure from the OECD (go to page 37), average disposable income per household, the US ranks second after Luxembourg among the nations measured. Luxembourg has about the same population of Long Beach, so it is hard to worry too much about it.

                                            But a social welfare function that looks at the lowest decile of income is just as legitimate (or perhaps I should say, illegitimate). By this measure, the US ranks 20th among countries measured, which places it toward the bottom of the OECD pack, with levels similar to Greece and Italy.

                                            On the other hand, the top 40 percent of American household are better off than their counterparts in all other countries (with the exception of Luxembourg), reflecting a great deal of affluence across a large number of people. So where to pick? As Arrow would say, that is really impossible.

                                            Here is the chart that he mentions:

                                            Ineq-cross-country-by-income

                                            Here's a bit more detail on the distribution of disposable income (the bars start at the average income of the upper 10% and end at the average income of the bottom 10%, with the average income for each of the other eight deciles marked by horizontal lines):

                                            Ineq-cross-country

                                            As you can see, the US has the widest distribution.

                                            It would be nice to move the bottom of the US distribution up since it's a bit of an outlier for countries with average income in the vicinity of ours. But that might require raising taxes on the wealthy and redistributing income, or at least using the money to try and improve the conditions that lead to this outcome. That would then cause the people at the upper end of the distribution to quit working hard and taking risks, people would stop innovating, and our entire society would devolve into socialism ending our way of life as we know it. So, sorry, nothing we can do.[Update: I didn't think I needed the </sarcasm> tag, but given some of the comments, guess I was wrong.]

                                              Posted by on Thursday, September 16, 2010 at 01:08 AM in Economics, Income Distribution | Permalink  Comments (76) 


                                              Wednesday, September 15, 2010

                                              links for 2010-09-15

                                                Posted by on Wednesday, September 15, 2010 at 11:02 PM in Economics, Links | Permalink  Comments (17) 


                                                Eichengreen: Competitive Devaluation to the Rescue

                                                In response to Japan's intervention on the Yen, Barry Eichengreen reminds us that in March 2009, he argued that coordinated cross-country quantitative easing by monetary authorities would be better than the competitive devaluation we seem to be heading towards since it avoids large, temporary swings in exchange rates:

                                                Competitive devaluation to the rescue, by Barry Eichengreen, guardian.co.uk: Every day it seems more likely that we are destined – or should one say doomed? – to replay the disastrous economic history of the 1930s. We have had a stock market crash to rival 1929. We have had a banking crisis comparable to 1931. With the economic meltdown in eastern Europe we have the prospect of a financial crisis in Vienna, exactly as in 1931. We have squabbling among the major economies over the design of rescue loans, just as when the Bank for International Settlements was hamstrung in its efforts to contain the crisis in Austria. We have the prospect of a failed world economic conference in London to dash remaining hopes for a co-operative response, just as in 1933.
                                                And if all this wasn't enough, now we have the dreaded specter of competitive devaluation. In the 1930s, one country after another pushed down its exchange rate in a desperate effort to export its way out of depression. But each country's depreciation only aggravated the problems of its trading partners, who saw their own depressions deepen. Eventually even countries that valued currency stability were forced to respond in kind.
                                                In the end competitive devaluation benefited no one, it is said, since all countries can't devalue their exchange rates against each another. The only effects were to fan political tensions, heighten exchange rate uncertainty, and upend the global trading system. Financial protectionism if you will.
                                                Now, we are warned, there are signs of the same. The Bank of England is not exactly discreetly encouraging the pound to fall. And just last week the Swiss National Bank intervened in the foreign exchange market to push down the franc. Will Japan, the United States and China be long to follow? Will we all yet again end up shooting ourselves in the foot?
                                                In fact, this popular account is a misreading of both the 1930s and the current situation. In the 1930s, it is true, with one country after another depreciating its currency, no one ended up gaining competitiveness relative to anyone else. And no country succeeded in exporting its way out of the depression, since there was no one to sell additional exports to. But this was not what mattered. What mattered was that one country after another moved to loosen monetary policy because it no longer had to worry about defending the exchange rate. And this monetary stimulus, felt worldwide, was probably the single most important factor initiating and sustaining economic recovery.
                                                It is true that the process was disorderly and disruptive. Better would have been for the countries concerned to co-ordinate their moves to a more stimulative monetary policy without sending exchange rates on a roller-coaster ride. But, not for the first time, they failed to agree. Those in the most precarious positions had no choice but to pursue the new policy unilaterally.
                                                In any case, monetary easing achieved through a process of "competitive devaluation" was better than no monetary easing. ...
                                                This, in a nutshell, is our situation again today. Sterling's weakness reflects, in part, the exceptional severity of the British slump. But it also reflects the fact that the Bank of England has moved further and faster in the direction of quantitative easing than any other central bank. ... Now the Swiss National Bank has followed suit...
                                                Will other central banks, seeing their own currencies strengthen, conclude that the threat of deflation has grown more immediate and also now move quickly to quantitative easing? If so, exchange rates against sterling and the franc will revert to more normal levels. And, with quantitative easing all around, the world will receive the additional dose of monetary stimulus that it desperately needs.
                                                Better of course would be for the major countries to agree to co-ordinate their monetary policy actions. Then exchange rates will not move by large amounts in one direction today and the opposite direction tomorrow. There will not be further disruptions to the global trading system. There will not be international recriminations over beggar-thy-neighbor policy. The G20 countries could even make such co-ordination part of their agreement at the 2 April summit in London. Or not.

                                                Monetary policy works through lowering interest rates and encouraging new investment, but people seem to have forgotten all about the long and variable lags, particularly for monetary policy. The problem of finding "shovel ready" projects in not limited to the public sector. Even projects that are already planned take time to set in motion in response to lower interest rates (if producers are even willing to initiate new projects given the bleak outlook for sales).

                                                We need to remember that policy takes time to work, that the risks are not symmetric, and that the consequences of failing to act in a timely manner could be very costly down the road. We need to take action now, and not just from coordinated monetary policy. A coordinated fiscal intervention is also needed, but, unfortunately for the jobless, that's not going to happen.

                                                  Posted by on Wednesday, September 15, 2010 at 12:16 PM in Economics, International Finance, Monetary Policy | Permalink  Comments (22) 


                                                  EPI: State and Local Public Employees Undercompensated

                                                  A new study from the EPI says that once you control for differences between public and private sector employees, public sector employees are, on average, undercompensated:

                                                  State and local public employees undercompensated, EPI study finds: State and local public employees are undercompensated, according to a new Economic Policy Institute analysis. The report, Debunking the Myth of the Overcompensated Public Employee: The Evidence by Labor and Employment Relations Professor Jeffrey Keefe of Rutgers University, finds that, on average, state and local government workers are compensated 3.75% less than workers in the private sector.
                                                  The study analyzes workers with similar human capital. It controls for education, experience, hours of work, organizational size, gender, race, ethnicity and disability and finds that, compared to workers in the private sector, state government employees are undercompensated by 7.55% and local government employees are undercompensated by 1.84%. The study also finds that the benefits that state and local government workers receive do not offset the lower wages they are paid.
                                                  The public/private earnings differential is greatest for doctors, lawyers and professional employees, the study finds. High school-educated public workers, on the other hand, are more highly compensated than private sector employees, because the public sector sets a floor on compensation. The earnings floor has collapsed in the private sector.
                                                  The Political Economy Research Institute (PERI) at the University of Massachusetts, Amherst and the DC-based Center for Economic Policy Research are also releasing a study today, which echoes the national findings of Debunking the Myth of the Overcompensated Public Employee at a regional level. PERI’s report, The Wage Penalty for State and Local Government Employees in New England finds a "wage penalty" for state and local government workers in New England of almost 3%.

                                                    Posted by on Wednesday, September 15, 2010 at 10:09 AM in Economics | Permalink  Comments (72) 


                                                    Fed Watch: Yen Intervention

                                                    Tim Duy:

                                                    Yen Intervention, by Time Duy: At the beginning of August, I wrote:

                                                    Now, suppose Japanese officials believe that intervention is required regardless of the G-20. Presumably, they will give US Treasury Secretary Timothy Geithner a phone call to at least keep him in the loop, if not to receive his implicit consent. One wonders if Geithner will recognize what he would be consenting to: Japanese intervention, if it occurs, means that Chinese authorities managed to get Japan to acquire their Dollar reserves for them. Instead of buying Dollars, China buys Yen, which in turn induces Japan to buy Dollars. This maintains the artificial capital flows to the US while allowing China to escape accusations of being a "currency manipulator."

                                                    Since then, Japan's currency challenge only intensified, culminating in last week's almost comical complaint from Japanese policymakers:

                                                    Japan’s government said it will seek discussions with China over the nation’s record purchases of Japanese bonds as an appreciating yen threatens to undermine an economic recovery.
                                                    Japan is closely watching the transactions and will seek to maintain close contact with Chinese authorities on the issue, Vice Finance Minister Naoki Minezaki told lawmakers in Tokyo. Finance Minister Yoshihiko Noda suggested at the same hearing that it’s inappropriate for China to buy Japan’s bonds without a reciprocal ability for Japanese to invest in China’s market.

                                                    Did policymakers recognize the irony of their situation? It is not exactly a secret that Japan has made frequent excursions into the currency markets. But apparently they feel that intervention should be limited to Dollar purchases. Surely another Asian nation wouldn't play the same game on them?

                                                    Alas, the Chinese did - under pressure to "loosen" the renminbi - and pushed the Japanese into intervening last night to tame the surging Yen. In effect, the Chinese managed to get the Japanese to do their Dollar buying for them. Honestly, I have a hard time faulting the Japanese. They are facing a serious deflation problem, and pumping Yen into the system is an appropriate response (although they might simply sterilize the intervention, which would be, in my opinion, a policy error).

                                                    What must be going through the head of US Treasury Secretary Timothy Geithner at this point? After all, as far as global imbalances are concerned, if he can't stop central banks from intervening in the Dollar, he really isn't going to be making much progress on reversing the deteriorating US trade deficit. And before anyone gets too excited about the most recent trade numbers, note the trend remains intact. Moreover, CR is tracking the LA ports data, and it looks ugly. Geithner is now out and about trying to jawbone Chinese officials. From his interview with the Wall Street Journal:

                                                    WSJ: Are you satisfied with China’s progress on the yuan?
                                                    Geithner: Of course not. China took the very important step in June of signaling that they’re going to let the exchange rate start to reflect market forces. But they’ve done very, very little, they’ve let it move very, very little in the interim. It’s very important to us, and I think it’s important to China, I think they recognize this, that you need to let it move up over a sustained period of time.

                                                    So, Geithner finally realizes the extent of the Chinese nonevent. Recall the press fanfare that accompanied the initial Chinese currency announcement - journalists falling all over themselves to speak brightly of China's economic maturation. How many of those stories were sourced by Treasury officials crowing about the breakthrough that allowed them to avoid labeling China a currency manipulator? And where does this leave Geithner? Either complicit in trumping up the most minor of policy adjustments, or completely sucker punched by his Chinese counterparts. Honestly, I don't know which is worse.

                                                    What it all boils down to is this: There apparently is no motivation for global central banks to stop directing capital inflows at the US in an effort to support mercantilist objectives. If it isn’t China, it will be some other economy. And equally apparent, there is no motivation among US policymakers to address such government directed capital flows. Which will leave politicians falling back on ultimately harmful trade barriers. The absolute inability of US policymakers to seriously address a global financial architecture where a rule of the game is "when in doubt, by Dollars" will ultimately have serious consequences via disruptive adjustment when the system can no longer be maintained, via either external or internal forces.

                                                      Posted by on Wednesday, September 15, 2010 at 01:17 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (67) 


                                                      What’s Holding Back Small Businesses?

                                                      If you actually ask small businesses what they are worried about instead of asserting what's politically convenient, and do so consistently over time so you can detect where big swings occur, it's clear that small business believe that lack of demand is the biggest problem they face right now:

                                                      What’s Holding Back Small Businesses?, by Catherine Rampell, Economix: The biggest single problem facing America’s small businesses isn’t taxes or overregulation. It’s low demand, according to a new report released by the National Federation of Independent Business.

                                                      Thirty-one percent of small businesses surveyed by the N.F.I.B. said that “poor sales” are their company’s “single most important problem.” The other options included were competition from large businesses, insurance costs and availability, financing and interest rates, government requirements and red tape, inflation, quality of labor, cost of labor and “other.”

                                                      Here’s a chart breaking down what percent of small businesses cited each of these problems as their biggest challenge, going back to 1986:


                                                      National Federation of Independent Business, via Haver

                                                      ...[A]s you can see, the portion of small businesses citing taxes as their superlative problem has remained about the same — mostly in the 17-22 percent range, say — for about a decade. Additionally,... financial and interest rate concerns are a comparably negligible concern.

                                                      By contrast, the share of companies saying the poor sales is their main challenge has about doubled since the downturn began....

                                                      There's also a big change in the "insurance cost/availability" category in 2008 when these worries ease relative to the earlier 2000s (the bulge in this category seems to accord fairly well with the Bush years). That, like the rest of the evidence in the chart -- there's a very small increase in the answer on government requirements and that's about it -- is inconsistent with the charge that this administration is holding back the recovery by creating business uncertainty. It's the decline in demand that has small businesses the most concerned.

                                                        Posted by on Wednesday, September 15, 2010 at 01:08 AM in Economics | Permalink  Comments (52) 


                                                        Tuesday, September 14, 2010

                                                        links for 2010-09-14

                                                          Posted by on Tuesday, September 14, 2010 at 11:02 PM in Economics, Links | Permalink  Comments (15) 


                                                          The U.S. Needs a New and Improved New Deal

                                                          I have a new column at the Fiscal Times:

                                                          The U.S. Needs a New and Improved New Deal

                                                            Posted by on Tuesday, September 14, 2010 at 08:46 AM in Economics, Fiscal Times, Social Insurance | Permalink  Comments (105) 


                                                            Basel III

                                                            I have a few thoughts at MoneyWatch on the new bank regulations in Basel III:

                                                            Basel III

                                                              Posted by on Tuesday, September 14, 2010 at 08:28 AM in Economics, Financial System, MoneyWatch, Regulation | Permalink  Comments (3) 


                                                              The IMF Calls for Job Creation

                                                              As Paul Krugman noted, the OECD has "climbed down" from its recommendation that advanced nations begin cutting spending and raising interest rates right away. The IMF seems to be tempering its message as well:

                                                              I.M.F. Calls for Countries to Focus on Creating Jobs, by Liz Alderman, NY Times: Rising long-term unemployment, especially among young people, poses the next big threat to the global economic recovery, the International Monetary Fund warned on Monday. ... Dominique Strauss-Kahn, the managing director of the I.M.F., said the financial crisis “won’t be over until unemployment significantly decreases.”
                                                              Mr. Strauss-Kahn urged governments to start factoring back-to-work policies into their overall equation for stoking growth. He added ... that a failure to halt persistent high joblessness could fan social tensions in several countries and restrain growth over time. ...
                                                              While governments hit by the financial crisis have had to tighten their belts, in part to address investor concern about rising debt, countries that need to rebuild credibility should first reallocate spending to get the long-term unemployed and young people back into the labor market, said Olivier J. Blanchard, the I.M.F.’s chief economist. ...
                                                              Countries that have so far avoided the harsh judgment of financial markets could afford a small increase in debt to ward off persistent joblessness, Mr. Blanchard said. He added that such a move could pay for itself in the form of increased economic activity. ...
                                                              Policy makers at the conference referred to the prospect of rising long-term unemployment as a crisis... Mr. Blanchard ... said the United States, too, should consider subsidies to help the long-term unemployed...

                                                                Posted by on Tuesday, September 14, 2010 at 12:21 AM in Economics, Unemployment | Permalink  Comments (8) 


                                                                Monday, September 13, 2010

                                                                links for 2010-09-13

                                                                  Posted by on Monday, September 13, 2010 at 11:02 PM in Economics, Links | Permalink  Comments (28) 


                                                                  FRBSF Economic Letter: Labor Force Participation and the Future Path of Unemployment

                                                                  How many jobs do we need to create each month on average in order to bring the unemployment rate down to 8% by June 2012? Uncertainty about how the labor force participation rate will change between now and then lead to uncertainty in this number, but the estimates range from 208,000 to 294,000 jobs per month (source):

                                                                  Figure 1
                                                                  Job creation needed per month

                                                                  Assuming 8% unemployment in June 2012Job creation needed per month; Assuming 8% unemployment in June 2012
                                                                  Source: Sources: BLS, CBO, SSA, authors' calculations.

                                                                  If the SSA is right and labor force participation falls to 64.6% in 2012, we will need to create an average of 208,000 jobs per month over the over the 22 months beginning in September 2010 to bring the unemployment rate down to 8% in June 2012. But if the labor force participation rate rises to 65.5%, as the BLS predicts, we will need to add 294,000 jobs per month in order to reach that level.

                                                                  An 8% unemployment rate 22 months from now would be an improvement, but nothing to write home about. An 8% rare is still fairly elevated and we should try to do better. But given the job creation rates we've seen lately -- the numbers are far short of even the lowest estimate of what is needed to hit the 8% target -- and the lack of any serious attempts from Congress to spur additional job creation, we'll be lucky to achieve even that.

                                                                    Posted by on Monday, September 13, 2010 at 06:02 PM in Economics, Unemployment | Permalink  Comments (23) 


                                                                    Lieberman Favors Extension of Bush-Era Tax Rates for the Wealthy

                                                                    Joe Leiberman, team player:

                                                                    Lieberman Favors Extension of Bush-Era Tax Rates, NY Times: ...Senator Joseph I. Lieberman, the Connecticut independent who is aligned with the Democrats, said on Monday that he favored maintaining the lower rates for everyone, including the wealthiest Americans, for at least one more year.
                                                                    “I don’t think it makes sense to raise any federal taxes during the uncertain economy we are struggling through,” Mr. Lieberman said... “The more money we leave in private hands, the quicker our economic recovery will be. And that means I will do everything I can to make sure Congress extends the so-called Bush tax cuts for another year, and takes action to prevent the estate tax from rising back to where it was.” ...
                                                                    Senate Republicans control enough votes to use the threat of a filibuster to block any legislation on the tax cuts that they do not support. Without the support of all 59 members of the Democratic caucus, it would be all but impossible for Democratic leaders to overcome such a block. ...
                                                                    Mr. Lieberman ... did not say whether he would join Republicans in such a filibuster. But in similar situations in the past, on issues that he feels strongly about, he has been open to teaming up with them.
                                                                    The other Senate Democrats who have expressed doubts about letting the tax breaks expire for the rich are Evan Bayh of Indiana, Kent Conrad of North Dakota, Ben Nelson of Nebraska and Jim Webb of Virginia. ...

                                                                    Many of the Democrats supporting an extension of the tax cuts for the wealthy have expressed concern about deficits in the past. Interesting that when push comes to shove, the wealthy are more important that the deficit. It's framed in terms of worries about the effects on spending, but as noted below, if that is really the concern there are better ways to address it than tax cuts for high income taxpayers.

                                                                    If Lieberman is really concerned about the effects on aggregate demand -- which would likely be relatively small for wealthy taxpayers -- he could have proposed transferring the tax cut from the wealthy to lower income groups where the money is more likely to be spent. The effects on aggregate demand would be much larger. The fact that he didn't propose this, and instead chose to defend tax cuts for the wealthy on such a flimsy basis -- and threw in the estate tax for good measure -- is telling as to what his real concern is.

                                                                      Posted by on Monday, September 13, 2010 at 11:34 AM in Economics, Fiscal Policy, Politics, Taxes | Permalink  Comments (40) 


                                                                      Paul Krugman: China, Japan, America

                                                                      What should the US do about China's currency policy?:

                                                                      China, Japan, America, by Paul Krugman, Commentary, NY Times: Last week Japan’s minister of finance declared that he and his colleagues wanted a discussion with China about the latter’s purchases of Japanese bonds, to “examine its intention” — diplomat-speak for “Stop it right now.” The news made me want to bang my head against the wall in frustration.
                                                                      You see, senior American policy figures have repeatedly balked at doing anything about Chinese currency manipulation, at least in part out of fear that the Chinese would stop buying our bonds. Yet in the current environment, Chinese purchases of our bonds don’t help us — they hurt us. The Japanese understand that. Why don’t we?
                                                                      Some background: If discussion of Chinese currency policy seems confusing, it’s only because many people don’t want to face up to the stark, simple reality — namely, that China is deliberately keeping its currency artificially weak.
                                                                      The consequences of this policy are also stark and simple: in effect, China is taxing imports while subsidizing exports, feeding a huge trade surplus. ... And in a depressed world economy, any country running an artificial trade surplus is depriving other nations of much-needed sales and jobs. Again, anyone who asserts otherwise is claiming that China is somehow exempt from the economic logic that has always applied to everyone else.
                                                                      So what should we be doing? U.S. officials have tried to reason with their Chinese counterparts, arguing that a stronger currency would be in China’s own interest. They’re right about that: an undervalued currency promotes inflation, erodes the real wages of Chinese workers and squanders Chinese resources. But while currency manipulation is bad for China as a whole, it’s good for politically influential Chinese companies — many of them state-owned. ...
                                                                      Time and again, U.S. officials have announced progress on the currency issue; each time, it turns out that they’ve been had. ... Clearly, nothing will happen until or unless the United States shows that it’s willing to do what it normally does when another country subsidizes its exports: impose a temporary tariff that offsets the subsidy. So why has such action never been on the table?
                                                                      One answer, as I’ve already suggested, is fear of what would happen if the Chinese stopped buying American bonds. But this fear is completely misplaced: in a world awash with excess savings, we don’t need China’s money...
                                                                      It’s true that the dollar would fall if China decided to dump some American holdings. But this would actually help..., making our exports more competitive. Ask the Japanese, who want China to stop buying their bonds because those purchases are driving up the yen.
                                                                      Aside from unjustified financial fears, there’s a more sinister cause of U.S. passivity: business fear of Chinese retaliation.
                                                                      Consider a related issue: the clearly illegal subsidies China provides to its clean-energy industry. These subsidies should have led to a formal complaint from American businesses; in fact,... “multinational companies and trade associations in the clean energy business, as in many other industries, have been wary of filing trade cases, fearing Chinese officials’ reputation for retaliating ... and potentially denying market access to any company that takes sides against China.”
                                                                      Similar intimidation has surely helped discourage action on the currency front. So this is a good time to remember that what’s good for multinational companies is often bad for America, especially its workers.
                                                                      So here’s the question: Will U.S. policy makers let themselves be spooked by financial phantoms and bullied by business intimidation? Will they continue to do nothing in the face of policies that benefit Chinese special interests at the expense of both Chinese and American workers? Or will they finally, finally act? Stay tuned.

                                                                        Posted by on Monday, September 13, 2010 at 01:17 AM in China, Economics, Financial System, International Finance | Permalink  Comments (163) 


                                                                        "All I Got was This Lousy T-Shirt"

                                                                        Why do people believe that the stimulus was ineffective even though there's considerable evidence pointing in the other direction?:

                                                                        Second Helpings, by James Surowiecki: When President Obama unveiled an array of new tax-cut and spending proposals last week, one word was noticeably missing from his speeches: “stimulus.” Republicans, meanwhile, energetically set about decrying the plan as “more of the same failed ‘stimulus’ ”... as if the word itself were a damning indictment. ... This wouldn’t be surprising if we were talking about a failed program. But, by any reasonable measure, the $800-billion stimulus package ... was a clear, if limited, success. ...
                                                                        Politically, however, none of this has made any difference. Polls show that a sizable majority of voters think that the stimulus either did nothing to help or actively hurt the economy, and most people say that they’re opposed to a new stimulus plan. The hostility has numerous sources. Many voters conflate the stimulus bill with the highly unpopular bailouts of the banking sector...; Republicans have done a good job of encouraging such misconceptions... Also, the ... Administration’s forecasts about the recession ... were too optimistic, and so its promises about what the stimulus would accomplish set the public up for disappointment.
                                                                        But the most interesting aspect of the stimulus’s image problems concern its design and implementation. Paradoxically, the very things that made the stimulus more effective economically may have made it less popular politically. For instance, because research has shown that lump-sum tax refunds get hoarded rather than spent, the government decided not to give individuals their tax cuts all at once, instead refunding a little on each paycheck. The tactic was successful at increasing consumer demand, but it had a big political cost: many voters never noticed that they were getting a tax cut. Similarly,... the billions of dollars that went to state governments ... helping the states avoid layoffs and spending cuts ... didn’t get much notice..., saving jobs just isn’t as conspicuous as creating them. Extending unemployment benefits was also an excellent use of stimulus funds... But unless you were unemployed this wasn’t something you’d pay attention to.
                                                                        The stimulus was also backloaded, so that only a third was spent in the first year. This reduced waste, since there was more time to vet projects, and insured that money would keep flowing into 2010, lessening the risk of a double-dip recession. But it also made the stimulus less potent in 2009, when the economy was in dire straits, leaving voters with the impression that the plan wasn’t working. More subtly, while the plan may end up having a transformative impact on things like the clean-energy industry, broadband access, and the national power grid, it’s hard for voters to find concrete visual evidence of what the stimulus has done... That’s a sharp contrast with the New Deal legacy of new highways, massive dams, and rural electrification. Dramatic, high-profile deeds have a profound effect on people’s opinions, so, in the absence of another Hoover Dam or Golden Gate Bridge, it’s not surprising that the voter’s view is: “We spent $800 billion and all I got was this lousy T-shirt.” ...

                                                                        A little over a year ago, I talked about why it's so hard to tell if the stimulus worked:

                                                                        This sounds familiar:

                                                                        Ecology is one of the hardest branches of biology, possibly of all science. Real ecological communities are fantastically complex ... and hard to dissect and understand. Experiments in the wild are difficult to control, and important variables are often hard to measure. ... Experiments in the laboratory are problematic too. ...

                                                                        Much of the uncertainty in economics derives from our inability to do laboratory experiments, and that includes uncertainty about which model best describes the macroeconmy. 

                                                                        When the present crisis is finally over, those who advocated fiscal policy, those who advocated monetary policy, and those who advocated no policy at all will all say "I told you so" based upon their reading of the evidence.

                                                                        Some New Keynesians will cite fiscal policy as the important policy response, and the timing of the policy relative to the recovery will likely support that argument. Other New Keynesians along with Monetarists (e.g. Lucas and others who believe monetary policy can help, but fiscal policy is ineffective) will insist it was monetary policy that saved us. The timing of the monetary policy response will support their position as well.

                                                                        Still others, those such as Prescott who believe in Real Business Cycle models, will say the economy recovered despite policy, and would have recovered all that much faster if government hadn't gotten in the way. Without a baseline to refer to showing what would have happened without policy, it would be hard to refute this argument.

                                                                        Once this is all over, there will be ways to tease this out of the data, e.g. the pattern of the response of key macroeconomic variables may be most consistent with one of the policies, but there will still be considerable uncertainty due to the high correlation in the timing of the monetary and fiscal policy responses (cross-country studies could help too since the policy response varied by country, but other differences across countries that are difficult to control for making these estimates uncertain as well).

                                                                        Ideally, we would go to the lab and run the economy with the same initial conditions, say, 1,000 times with no policy intervention at all to establish the average non-intervention response (and its variance), i.e. the baseline, an important missing piece of information when all you have is non-experimental data. Then, we would run the economy again with a monetary policy response to the crisis 1,000 times (or do several experiments with different monetary policy responses to see which is best), and yet again 1,000 more times with fiscal policy (or, as with monetary policy, perhaps several fiscal polices involving different levels of spending and taxes), then compare the results to see how well each policy attenuates the cycle. (I would also want to run the economy with several combinations of the two polices in case there are important interaction effects the experiments with individual treatments might miss.)

                                                                        That would probably give us a pretty good idea about which policy works best. However, without the ability to do experiments, the best we can do is to build a model of the economy based upon historical data, and then use the model to simulate the experiments above. That is, estimate the model based upon actual data, then run it with various combinations of monetary and fiscal policy and see how the outcome varies with differences in policy. Unfortunately, the answers you get are only as good as the model used to get them, and considerable uncertainty remains over which macroeconomic model is best (which is why we have Real Business Cycle, New Keynesian, and Monetarist type macroeconomic models along with all their various sub forms).

                                                                        Here's another way to think about it. Macroeconomists know all of the major historical episodes and correlations that a model must explain. We can't do experiments, so there is just one set of data, and of course any model that is built will be able to explain how these data evolve over time. And it's possible to build different models that explain the data equally well. If we could do experiments, we could test these models in ways that would potentially rule some of them out, but with just one set of data and models built specifically to explain the data such testing is not possible.

                                                                        So we have to wait for time to bring us more data and then see if the model can explain them, test the models across countries, find things we didn't know about when we built the model and test the model against those -- and there are other ways to get at this -- but for the most part it's time that settles these issues. The models either do or do not continue to explain new data as they arrive (e.g. an unexpected Great Recession).

                                                                        But at any point in time, it will be difficult to distinguish between different models because those models are built to explain everything that is known about the historical macro data. Perhaps some time in the distant future when we have much more data than we have now, it will become more difficult to construct competing models and we will begin to converge on a common theoretical structure -- it seemed like we were headed in that direction prior to the recent crisis -- but for now we are stuck arguing about which model is best without the means to turn to the data and clearly distinguish one from the other.

                                                                          Posted by on Monday, September 13, 2010 at 01:08 AM in Economics, Fiscal Policy, Macroeconomics, Methodology | Permalink  Comments (31) 


                                                                          Fed Watch: The Fair

                                                                          Tim Duy:

                                                                          The Fair, by Tim Duy: A man takes his son to the county fair; the lights and sounds of the amusement rides are like a magnet to the boy. The boy, however, is penniless. His father, seeing the longing in his son's eyes, hands the boy a dollar for the rides, but quizzically adds "if it looks like you are about to have any fun with that dollar, I will take it back from you." The boy is puzzled. First, a dollar only buys three tickets, and the least expensive ride is four tickets. Plus, Dad said he would take the dollar back if he went to buy tickets. So what is the point of even trying to buy any tickets?

                                                                          Consequently, the father and son stand at the edge of the midway, the father wondering why his son simply stands there while the son wonders why his dad doesn't want him to have any fun. They are soon joined by the boy's grandfather, who, assessing the situation, says that the father should never have given the son a dollar in the first place. "He will just buy candy, which will cost you more later when you have to take him to the doctor to treat diabetes." The father neither agrees or disagrees. Along comes a trusted uncle, who says to give the boy another dime, but " then if he looks like he will have any fun, take back a quarter."

                                                                          The grandfather and uncle start bickering, loudly, in public, about what to do with the boy and his dollar. Soon another uncle rushes into the fray, proclaiming it is pointless to give the boy a dollar because all the workers are already busy helping other fairgoers. "He can't buy anything anyway, and if he tries, he will just drive up prices for all his cousins." The discussion becomes increasingly heated, drawing the boy's cousins away from the rides. The lights and noise of the fair fade as lines dwindle and the rides grow silent.

                                                                          All the while, the confused boy is wondering why his father just stands there, refusing to criticize the grandfathers and uncles even as the argue increasingly silly positions. Finally, the father, realizing the boy's confusion, turns to him and says "Reaching consensus in the family is always more important than the fair." The arguing continues as employees begin to turn off the rides, one by one.

                                                                          This, I believe, is an apt analogy of the current state of monetary policy. A policy that is supporting disinflationary expectations simply because it lacks a credible commitment to any other outcome.

                                                                          Why does policy lack a credible commitment? First, as I think has been clear from day one of the Fed's quantitative easing policy, policymakers eagerly await the opportunity to reduce the balance sheet - the expansion of the balance sheet was never intended to yield a permanent increase in the money supply, and as such should have had little impact on long run expectations. As recently as Federal Reserve Chairman Ben Bernanke's July Congressional testimony, policymakers were stressing the ability of the Fed to reduce the balance sheet, clearly much more concerned about the inflationary potential of their actions than the ongoing disinflationary impact of being stuck at a subpar equilibrium. Only recently has attention turned to the possibility of additional action, and then only under critical pressure. When additional action is taken, it will almost certainly be in the context of a temporary action, the Fed will stand ready to withdraw the stimulus should it look like economic agents are having any fun with that infusion of cash.

                                                                          Moreover, I do not believe the swelling of the balance sheet - albeit massive in the eyes of policymakers - sufficed to convince market participants that the Fed was committed to maintaining inflation expectations. St. Louis Federal Reserve Chairman James Bullard, in his "Seven Faces" paper, claims that the suggestions that the appropriate Federal Funds target should have been negative 6% are "nonsensical." And, of course, in a sense they are - zero is indeed the lower bound. But economists also suggested estimates of the quantitative equivalent of negative 6%, perhaps something on the order of a balance sheet expansion to $10 trillion, far beyond what Fed policymakers found tolerable. And I think that big number was important - it gave an indication of the size of monetary commitment consistent with previous policy response. The failure to meet that commitment could reasonably be interpreted by market participants as an indication the Fed was willing to accept the disinflationary impact of the Great Recession, perhaps so far as seeing the event as another opportunity for opportunistic disinflation.

                                                                          Moreover, any sense that the policy action to date was acceptably insufficient was reinforced by the Fed's own forecasts, which undeniably reveal an expectation that policymakers anticipate an agonizingly long recovery, yet decline to add additional stimulus. Recall that the most recent FOMC decision only prevents premature tightening of policy, not a stimulus boost. Moreover, consider Bullard's remarks Friday:

                                                                          Continue reading "Fed Watch: The Fair" »

                                                                            Posted by on Monday, September 13, 2010 at 12:42 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (13) 


                                                                            Sunday, September 12, 2010

                                                                            links for 2010-09-12

                                                                              Posted by on Sunday, September 12, 2010 at 11:02 PM in Economics, Links | Permalink  Comments (14) 


                                                                              Boehner Signals He’s Open to Obama Tax Cut

                                                                              Is Boehner backing off his position that the tax cuts for the wealthy must be extended?:

                                                                              House G.O.P. Leader Signals He’s Open to Obama Tax Cut, by David Herszenhorn, NY Times: The House Republican leader, Representative John A. Boehner of Ohio, said on Sunday that he was prepared to vote in favor of legislation that would let the Bush-era tax cuts expire for the wealthiest Americans if Democrats insisted on continuing the lower rates only for families earning less than $250,000 a year.
                                                                              Speaking on “Face the Nation” on CBS, Mr. Boehner made clear that he supports continuing the lower tax rates at all income levels and that he believes the Democrats would be making a mistake by increasing taxes on anyone, given the weak economy.
                                                                              Mr. Boehner ... said... “I think raising taxes in a very weak economy is a really, really bad idea,” ...

                                                                              That's very Keynesian of him to have the concern that "raising taxes in a very weak economy is a really, really bad idea," and there's an easy response for Democrats, one I discuss here. The Democrats say okay, if that's your concern, why not transfer the tax cuts, temporarily, to lower income groups who are much more likely to spend the money, or use it to backfill state and local budgets to stop further job losses? There are all sorts of ways to use the money that would be more stimulative than continuing the tax cuts for the wealthy, so if your objection is that raising taxes in a recession is "a really, really bad idea," then transfer the tax cuts where they will do the most good.

                                                                              One more note. I am not expecting that Boehner will support the bill when it comes time to actually cast a vote. This is political posturing that is probably based upon polling data showing that most people do not support his original position. If and when it comes time to cast his vote, he will likely find some other provision in the bill, or some consideration he will claim was not present when he made this statement, to rationalize a no vote.

                                                                                Posted by on Sunday, September 12, 2010 at 11:50 AM in Economics, Fiscal Policy, Taxes | Permalink  Comments (30) 


                                                                                Williamson: Monetary Policy Issues

                                                                                Stephen Williamson discusses the Wall Street Journal Symposium on monetary policy. He reacted much as I did, though as noted below I at least found one statement I could support:

                                                                                Two days ago, the Wall Street Journal published a "symposium," titled "What Should the Federal Reserve Do Next," with short pieces by John Taylor, Richard Fisher (Dallas Fed President), Frederic Mishkin, Ronald McKinnon, Vincent Reinhart, and Allan Meltzer. The WSJ picked a group of conservative economists with a considerable amount of accumulated policy experience among them, and including one sitting Federal Reserve Bank President (Fisher). One would think we could get something useful out of these guys. Well, apparently not.

                                                                                While I mostly agree with what he says, I have a few quibbles. Stephen Williamson says:

                                                                                Many central banks focus on "core" measures of inflation. I think that's nonsense. The idea is that we should ignore volatile prices when we think about inflation targeting, which seems akin to ignoring investment and consumer durables expenditures during recessions. Some people draw distinctions between prices that are "sticky" and those that are not, which seems like a related, and equally bad, idea. Since the costs of inflation are related to the fact that we write contracts in nominal terms, which makes inflation uncertainty bad, it seems we should aim for predictability in the rate of change in the broadest possible measure of the price level, which for me is the implicit GDP price deflator.

                                                                                Monetary policy works with a lag, so we need to know about inflation in the future -- that's the target we are trying to hit. There is evidence core inflation is better than headline inflation at predicting future headline inflation. Here's Mike Bryan of the Cleveland Fed (see here too):

                                                                                Michael Bryan, an economist at the Cleveland Fed, says the bank’s trimmed mean consumer price index does a better job in the short term at predicting future overall inflation than core inflation does. “It’s really reducing the noise and improving the signal,” Bryan said. “There’s almost no signal in the overall month-to-month CPI.”

                                                                                The same is true for inflationary expectations. I should add that the evidence is a bit more mixed than this implies, e.g. there is one paper that argues the core inflation rate produces a biased estimate of future inflation, but my point is that there isn't an open and shut case against the use of core inflation even if you think headline inflation is the right quantity to target. We also differ on which price measure to use, I prefer the PCE index rather than the nominal GDP deflator since I think it produces a measure closer to what we have in mind in our theoretical models.

                                                                                I should also add that the objection to using a weighted price index, perhaps one that includes wages and asset prices in addition to the usual components -- where the weights are based upon the degree of stickiness -- is really an objection to the underlying mechanism used to model price stickiness (the "Calvo Fairy"). If you accept the mechanism, then this approach has theoretical support (see here for a discussion from Woodford on this point).

                                                                                He also objects to the use of the output gap in the Taylor rule, partly based upon measurement issues, and calls for pure inflation targeting. However, while I agree measurement is always a difficult issue, one that goes beyond concerns about how to measure the gap (e.g. which inflation measure is best?), that concern is not uncommon and not enough to pose an insurmountable objection. More importantly, the literature on divine coincidence (here and here) suggests that there can be advantages to a rule that includes gap measures. That is, a pure inflation target does not do as good a job of maximizing welfare as a rule that includes both inflation target and and output gap components.

                                                                                But I have no disagreement at all with his (mostly negative) comments regarding the contributions of Fisher, Taylor, and Meltzer. On Fisher he says:

                                                                                Let's start with the low point. Fisher should win the bad analogy contest with this:
                                                                                One might assume that with more than $1 trillion in excess bank reserves and significant amounts of cash held by businesses, the gas tank of those who have the capacity to hire is reasonably full. One might also conclude that the Fed, having cut the cost of interbank overnight lending to near zero and used quantitative easing to coax the entire yield curve downward, has driven the cost of gas to virtually nil for businesses that are creditworthy. And yet businesses still aren't hiring.
                                                                                So, the gas is in the tank, the Fed has done all it can by making the cost of gas zero. So why won't the car go? Fisher says:
                                                                                If businesses are more certain about future policy, they'll release the liquidity they're now hoarding.
                                                                                He's talking about fiscal policy:
                                                                                Fiscal and regulatory authorities share significant responsibility for incentivizing economic behavior through taxes, spending and rule making.
                                                                                So, apparently the person driving the car, which is full of cheap gas, is paralyzed with fear - he or she might get stopped at the toll both, have to obey speed limits, etc. If Fisher is worried about policy uncertainty, he should probably clean his own house first (to use another analogy). What does the Fed intend to do with the more than $1 trillion in mortgage-backed securities (MBS) on its balance sheet. Will it hold those forever? Will they be sold off slowly? If so, when, and at what rate? What's with that "extended period" language in the FOMC policy statement? How long is that period? How do we know when it is time for the Fed to tighten? When the time comes to tighten, how does the Fed intend to do it - raise the interest rate on reserves, sell Treasuries, sell MBS?

                                                                                Finally, Williamson doesn't discuss the contributions of Reinhardt, McKinnon, and Mishkin, and while Mishkin and McKinnon deserve to be ignored, I thought Reinhardt had the most reasonable answer, one I could support:

                                                                                The Fed should promise to purchase government and mortgage-related securities between its regularly scheduled meetings as long as activity is forecast to be subpar and inflation is low or headed down. Purchases of, say, $100 billion every six-to-eight weeks would add up to a number worthy of shock and awe for those with a somber economic outlook.
                                                                                But those foreseeing a quick return to above-trend growth or expecting a slower trend would similarly be reassured that the Fed would not keep its foot on the accelerator for too long. Most importantly, by linking to economic conditions, the Fed would not be providing an open-ended promise to monetize the federal debt.

                                                                                  Posted by on Sunday, September 12, 2010 at 10:29 AM in Economics, Monetary Policy | Permalink  Comments (4) 


                                                                                  Saturday, September 11, 2010

                                                                                  links for 2010-09-11

                                                                                    Posted by on Saturday, September 11, 2010 at 11:03 PM in Economics, Links | Permalink  Comments (12) 


                                                                                    "Obama Should Follow in FDR's Footsteps"

                                                                                    There are lots and lots of things that need attention in our cities and counties, starting with, but by no means limited to, infrastructure. Labor and raw materials are relatively cheap due to the recession, and interest rates will never be lower, so why don't we hire people to do what needs to be done?:

                                                                                    Obama should follow in FDR's footsteps, by Nick Taylor, Commentary, LA Times: As President Obama weighs his options for adding jobs and pumping up the economy ... he might look back for guidance to Franklin Roosevelt.
                                                                                    Indeed, Obama's experience so far resembles FDR's first uneven stabs at job creation. Roosevelt accepted the Democratic nomination in 1932... When he took office, with the unemployment rate at 24.9%, he created the Civilian Conservation Corps... But it was too limited... The "CCC boys"  ... never numbered more than 300,000... Roosevelt continued his efforts with the Federal Emergency Relief Administration..., it put 2 million people to work by the fall of 1933...
                                                                                    These efforts still left far too many people out of jobs. As winter approached, relief administrator Harry Hopkins persuaded Roosevelt to create a temporary jobs program that would give the private economy a few more months to pick up steam. The Civil Works Administration put more than 4 million workers into jobs during the winter of 1933-34. They mostly repaired roads, parks and public buildings, but there were jobs for teachers and other white-collar workers too.
                                                                                    The CWA ended, as designed, after just five months. But unemployment remained unacceptably high. Like Obama today, Roosevelt had midterm elections to think about. His critics accused him of socialism and fretted publicly that large deficits would ruin the country. They insisted that workers would ... never be weaned off the government's largesse.
                                                                                    But despite his vocal opponents, in January 1935, FDR announced his intention to launch the massive jobs program that became the Works Progress Administration. ... The WPA addressed a range of long-standing infrastructure needs, including roads and bridges, hospitals and water treatment plants, and airports. Its workers fought floods and forest fires and cleaned up after hurricanes. Its sewing rooms made clothing and blankets that went out to disaster victims. The WPA also employed nurses, doctors, teachers, librarians and artists. By the fall of 1936, 3.3 million people were on the WPA payroll. The stimulus provided by those jobs buoyed the economy. By the spring of 1937, after Roosevelt's landslide reelection, the country's unemployment rate had dropped to 14%.
                                                                                    FDR then, again like Obama, heard calls to cut spending and balance the budget. ... And he heeded them. He slashed WPA spending by two-thirds ... for the year starting July 1937. Half as many workers — 1.65 million — would get WPA paychecks.
                                                                                    At the same time, Roosevelt tightened bank reserve requirements. Deductions for the new Social Security System took more money out of the economy. ... That fall, industrial production fell, the stock market plunged and, by the end of the year, unemployment had surged, with another 2 million workers losing their jobs. Republicans called it the Roosevelt recession.
                                                                                    In the spring of 1938, Roosevelt decided he'd had enough of budget-cutting. He resumed spending, and soon the WPA rolls were back above 2 million, on their way to an all-time high of 3.4 million.
                                                                                    The lesson for Obama in all this is that stimulus works, and the sooner and more aggressive, the better..., a push today on new infrastructure would also provide lasting and necessary benefits. ... An America prepared today to meet the future will be applauded long after this recession is consigned to the history books. ...

                                                                                    Millions of people out of work, vast needs throughout the nation, and a president unwilling to fight to bring the two together because, I don't know, it's not bipartisan? Whatever the reason, there are many, many areas where we could put people to work where the benefits exceed the costs, including valuable public goods that the private sector will not provide, but we don't seem to be willing to allow the government to broker these exchanges. It's frustrating. People could be helped, and it would make us all better off, but it's hard to see how this could possibly happen at the scale that is needed.

                                                                                    Update: I should have waited until this came out before doing this post:

                                                                                    Building the Bridges to a Sustainable Recovery, by Robert H. Frank, Commentary, NY Times: Last year’s economic stimulus program helped stem a crisis that was poised to rival the Great Depression. ... Now, those stimulus payouts are waning... As a result, a fragile economic recovery is faltering. ...
                                                                                    All the while, however, we’re facing vivid examples of failing infrastructure across the country. Clearly, the maintenance and rebuilding of bridges, roads, water systems and the like can’t be postponed forever. And the work will never be cheaper ... than right now, when high unemployment and excess capacity have put the opportunity cost of the necessary labor and equipment near zero. ...
                                                                                    According to data compiled by the civil engineers’ society, planned spending across 15 categories of infrastructure, including aviation, drinking water systems, energy programs, levees, roads, schools and wastewater treatment, will fall short ... by a cumulative total of more than $1.8 trillion in the next five years. ...
                                                                                    Deferring maintenance does nothing to alleviate our national indebtedness; in fact, it makes the problem far worse. According to the Nevada Department of Transportation, for instance, rehabilitation of a 10-mile section of I-80 that would cost $6 million this year would cost $30 million in two years, after the road deteriorated further.
                                                                                    If such a project is at all representative, spending an extra $100 billion nationwide on interstate highway maintenance now would reduce the national debt two years from now by several hundred billion dollars...
                                                                                    Some people object that infrastructure spending takes too long to roll out. But many projects could be started immediately. And remarkably low long-term interest rates imply that markets expect several more years of sluggish economic activity, so even projects that take a little longer would still be timely.

                                                                                    But won’t this extra spending make the deficit problem worse? A better question is this: Why is anyone worried about short-run deficits in the first place? Deficits are a long-run problem..., the short-run imperative is to increase total spending by enough to put everyone back to work as quickly as possible. ...

                                                                                    With the midterm elections looming and deficit hysteria at a fever pitch, it is far from certain that even the president’s modest proposal can gain Congressional approval. If it can’t, our infrastructure clearly isn’t the only thing that needs fixing.

                                                                                      Posted by on Saturday, September 11, 2010 at 02:34 PM in Economics, Fiscal Policy | Permalink  Comments (30) 


                                                                                      Why Has Union Membership Declined?

                                                                                      UC Berkeley's Claude Fischer on the decline of unions:

                                                                                      Labor’s laboring effort, by Claude Fischer: ...Historians and sociologists have tried to figure out for many years now why union membership in the United States is so low – now about one-eighth of the employed – compared to elsewhere in the world and why it has dropped so far – down from about one-third in 1955. ...
                                                                                      The United States’ rate of “union density” ... is far below of that of most western European nations (with the interesting exception of France) which range from about 20% to about 60%. While union membership rates have been declining there as well, the drop-off is not nearly as steep as here. ...
                                                                                      As the graph below shows, unionization leaped up during the Depression, New Deal Era, and early post-war period. Since then, it has dropped steadily... Recent studies point to a few key explanations for the precipitous drop in the last half-century. One, clearly, is the ... disappearance of the blue-collar industrial jobs that once spurred demand for unions... Another factor is globalization – both U.S. manufacturers (and now service providers, too) moving ... to low-wage nations and workers from low-wage nations moving into the U.S. economy. Although unions have had a few successes organizing a few immigrant workers, for various reasons the immigrants are a hard-to-unionize work force.

                                                                                      chart showing union density by year, 1880-2000
                                                                                      Union density

                                                                                      Political constraints on unions have also become much more inhibiting over recent decades. Starting with the end of the New Deal and intensifying with the Reagan Administration in 1981, the rules on organizing and the regulatory oversight of the workplace have made it harder to establish and sustain unions. Also, decentralization in the United States ... allows states to set many labor laws. The states with anti-union laws make it especially hard to unionize and, by attracting business, undermine unionization in other states.
                                                                                      In Europe, union membership is often a routine, required part of getting a job and unions have official or semi-official roles (along with associations of employers) in national government... Such a central role for unions would be hard to imagine in the United States. How come?
                                                                                      Why Weak Labor?
                                                                                      This question has perplexed scholars for over a century. Commonly called the “Why No Socialism in America?” question...
                                                                                      The answers have been all over the board: American workers did not need to organize because they flourished without unions; American workers were divided by ethnicity and race in ways European workers were not; employers in the United States were unusually powerful  ... and got governments to crack down on unions (the notorious cases involve state governors using the National Guard to break strikes); the American dream of self-employment distracted workers; the American electoral system prevented a labor party from growing; Americans’ individualism led them to reject collective action; and many more. ...

                                                                                      "Do you approve or disapprove of unions?" chart showing Gallup results
                                                                                      Gallup results. Dark green: approve; light green: disapprove

                                                                                      The political restraints on unions seem to be much harsher than Americans’ opinion about unions. As the Gallup Poll data shown here indicate, approval of unions has slipped about 20 points since their heyday, but in the 2000s Americans have been about twice as likely to approve than disapprove. Perhaps there is something in our politics, as some analysts suggest, that have given employers excessive clout in setting the rules.
                                                                                      Open and Closed
                                                                                      I want to add another consideration: It may not be American individualism that resists unionization, but American voluntarism (as discussed in Made in America). Unions face critical “free-rider” problems if membership is totally voluntary. For example, I could benefit from the union’s effort to improve working conditions at my workplace without paying dues...
                                                                                      To be effective, however, unions usually need some way to enforce or strongly encourage membership and loyalty. The classic mechanism is the “closed” or “union” shop... “Right-to-Work” laws in about half the states make such union-employer contracts illegal... In Europe, as I noted, there are many incentives to encourage or require union membership. ...
                                                                                      Americans have been celebrated for centuries as joiners of voluntary associations. But that may be the kicker: the associations must be voluntary associations... Perhaps, then, Americans are fine with unions – as voluntary associations like churches or social clubs – but reject compulsory ones. And it may be that unions cannot be really effective if the door to come and go is really open. ...
                                                                                      Going back to the graph above, perhaps the great surge in unionization during the middle of the 20th century was Americans’ emergency response to economic collapse – a deviation from their typical practice. Then they started returning to the cultural norm, an insistence on voluntariness. The current economic crisis has not been deep enough – or perhaps not sufficiently exploited – to spur another surge of counter-cultural unionization.

                                                                                      I am happy to stick with the explanation that "our politics ... have given employers excessive clout in setting the rules." But if I were to go down the path the author takes, I think I would attribute it more to our desire for equal opportunity and fairness than our "celebrated" characteristic "as joiners of voluntary associations."

                                                                                      Update: Also, I meant to ask: What caused the sudden decline in support for unions in mid 2000s? Disapproval jumped from around 30% to 45%, then fell back to 41%, and approval fell similarly.

                                                                                        Posted by on Saturday, September 11, 2010 at 10:33 AM in Economics, Politics, Unemployment | Permalink  Comments (85) 


                                                                                        Friday, September 10, 2010

                                                                                        links for 2010-09-10

                                                                                          Posted by on Friday, September 10, 2010 at 11:01 PM in Economics, Links | Permalink  Comments (16) 


                                                                                          Households’ Balance Sheets and the Recovery

                                                                                          This is why I still think tax cuts need to be part of a recovery package, and that it's okay if those tax cuts are saved:

                                                                                          Household-net-worth
                                                                                          [full-sized version]

                                                                                          Quite a bit more on this here: Households’ Balance Sheets and the Recovery, CBS MoneyWatch.

                                                                                          Update: After posting this, I realized I should have said something about distributional issues, and it's coming up in comments. The point that the problem is largest for the middle class and blow is hinted at in the last paragraph of the quote from the original Cleveland Fed article, but I didn't make it explicit enough. I was intending to update the post to include this, but fortunately Mike Rorty covers this issue in a follow-up post to this one, so let me send you there: The Distribution of Households’ Balance Sheets and the Recovery.

                                                                                            Posted by on Friday, September 10, 2010 at 11:51 AM in Economics, Financial System, Fiscal Policy, Saving, Taxes | Permalink  Comments (64) 


                                                                                            Paul Krugman: Things Could Be Worse

                                                                                            Too little too late is better than nothing at all:

                                                                                            Things Could Be Worse, by Paul Krugman, Commentary, NY Times: ...In the 1990s, Japan conducted a dress rehearsal for the crisis that struck much of the world in 2008. Runaway banks fueled a bubble in land prices; when the bubble burst, these banks were severely weakened, as were the balance sheets of everyone who had borrowed in the belief that land prices would stay high. The result was protracted economic weakness.
                                                                                            And the policy response was too little, too late. The Bank of Japan ... was always behind the curve and persistent deflation took hold. The government propped up employment with public works programs, but its efforts were never focused enough to start a self-sustaining recovery. Banks were kept afloat, but were slow to face up to bad debts and resume lending. The result of inadequate policy was an economy that remains depressed to this day.
                                                                                            Yet the picture is grayish rather than pitch black. Japan’s economy may be depressed, but it’s not in a depression. The employment picture has been troubled... But thanks to those government job-creation plans, the country isn’t suffering mass unemployment. Debt has risen, but despite constant warnings of imminent crisis — and even downgrades from rating agencies back in 2002 — the government is still able to borrow, long term, at an interest rate of only 1.1 percent.
                                                                                            In short, Japan’s performance has been disappointing but not disastrous. And given the policy agenda of America’s right, that’s a performance we may wish we’d managed to match.
                                                                                            Like their Japanese counterparts, American policy makers initially responded to a burst bubble and a financial crisis with half-measures. ... The question is: What happens now?
                                                                                            Republican obstruction means that the best we can hope for in the near future are palliative measures — modest additional spending like the infrastructure program President Obama proposed this week, aid to state and local governments to help them avoid severe further cutbacks, aid to the unemployed to reduce hardship and maintain spending power.
                                                                                            Even with such measures, we’ll be lucky to do as well as Japan did at limiting the human and economic cost of the economy’s financial woes. But it’s by no means certain that we’ll do even that much. If the Republicans go beyond obstruction to actually setting policy — which they might if they win big in November — we’ll be on our way to economic performance that makes Japan look like the promised land.
                                                                                            It’s hard to overstate how destructive the economic ideas offered earlier this week by John Boehner, the House minority leader, would be... Basically, he proposes two things: large tax cuts for the wealthy that would increase the budget deficit while doing little to support the economy, and sharp spending cuts that would depress the economy while doing little to improve budget prospects. Fewer jobs and bigger deficits — the perfect combination.
                                                                                            More broadly, if Republicans regain power, they will surely do what they did during the Bush years: they won’t seriously try to address the economy’s troubles; they’ll just use those troubles as an excuse to push the usual agenda, including Social Security privatization. They’ll also surely try to repeal health reform, which would be another twofer, reducing economic security even as it increases long-term deficits.
                                                                                            So I find myself almost envying the Japanese. Yes, their performance has been disappointing. But things could have been worse. And the case Democrats now need to make — the case the president finally began to make in Cleveland this week — is that if Republicans regain power, things will indeed be worse. Americans, understandably, are disappointed over, frustrated with and angry about the state of the economy; but disappointment is better than disaster.

                                                                                              Posted by on Friday, September 10, 2010 at 02:16 AM in Economics, Financial System, Fiscal Policy, Monetary Policy | Permalink  Comments (76) 


                                                                                              They Call Him "The Leader"

                                                                                              John Keefe:

                                                                                              Food Stamps Slated For Cuts, by John Keefe: While the numbers of people receiving food assistance through the USDA SNAP program (formerly know as food stamps) are growing, funding is set to be cut, if a bill passed by the House makes its way into law. It comes down to budget priorities, and is a preview of the “austerity” we will be seeing from federal and state governments as they try to mitigate the costs of the financial crisis and the weak economy we are all grappling with.

                                                                                              Yesterday I wrote about how the SNAP has grown in the past few years (see that post here). ... Mark Thoma followed up on the topic, wondering how food stamps would fare in the proposed rollbacks of federal spending declared by House Minority Leader John Boehner (Republican, Ohio). (See Mark’s post here.)

                                                                                              Mark closes by posing:

                                                                                              Given all the worries Boehner and others have expressed about the bad incentives that social insurance creates, worries that are not supported by the empirical evidence on this question, is this one of the programs that would be on the chopping block? I wish a reporter would ask him that question.

                                                                                              Well, Mark, I’m a reporter, after reading your note I did ask, or at least tried to. I called Rep. Boehner’s press people, and they switched me over to his staff. (They call him “The Leader.”) I left a message, and it’s been several hours but there has been no call back, and I don’t expect one. In my experience politicians don’t like to answer questions, they prefer to make statements, such as this one where The Leader derides recent efforts to restore jobs ...

                                                                                              Anyway, I wasn’t able to reach Rep. Boehner’s people, but here’s what has already happened in the House, two weeks ago, as the Democrats who still are in the majority try to spur the economy with the shrinking funds available, and deal with the political will of Republicans:

                                                                                              This afternoon, the House, reconvened for a special emergency vote, passed a $26.1 billion bill providing aid to cash-strapped state governments. The bill provides $16.1 billion in Medicaid funding and $10 billion to help states keep teachers on the payroll. …

                                                                                              To pay for the bill - Republicans refused to cross the aisle unless the bill was entirely deficit-neutral - the Senate resorted to some controversial cuts… [M]ost controversially, it took $12 billion from future Supplemental Nutrition Assistance Program, or food stamps, funding. Senate aides stress that the cut does not cut the benefits authorized in the most recent Farm Bill. It takes from expanded benefits created in the $787 billion American Recovery and Reinvestment Act, the Feb. 2009 stimulus. ...

                                                                                              Rep. Rosa DeLauro (D-Conn.) has spoken out against the cut to SNAP. “This is a bitter pill to swallow,” DeLauro told The Hill. “I fought very hard for the food assistance money in the Recovery Act and the fact is that participation in the food stamps program has jumped dramatically with the economic crisis, from 31.1 million persons to 38.2 million just in one year.” DeLauro said she will attempt to restore the SNAP funds, though she has not specified how.

                                                                                                Posted by on Friday, September 10, 2010 at 01:34 AM in Economics, Politics, Social Insurance | Permalink  Comments (28) 


                                                                                                Is This Your Grandfather’s Mortgage Crisis?

                                                                                                Via Vox EU:

                                                                                                Is this your grandfather’s mortgage crisis?, by Kenneth A. Snowden, Vox EU: The current mortgage crisis in the US is more severe than any since the 1930s. So it makes good sense to examine the origins, impacts, and consequences of that last great mortgage crisis great mortgage crisis – indeed many commentators have made a direct comparison between the two (see for example Eichengreen and O'Rourke 2010). The case for examining the last great crisis is especially pronounced given that the US Secretary of the Treasury has just asked Americans to “consider the challenge of how to build a more stable housing finance system” (Geithner 2010).

                                                                                                Yet we should be humble in taking up this challenge. We are after all reforming a mortgage system that was built on a framework that Depression-era policymakers forged in response to their own crisis. One of those policymakers was Henry Hoagland, who described the situation he faced in 1935 as a member of the Federal Home Loan Bank Board thus:

                                                                                                [A] tremendous surge of residential building in the [last] decade…was matched by an ever-increasing supply of homes sold on easy terms. The easy terms plan has a catch…[o]nly a small decline in prices was necessary to wipe out this equity. Unfortunately, deflationary processes are never satisfied with small declines in values. In the field of real-estate finance… we have depended so much upon credit that our whole value structure can be thrown out of balance by relatively slight shocks. When such a delicate structure is once disorganized, it is a tremendous task to get it into a position where it can again function normally. (Hoagland 1935)

                                                                                                This column looks back over the terrain that Hoagland described by examining how the residential mortgage market worked before 1930 and how it was changed by crisis and policy in the 1930s. It turns out that this history lesson provides some fresh perspective on today’s mortgage crisis (see my accompanying paper, Snowden 2010, for more details).

                                                                                                Continue reading "Is This Your Grandfather’s Mortgage Crisis?" »

                                                                                                  Posted by on Friday, September 10, 2010 at 12:26 AM in Economics, Housing | Permalink  Comments (9) 


                                                                                                  Thursday, September 09, 2010

                                                                                                  links for 2010-09-09

                                                                                                    Posted by on Thursday, September 9, 2010 at 11:02 PM in Economics, Links | Permalink  Comments (11) 


                                                                                                    "Illegal immigration: What's the real cost to taxpayers?"

                                                                                                    Here's a follow-up to the post on immigration and Social Security:

                                                                                                    Illegal immigration: What's the real cost to taxpayers?, by Edward Schumacher-Matos, Commentary, Washington Post: In 1909, at the height of the last great immigration wave, when immigrants reached a peak of almost 15 percent of the U.S. population, they made up about half of all public welfare recipients. ... In the country's 30 largest cities, meanwhile, more than half of all public school students were the children of immigrants. ...
                                                                                                    This history is forgotten in the angry debate over the cost to taxpayers of unauthorized immigrants and their children today. My recent column reporting that unauthorized immigrants were making unexpectedly large contributions to Social Security, for example, led to denunciations that I was being misleading by not looking at the total fiscal picture.
                                                                                                    The truth is that unauthorized immigrants are probably a net burden on taxpayers in the short term, but only if you consider education as a cost and not as an investment in the nation's future, as it was seen a century ago. ...
                                                                                                    Any fiscal look ... has to be placed in the context of overall economic contribution. Economists overwhelmingly agree that the unauthorized contribute to the nation's economic growth..., though wages for unskilled workers suffer. None of this is to say that we should allow illegal immigration. As Milton Friedman once noted, you can't have open borders and hope to maintain generous government benefits for your citizens. ...
                                                                                                    But you ask: What is the fiscal balance, anyway? No one knows..., no definitive study has been done. ... The most insightful study remains one done by the National Research Council in 1997. ... The study found that an immigrant high school dropout -- which characterizes nearly half of today's unauthorized people -- received $89,000 more in services than he paid in taxes in his life. But an immigrant with at least some college -- a quarter of today's unauthorized -- gave $105,000 more than he got. For the high school graduates left, those who arrived during their teens or earlier were slightly profitable for the government, while the children of those who arrived later paid off the small deficit of their parents. ...
                                                                                                    A tough federal law passed in 1996 has since cut almost all benefits to unauthorized immigrants. Even the Center for Immigration Studies, which advocates forcing out immigrants here illegally, acknowledged that the average undocumented household in 2002 received fully 46 percent less in federal benefits than an American one. But this likely would go up with legalization.
                                                                                                    So, the main question may be: Are they deserving? Look around you at the people whose European-born ancestors were on the dole and overcrowding schools a century ago. You decide.

                                                                                                      Posted by on Thursday, September 9, 2010 at 06:18 PM in Economics, Immigration | Permalink  Comments (36)