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Sunday, October 31, 2010

Paul Krugman: Mugged by the Moralizers

The moralizers are winning, though winning may be the wrong term to use for something that makes us worse off:

Mugged by the Moralizers, by Paul Krugman, Commentary, NY Times: “How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills?” That’s the question CNBC’s Rick Santelli famously asked in 2009, in a rant widely credited with giving birth to the Tea Party movement.
It’s a sentiment that resonates not just in America but in much of the world...: debt is evil, debtors must pay for their sins, and from now on we all must live within our means. And that kind of moralizing is the reason we’re mired in a seemingly endless slump.
The years leading up to the 2008 crisis were indeed marked by unsustainable borrowing... When lenders suddenly decided that they had lent too much,... debtors were forced to slash spending. This pushed the world into the deepest recession since the 1930s. ...
The key thing to bear in mind is that for the world as a whole, spending equals income. If one group of people ... is forced to cut spending to pay down its debts, one of two things must happen: either someone else must spend more, or world income will fall.
Yet those parts of the private sector not burdened by high levels of debt see little reason to increase spending. Corporations are flush with cash — but why expand when so much ... capacity ... is sitting idle? Consumers ... incentive to spend is ... outweighed by worries about a weak job market. Nobody in the private sector is willing to fill the hole created by the debt overhang.
So what should we be doing? First, governments should be spending while the private sector won’t, so that debtors can pay down their debts without perpetuating a global slump. Second, governments should be promoting widespread debt relief: reducing obligations to levels the debtors can handle is the fastest way to eliminate that debt overhang.
But the moralizers will have none of it. They denounce deficit spending, declaring that you can’t solve debt problems with more debt. They denounce debt relief, calling it a reward for the undeserving.
And if you point out that their arguments don’t add up, they fly into a rage. Try to explain that when debtors spend less, the economy will be depressed unless somebody else spends more, and they call you a socialist. Try to explain why mortgage relief is better for America than foreclosing ... at a huge loss, and they start ranting like Mr. Santelli. ...
And those who should know better lack all conviction. John Boehner ... was widely mocked ... when he declared that “It’s time for government to tighten their belts” — in the face of depressed private spending, the government should spend more, not less. But since then President Obama has repeatedly used the same metaphor...
 Meanwhile, the administration’s mortgage modification program — the program that inspired the Santelli rant — has ... accomplished almost nothing. At least part of the reason is that officials were so worried that they might be accused of helping the undeserving that they ended up helping almost nobody.
So the moralizers are winning. More and more voters, both here and in Europe, are convinced that what we need is not more stimulus but more punishment. Governments must tighten their belts; debtors must pay what they owe.
The irony is that in their determination to punish the undeserving, voters are punishing themselves: by rejecting fiscal stimulus and debt relief, they’re perpetuating high unemployment. They are, in effect, cutting off their own jobs to spite their neighbors.
But they don’t know that. And because they don’t, the slump will go on.

    Posted by on Sunday, October 31, 2010 at 11:43 PM in Economics | Permalink  Comments (135) 

    "Foreign Money, National Security, And The Midterm Elections"

    Simon Johnson:

    Foreign Money, National Security, And The Midterm Elections, by Simon Johnson: Campaign contributions by non-citizens are a huge issue lurking behind the midterm elections; they will be even more important in 2012. Think about the economic dynamics:

    1. Americans have a long-standing and well-founded aversion to foreign involvement in their politics, and it is well-established that this can happen in part through corporate “commercial” structures. Thomas Jefferson objected to Alexander Hamilton’s plan for a national bank in part because he feared this would become a stalking horse for the British in some form...
    2. The Supreme Court has determined that corporations can make political contributions virtually without limit, apparently not understanding or not caring that (a) management has a fiduciary responsibility to shareholders, (b) globalization means more foreign shareholders on average..., and (c) at the margin, key strategic shareholders – the people who provide extra capital when the chips are down – increasingly tend to be foreign. Think about the role of Sovereign Wealth Funds in providing funds to our banking system in 2007-08...
    3. During the Reagan years and again, even more, under the Second President Bush, the US ran a large current account deficit – reaching 6 percent of GDP before the 2008 crisis (and still around 3 percent of GDP). You may think this a technical detail that is largely irrelevant to the political process, but you would be wrong. We finance our current account deficit with capital inflows from abroad or, to put that more plainly: Foreigners buy and hold financial assets in the United States. Some of those assets are US government obligations but traditionally and increasingly non-US people have also acquired claims on corporate entities – including common or preferred stock.

    There are good economic reasons to allow foreigners to buy financial assets in the United States. ... And there is nothing wrong per se with running a current account deficit – although it would be much better if we used the inflow of foreign capital to finance investment, rather than (as in the Bush years) tax cuts that just further encourage overconsumption.

    Irrespective of how you feel about foreign capital inflows in economic terms, you have to face the political reality. As foreigners accumulate claims on the United States, they will increasingly diversify into corporate assets... Some of these corporate assets explicitly come with voting rights – but those are supposed to be voting rights over the corporation (or investment fund), not voting rights in political elections.

    We have effectively enfranchised foreigners in US elections. This is clearly and absolutely not what the drafters of the Constitutions had in mind. ...

    The only way to deal with this is to require complete disclosure by all corporate entities ... regarding the contributions they make to any organization or individual involved in political messaging or campaigning. To be sure, this would be onerous. Thomas Jefferson and his colleagues would have wanted it no other way. ...

    And however you prefer to define our legitimate national security interests, how are they consistent with letting foreign citizens influence or even determine the outcome of our elections?

    I agree, we need complete disclosure from corporations on their political contributions (and I'd add contribution limits), and I don't think you have to argue that it allows foreign influence to make this case. The undue influence over elections given to corporations through non-disclosure and the ability to make unlimited contributions is enough for me.

      Posted by on Sunday, October 31, 2010 at 11:34 PM in Economics, Politics | Permalink  Comments (7) 

      links for 2010-10-31

        Posted by on Sunday, October 31, 2010 at 11:01 PM in Economics, Links | Permalink  Comments (18) 

        "David Broder Calls for War With Iran to Boost the Economy"

        I don't know if I can muster the shrillness this deserves, so let me turn it over to Dean Baker and Brad DeLong. Brad DeLong first:

        There Should Be Resignations in Protest and on Principle from the Washington Post Today..., by Brad DeLong: ...but there should be such resignations every day. ...

        David Broder... call[s] for Barack Obama to bomb Iran to get the economy moving? It would be good for the country if this monstrosity shut itself down today. ... Broder is ... monstrous:

        [I]f Obama cannot spur that [economic] growth by 2012, he is unlikely to be reelected.... Can Obama harness the forces that might spur new growth?.... What are those forces?... One is the power of the business cycle.... What else might affect the economy? The answer is obvious, but its implications are frightening. War and peace influence the economy.

        Look back at FDR and the Great Depression. What finally resolved that economic crisis? World War II.

        Here is where Obama is likely to prevail.... [H]e can spend much of 2011 and 2012 orchestrating a showdown with the mullahs. This will help him politically because the opposition party will be urging him on. And as tensions rise and we accelerate preparations for war, the economy will improve.

        I am not suggesting, of course, that the president incite a war to get reelected. But the nation will rally around Obama because Iran is the greatest threat to the world in the young century. If he can confront this threat and contain Iran's nuclear ambitions, he will have made the world safer and may be regarded as one of the most successful presidents in history.

        Dean Baker:

        David Broder Calls for War With Iran to Boost the Economy, by Dean Baker: This is not a joke (at least not on my part). David Broder, the longtime columnist and reporter at a formerly respectable newspaper, quite explicitly suggested that fighting a war with Iran could be an effective way to boost the economy. Ignoring the idea that anyone should undertake war as an economic policy, Broder's economics is also a visit to loon tune land. ...
        Sorry Mr. Broder, outside of Fox on 15th the world does not work this way. War affects the economy the same way that other government spending affects the economy. ...
        If spending on war can provide jobs and lift the economy then so can spending on roads, weatherizing homes, or educating our kids. Yes, that's right, all the forms of stimulus spending that Broder derided so much because they add to the deficit will increase GDP and generate jobs just like the war that Broder is advocating (which will also add to the deficit).
        So, we have two routes to prosperity. We can either build up our physical infrastructure and improve the skills and education of our workers or we can go kill Iranians. Broder has made it clear where he stands.

        Even they aren't shrill enough for my taste. Trying to sell a war by pointing to positive economic and political externalities is pretty disgusting, especially when the same economic benefits and then some can be realized by spending the money on infrastructure instead. Killing Iranians and Americans is not required. (And even if there was some way to justify going to war to spur the economy, the spike in oil prices that would surely occur would likely make things worse, not better.)

        How about a war on joblessness? Had that war been conducted with the support of people like Broder, or without for that matter, the economy would be doing better, and Democrats would be doing better in the polls. I'm convinced of that. But the Broders of the world, the "serious people," aren't so serious when it comes to ordinary households struggling to make ends meet. Where's the support for their struggles? Why aren't they worth spending money on? Grrr.

          Posted by on Sunday, October 31, 2010 at 11:43 AM in Economics, Fiscal Policy, Press | Permalink  Comments (53) 

          Saturday, October 30, 2010

          links for 2010-10-30

            Posted by on Saturday, October 30, 2010 at 11:01 PM in Economics, Links | Permalink  Comments (31) 

            "How Immigrants Create More Jobs"

            Tyler Cowen:

            How Immigrants Create More Jobs, by Tyler Cowen, Commentary, NY Times: In the campaign season now drawing to a close, immigration and globalization have often been described as economic threats. The truth, however, is more complex.
            Over all, it turns out that the continuing arrival of immigrants ... is encouraging business activity here, thereby producing more jobs, according to a new study. Its authors argue that the easier it is to find cheap immigrant labor at home, the less likely that production will relocate offshore. ...
            The study notes that when companies move production offshore, they pull away not only low-wage jobs but also many related jobs, which can include high-skilled managers, tech repairmen and others. But hiring immigrants even for low-wage jobs helps keep many kinds of jobs in the United States... In other words, immigrants may be competing more with offshored workers than with other laborers in America. ...
            Debates on immigration and labor markets reflect some common human cognitive failings — namely, that we are quicker to vilify groups of different “others” than we are to blame impersonal forces.
            Consider the fears that foreign competition, offshoring and immigration have destroyed large numbers of American jobs. In reality, more workers have probably been displaced by machines... Yet we know that machines and computers do the economy far more good than harm and that they create more jobs than they destroy.
            Nonetheless, we find it hard to transfer this attitude to our dealings with immigrants, no matter how logically similar “cost-saving machines” and “cost-saving foreign labor” may be in their economic effects. ...
            As a nation, we ... should be looking to immigration as a creative force in our economic favor. Allowing in more immigrants, skilled and unskilled, wouldn’t just create jobs. It could increase tax revenue, help finance Social Security, bring new home buyers and improve the business environment.
            The world economy will most likely grow more open, and we should be prepared to compete. That means recognizing the benefits — including the employment benefits — that immigrants bring to this country.

              Posted by on Saturday, October 30, 2010 at 04:34 PM in Economics, Immigration, Unemployment | Permalink  Comments (66) 

              "White House Considering 'Decoupling' Top-Tier Tax Cut"

              The administration is considering a new strategy on extending the Bush tax cuts:

              White House considering 'decoupling' top-tier tax cut, by By Lori Montgomery, Washington Post: With Republicans poised to gain ground in Tuesday's elections, the White House is losing hope that Congress will approve its plan to raise taxes on the nation's wealthiest families and is increasingly focusing on a new strategy that would preserve tax breaks for both the wealthy and the middle class.
              According to people familiar with talks at the White House and among senior Democrats on Capitol Hill, breaking apart the Bush administration tax cuts is now being discussed as a more realistic goal. That strategy calls for permanent extension of cuts that benefit families earning less than $250,000 a year, and temporary extension of cuts on income above that amount.
              The move would "decouple" the two sets of provisions, Democrats said, and focus the debate when tax cuts for the rich expired next year or the year after. Republicans would be forced to defend carve-outs for a tiny minority populated by millionaires, an unpopular position that would be difficult to advance without the cover of a broad-based tax cut for everyone, aides in both parties said. ...
              The battle over taxes will be reengaged when lawmakers return to Washington in mid-November. If Congress fails to act before the end of the year, virtually every taxpayer will see increased withholding take a bite out of their paychecks in January.
              Democrats had hoped to deal with the issue before the election but could not agree on a strategy. ...
              While advocating permanent extension, Republican leaders have said they would accept a two-year extension of all the cuts.
              Administration officials said they have begun plotting strategy for the lame-duck legislative session but declined to comment on decoupling or another idea floated in recent weeks: embracing tax breaks for the rich in exchange for Republican support for additional economic stimulus.
              The stimulus could take the form of Obama's proposal to provide additional business tax breaks, which the president touted Friday... Or it could take the form of an extension of Obama's signature tax break for the middle class, Making Work Pay, which is scheduled to expire in December, congressional aides said.

              Why does decoupling and fighting over one versus two years draw a sharper political contrast than decoupling and arguing over zero versus one? Republicans have every intention of making the tax cuts permanent in any case, they're just trying to delay the main battle until they have a better chance of winning. Democrats have misplayed this.

              Also, notice how the talk of additional stimulus from the administration is now entirely about tax cuts? Additional spending, which would have a larger and more certain effect on aggregate demand and employment, is not even mentioned. Talk about giving up without a fight.

              And what kind of deal is "We'll trade tax cuts for the wealthy for tax cuts for business and the middle class" anyway? That sounds like the path to making the tax cuts for the wealthy permanent. There's no need to trade. Put tax cuts for the middle class and businesses to a vote and dare the party that has never seen a tax cut it doesn't like to vote it down.

                Posted by on Saturday, October 30, 2010 at 01:24 AM in Economics, Fiscal Policy, Politics, Taxes | Permalink  Comments (52) 

                Friday, October 29, 2010

                links for 2010-10-29

                  Posted by on Friday, October 29, 2010 at 11:01 PM in Economics, Links | Permalink  Comments (21) 

                  "Friedman was All Wrong about Japan ... and the Great Depression"

                  As I've noted before, one thing I've learned from this recession is that it's not as easy to increase the money supply as I thought. It's easy to create additional bank reserves and increase the monetary base, but if the new reserves simply pile up in the banking system, then they don't have much of an effect on the supply of money:

                  More On Friedman/Japan, by Paul Krugman: ...So: David Wessel quoted what Milton Friedman said about Japan in 1998, and interpreted it as meaning that Friedman would favor quantitative easing now. I think that’s right. And just to be clear, I also favor QE — largely because it might help some, and seems to be just about the only policy lever still available in the face of political reality.

                  But I think it’s also important to note that Friedman was all wrong about Japan — and that you can argue that he was also wrong about the Great Depression, for the same reason.

                  For what Friedman argued, both for Japan in the 1990s and America in the 1930s, was that all the central bank needed to do was more — push out those reserves into the banking system. This would raise the money supply, and a higher money supply would have the usual effects.

                  But the Bank of Japan tried that — and found that pushing more reserves into the banks didn’t even lead to rapid growth in the money supply, let alone end the problem of deflation. Here’s a chart of growth rates of the monetary base and of M2, Friedman’s preferred monetary aggregate:

                  Bank of Japan

                  So, after 2000 the Bank of Japan engineered a huge increase in the monetary base; this was the original quantitative easing. And it didn’t even translate into a surge in the money supply! This is why I’m so skeptical of people who say that all the Fed has to do is target higher nominal GDP growth — in liquidity trap conditions, the Fed doesn’t even control money, so how can you blithely assume that it controls GDP?

                  And this also calls very much into question Friedman’s famous claim that the Fed could easily have prevented the Depression, which gradually got transmuted into the claim that the Fed caused the Depression. Yes, M2 fell — but why should we believe that the Fed had any more control over M2 in the 30s than the BOJ had over M2 more recently?

                  Again, that doesn’t mean that I oppose having the Fed engage in unconventional asset purchases. I’m just trying to be realistic about the likely results. We really, really need expansionary fiscal policy along with Fed policy; and we’re not going to get it.

                    Posted by on Friday, October 29, 2010 at 05:39 PM in Economics, Monetary Policy | Permalink  Comments (91) 

                    Real GDP Grows at 2 Percent in the Third Quarter

                    I just posted this at MoneyWatch:

                    The BEA reports its advanced estimate for GDP in the third quarter:

                    Real gross domestic product ... increased at an annual rate of 2.0 percent in the third quarter of 2010, (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.7 percent

                    Calculated Risk notes "a few key numbers":

                  • "The change in real private inventories added 1.44 percentage points to the third-quarter change in real GDP after adding 0.82 percentage point to the second-quarter change. Private businesses increased inventories $115.5 billion in the third quarter, following increases of $68.8 billion in the second quarter and $44.1 billion in the first."

                    Without the boost in inventories, GDP would have been barely positive in Q3.

                  • "Real personal consumption expenditures increased 2.6 percent in the third quarter, compared with an increase of 2.2 percent in the second."

                    This was a little stronger than expected, and PCE will probably slow over the next couple of quarters.

                  • Investment: Nonresidential structures increased 3.9 percent, equipment and software increased 12.0 percent and real residential fixed investment decreased 29.1 percent.

                    As expected, residential investment declined sharply after the Q2 tax credit boost.

                    Overall this was a weak report and will not derail QE2 next Wednesday (further easing from the Fed).
                  • Positive growth is better than negative growth, but this is a loss relative to trend growth, and the fact the inventories are driving growth is of concern. Dean Baker puts it into perspective:

                    It may not be immediately obvious quite how weakly the economy is growing. First, we need a reference point. When an economy gets out of a steep recession, it should be soaring, not just scraping into positive territory. In the first four quarters following the end of the 1974-75 recession, growth averaged 6.1%. In the four quarters following the end of the 1981-92 recession, growth averaged 7.8%. The growth rate averaged just 3.0% in the four quarters following the end of this recession.
                    But the actual picture is even worse. Most of this growth was driven by the inventory cycle as firms went from running down their inventories to rebuilding them. If inventory fluctuations are pulled out, growth in demand averaged just 1.1% over the four quarters following the end of the recession. Final demand growth was down to just 0.6% in the most recent quarter.
                    This is cause for serious concern. Inventories grew at the second fastest rate ever in the last quarter. Growth is certain to slow in future quarters, meaning that inventories will be a drag on an already slowing economy. Instead of accelerating, we are likely to see growth just scraping along near zero.

                    I've been expecting a long, slow, agonizing recovery, in part because there's little chance that fiscal policy authorities will give the economy the boost it needs to recover faster. As I noted yesterday, the forecast from Macroadvisers is that employment won't fully recover until 2013. I made the same forecast about a year ago, but full recovery by 2013 is looking optimistic now. I wouldn't be surprised if it takes even longer than that.

                    The San Francisco Fed is also expecting a slow recovery:


                    And, again, even that might be optimistic given that they are forecasting an average growth rate for 2010 of 2.5% and today's estimate came in below that.

                    This is not a strong report. As Calculated Risk notes above, this won't derail quantitative easing. However, I don't expect another round of quantitative easing to have a large impact on the growth rate of GDP. Thus, while this won't derail QEII the problem is that it won't move fiscal policymakers to action, and fiscal policy is, in my opinion, the best way to help the economy recover faster.

                      Posted by on Friday, October 29, 2010 at 09:54 AM in Economics | Permalink  Comments (48) 

                      Paul Krugman: Divided We Fail

                      Large Republican gains in the midterms will lead to Congressional chaos and a weaker economy:

                      Divided We Fail, by Paul Krugman, Commentary, NY Times: Barring a huge upset, Republicans will take control of at least one house of Congress next week. How worried should we be by that prospect? ...

                      This is going to be terrible. In fact, future historians will probably look back at the 2010 election as a catastrophe for America, one that condemned the nation to years of political chaos and economic weakness.
                      Start with the politics. In the late-1990s, Republicans and Democrats were able to work together on some issues. President Obama seems to believe that the same thing can happen again today. ... Good luck with that.
                      After all, that era of partial cooperation in the 1990s came only after Republicans had tried all-out confrontation, actually shutting down the federal government in an effort to force President Bill Clinton to give in to their demands for big cuts in Medicare.
                      Now, the government shutdown ended up hurting Republicans politically... But the lesson current Republicans seem to have drawn from 1995 isn’t that they were too confrontational, it’s that they weren’t confrontational enough. ... Mitch McConnell, the Senate minority leader, has received a lot of attention thanks to a headline-grabbing quote: “The single most important thing we want to achieve is for President Obama to be a one-term president.” ...
                      Mr. McConnell was saying ... that, in 1995, Republicans erred by focusing too much on their policy agenda and not enough on destroying the president... So this time around, he implied, they’ll stay focused on bringing down Mr. Obama.
                      True, Mr. McConnell did say that he might be willing to work with Mr. Obama in certain circumstances — namely, if he’s willing to do a “Clintonian back flip,” taking positions that would find more support among Republicans than in his own party. Of course, this would actually hurt Mr. Obama’s chances of re-election — but that’s the point.
                      We might add that should any Republicans in Congress find themselves considering the possibility of acting in a statesmanlike, bipartisan manner, they’ll surely reconsider after looking over their shoulder at the Tea Party-types, who will jump on them if they show any signs of being reasonable. The ... Tea Party is one reason smart observers expect another government shutdown...
                      Beyond the politics, the crucial difference between the 1990s and now is the state of the economy.
                      When Republicans took control of Congress in 1994, the U.S. economy had strong fundamentals... In this favorable environment, economic management was mainly a matter of putting the brakes on the boom ... and head off potential inflation. And this was a job the Federal Reserve could do on its own by raising interest rates, without any help from Congress.
                      Today’s situation is completely different. The economy, weighed down by the debt that households ran up during the Bush-era bubble, is in dire straits; deflation, not inflation, is the clear and present danger. And it’s not at all clear that the Fed has the tools to head off this danger. Right now we very much need active policies on the part of the federal government to get us out of our economic trap.
                      But we won’t get those policies if Republicans control the House. In fact, if they get their way, we’ll get the worst of both worlds: They’ll refuse to do anything to boost the economy now, claiming to be worried about the deficit, while simultaneously increasing long-run deficits with irresponsible tax cuts — cuts they have already announced won’t have to be offset with spending cuts.
                      So if the elections go as expected next week, here’s my advice: Be afraid. Be very afraid.

                        Posted by on Friday, October 29, 2010 at 01:17 AM in Economics, Politics | Permalink  Comments (101) 

                        "Why Business Should Fear the Tea Party"

                        Robert Reich wonders why business leaders aren't more concerned about the tea party:

                        Why Business Should Fear the Tea Party, by Robert Reich, Commentary, WSJ: America's business leaders have not exactly shied away from offering political views ... which makes particularly curious the deafening silence of business leaders about the tea party that's now taking over the GOP and about to take over a chunk of Congress.
                        Maybe business leaders see it as a relatively harmless fringe group... Business leaders should take a closer look. ... By fueling the Republican surge in the midterm elections, the tea party has become the single most powerful force in the GOP. ...
                        At the least, business leaders who complain about uncertainties caused by Mr. Obama's policies might be concerned. John Castellani, the former head of the Business Roundtable ..., told Bloomberg Businessweek..., with remarkable understatement, "This kind of extremism makes it much harder to plan from a business perspective." ...
                        Underlying all of this is a deep tea party suspicion that big government is in cahoots with big business and Wall Street, against the rest of America. This has been the conventional view among leftist conspiracy theorists for years but it's now emerging full-throttle on the right.
                        Lesser known is that a higher proportion of tea party adherents believes that free trade agreements hurt the nation overall (61%) than does the general population (53%)...
                        History has shown that people threatened by losses of jobs, wages, homes and savings are easy prey for demagogues who turn those fears into anger at major institutions, as well as individuals and minorities who become easy scapegoats—immigrants, foreign traders, certain religious groups. ...
                        Business leaders should be standing up to this dangerous idiocy, while actively supporting policies to relieve the economic stresses that fuel it. Their silence in both regards is bad for business and threatens the stability of our economic and political system.

                        Aren't people like Rupert Murdoch, David Koch, and Charles Koch providing major backing for the Tea Party?

                          Posted by on Friday, October 29, 2010 at 01:11 AM in Economics, Politics | Permalink  Comments (39) 

                          Comment Amnesty

                          I've decided it's time to declare comment amnesty. All blocks, etc. are removed. Clean slate. I do this about once a year, though this is the first time I've noted it here.

                          I don't really have a formal comment policy. It's mostly discretionary. I read them as much as I can, and delete the ones I think should be deleted. But if I had to describe it, it's something like this:

                          I do all of the comment monitoring, and I sometimes I don't have time to do anything but scan through them fast and make quick, on the fly decisions (and there are times, like last week, when I don't get to them at all for several days -- still catching up on those). I'm sure I don't always get it right. I sometimes miss the context and misinterpret comments, and it's not always consistent. Things that get deleted one day might not on another. I try to guard against that, but I have my grouchy, intolerant days just like everyone else. There have been more than a few occasions when I've overreacted and regretted it later, and probably an equal number where I've underreacted. I do my best. It won't be perfect.

                          I dislike it when the very first comment on a post sets the wrong tone or sends the conversation in the wrong direction. So comments higher in the comment stream where they have a large impact on how the conversation proceeds, the first in particular, get more scrutiny. That's especially true if it's a post that took a lot of effort and is trying to explain something I think is important.

                          All comments about the comment policy are deleted. If you have something to say about that, send me an email.

                          There are some things that are simply out of bounds. The bounds are pretty loose, but they do exist.

                          I wish I could do more to manage comments, but I can barely keep up as it is.

                          I sometimes react negatively to pot shots at economics or economists. Not always -- context matters -- but sometimes I do.

                          Sometimes, and this happens on those grouchy, intolerant days in particular, I simply have a negative reaction to a comment, get mad, and delete it. Those are the ones I'm most likely to regret. I do try to catch myself, but don't always manage to do so. Some people rub me the wrong way too.

                          When guests post at my site, colleagues, etc., I am far less tolerant.

                          There are two reactions to getting a comment deleted. One is to try again after rewriting to tone things down, and I don't usually have any trouble after that. They get the message and that's that. The other is to protest loudly by various means, often email or another comment, and keep it up until I'm forced to block them altogether. It generally ends up that way. Having to deal with the few people who can't control themselves in commets is, to me, the very worst part of blogging. Some days, I can hardly read comments because I dread having to deal with the few that go to these extremes. And some days I don't read them for just that reason.

                          The best way to get a comment deleted is to misrepresent something I say in a post, and then attack me for it. In general, I don't see any reason why I should tolerate getting trashed on my own site. There are ways to disagree without doing that.

                          I sometimes delete comments that make false claims or link to sites I cannot, in good conscience, send people to. When you put links to those sites in your comments, they are likely to get deleted. False and misleading claims are sometimes deleted too, especially when they are used to try and counter a point I think is important (or when is the first comment on a post).

                          I do the best I can, but I can't check every word of every comment.

                          I used to send emails to people when I deleted comments, and I sometimes still do. But they mostly turn out to be fake emails, that appears to be highly correlated with getting a comment deleted, and it just brings a flaming email in return. So I mostly stopped bothering.

                          When fights break out in comments, and it seems to be interfering with the conversation, gets personal, etc., I am likely to delete the entire set of comments.

                          People who have been here a long time are given more leeway when they occasionally step over the line. There are a couple of people who have been here almost from day one, when they were, pretty much, the only ones on the site. They stuck around, kept the conversation going, and helped to build the site. They are more part of the site than visitors to it.

                          I don't delete as many comments as this post makes it seem, it's really not that many (excluding the never ending battle aganst spam which brings multiple deletions daily).

                          I'd hoped the comments under the daily links posts would be a way for people to pass on links I might have missed. People do add quite a few links (thanks), but mostly people treat these like open threads. Works for me. That's a good place to take off topic comments or conversations.

                          You are always welcome to get your own blog -- they're free at Google -- where you can say whatever you want without the worry that some unfair, grouchy, intolerant, ideological tyrant might not to allow your brilliant takedown comment to stay. That would be your blog, this is mine, and I will run it as I think is best. You can run yours as you think is best.

                          All of the rules I forgot to mention or haven't thought of yet are in force.

                          Most of you are great. Please keep commenting.

                          I expect it won't take long for some of you to get back on the banned list -- the same behavior will produce the same outcome -- but perhaps I misjudge. Hope so. I'll try to be tolerant, but there are limits.

                          I will probably regret this post.

                            Posted by on Friday, October 29, 2010 at 01:08 AM in Economics, Weblogs | Permalink  Comments (29) 

                            Thursday, October 28, 2010

                            links for 2010-10-28

                              Posted by on Thursday, October 28, 2010 at 11:01 PM in Economics, Links | Permalink  Comments (23) 

                              Richard Freeman: Labor Law is Broken

                              The National Labor Relations Act is broken, something that has likely contributed to stagnant earnings and the rise in income inequality:

                              Labor Law Is Broken, Economist Says, by Steven Greenhouse, NY Times: In a new paper, Richard B. Freeman, a labor economist at Harvard, said he had some “harsh and impolitic” news for the National Labor Relations Act on its 75th anniversary. He declared that the law “has become an anachronism irrelevant for most workers and firms.” ...
                              Mr. Freeman ... wrote that the act was passed to replace the costly unionization fights of yesteryear – often involving strikes, lockouts, violent confrontations — with “a ‘laboratory conditions’ elections process for ascertaining workers’ attitudes toward union representation that would be free from employer pressures or dishonest statements by employers or unions.” He said unionization elections in the private-sector “have turned into massive employer campaigns against unions.”
                              That, he wrote, is a major reason the percentage of private-sector workers in unions has fallen to 7 percent, down from nearly 40 percent in the 1950s.
                              He argued that the penalties in the National Labor Relations Act were weak and “have failed to deter firms from illegal actions to prevent unionization.” ... “Far from a laboratory conditions experiment in democracy,” he wrote, “the N.L.R.B. process turned into the same costly fight between unions and firms that union organizing was before the act, albeit in a different venue with different weapons.” ...
                              Professor Freeman said it was hardly surprising that the percentage of public-sector workers in unions was five times as high as the percentage of private-sector workers. One big reason for this, he wrote, is that private-sector employers “have sizable monetary incentives to oppose unionism,” and the penalties that N.L.R.B. “has at its disposal are too limited to offset these incentives.” He noted that government officials, unlike corporate officials,... “...have little to gain and much to lose from fighting unions.” ...
                              Professor Freeman wrote that “the failure of the N.L.R.A. process to meet the needs of workers and firms moved the U.S. close to the union-free world that many opponents of trade unions have long desired.”
                              He suggested that if unions were stronger, the United States might not have the highest income inequality in the developed world or stagnant real earnings for all but the highest paid. He also said that if unions were stronger, a liberal coalition “would presumably have greater countervailing power” to Wall Street and have helped push through stronger financial reforms.
                              In conclusion, Professor Freeman had four recommendations. He called for strengthening the penalties against illegal actions by management and unions, recommending penalties against individual managers or union leaders who break the law. Second, he said labor laws should be amended to protect supervisors from being fired or punished if they want to remain neutral...
                              Third, he called for early voting at neutral venues instead of having unionization elections held at the work site on a single day. ... He said this “should reduce intimidation or pressure from management or union activists...
                              Lastly, Professor Freeman recommends an idea that union leaders hate — allowing employers to set up employee committees that address not just productivity, but also issues that deal with workers’ well-being, like hours or pace of work. ... He said that a similar system in Canada works well. ... But unions oppose this idea, asserting that it could lead to management-dominated committees and could convince many workers that they do not need a union.

                              People often blame gloabalization and technical change for the decline in unions, but that is far from the complete story.

                                Posted by on Thursday, October 28, 2010 at 12:33 PM in Economics, Unemployment | Permalink  Comments (38) 

                                "The Pace of Job Creation Has Been Frustratingly Meager"

                                Macroadvisers says employment is not likely to recover until 2013:

                                Macro Musing: Are We in Another Jobless Recovery?:

                                • The U.S. is in the midst of another “jobless recovery,” in the sense that employment gains have been meager relative to enormous job losses that occurred during 2008 and 2009.
                                • We anticipate that job gains will continue at a moderate rate, and that the pre-recession peak in private nonfarm payroll employment won’t be reached until 2013, nearly 4 years after the recession ended.
                                • This would be roughly comparable to the time it took to regain the pre-recession peak in employment following the 2001 recession, but approximately twice as long as the recovery in employment following the 1990–91 recession and approximately four times as long following recessions in 1970, 1973–75, and 1981–82.
                                • The overwhelming factor contributing to the much more sluggish pace of job creation in recent recoveries is much slower growth of output.
                                • In contrast, other factors — including productivity growth and changes in the workweek — have played only minor roles in accounting for slower growth of private nonfarm payrolls in recent recoveries.
                                • The severity of the decline in employment during 2008 and 2009 is largely accounted for by the weakness in output during the recession, and not by anomalous behavior of productivity.

                                Are we in a jobless recovery? Yes, if one doesn’t quibble too much with semantics. While it is not the case that there have been no jobs gained in the last few months, the pace of job creation has been frustratingly meager ... [more] ...


                                I made the same forecast about a year ago, but full recovery by 2013 is looking optimistic now. I wouldn't be surprised if it takes even longer than that.

                                  Posted by on Thursday, October 28, 2010 at 12:42 AM in Economics, Unemployment | Permalink  Comments (86) 

                                  "Shares in our Democracy"

                                  Robert Reich:

                                  ...The great bulk of campaign money is coming from a narrower and narrower circle of monied interests. Anyone who doubts the corrupting effect has not been paying attention. Our elected representatives have been acutely sensitive to the needs of Wall Street bankers, hedge-fund managers, and the executives of big pharma, big oil, and the largest health insurance companies. This is not because these individuals and interests are particularly worthy or specially deserving. It is because they are effectively bribing elected officials with their donations. Such donations are not made out of charitable impulse. They are calculated investments no less carefully considered than investments in particular shares of stock. They are shares in our democracy. ...

                                    Posted by on Thursday, October 28, 2010 at 12:34 AM in Economics, Politics | Permalink  Comments (13) 

                                    "An Energized Minority Trumps a Tepid Majority"

                                    Larry Bartels argues that despite the popularity of president Obama's proposal to allow the tax cuts for richest 2% expire, the decision by Democratic leaders in Congress to adjourn without voting on the proposal was politically expedient:

                                    On Taxes, an Energized Minority, by Larry Bartels, Model Politics: During the 2008 campaign Barack Obama skillfully crafted a popular position on renewing the big Bush-era tax cuts. Obama pledged to keep the lower tax rates for families earning less than $250,000 per year—the vast majority of American taxpayers—while letting the top tax rate revert to its 2000 level.
                                    With the tax cuts set to expire at the end of this year President Obama has stuck to that position, despite a concerted effort by conservatives to insist that none of the tax cuts should be allowed to expire in the midst of a recession. What is more, he has managed to keep ... Americans on his side. A YouGov/Polimetrix survey fielded last week found that 42% of the public support the president’s position... Only 28% ... favor retaining all the tax cuts, including those for the richest taxpayers.
                                    Despite this sustained public support for the president’s position, Democratic leaders in Congress were unwilling to bring the issue to a vote before adjourning last month. ... In light of the popular support for the president’s position, was that a political miscalculation?
                                    Probably not. For one thing, likely voters in next week’s election are much more evenly divided in their views about the Bush tax cuts. ... This difference is partly due to the much-noted “enthusiasm gap” between Republicans and Democrats. ... Even more importantly, the sizable minority of people who want the tax cuts for affluent taxpayers renewed seem to attach much more weight to this issue than the slim majority who want them to expire. ...
                                    An even more lopsided difference appears in the impact of tax cut preferences on presidential approval. People who support President Obama’s position on this issue are only slightly more approving..., while those who want to renew all the tax cuts are moved about five times as far toward disapproving. ...
                                    These differences in preference intensity cannot be explained in terms of simple self-interest. On average, the people who want to renew the tax cuts for top earners are somewhat more affluent than the population as a whole; but only 8% say they have household incomes of $150,000 or more... Half have household incomes of less than $50,000, and almost that many say they don’t even know anyone who earns more than $200,000 per year.
                                    These results suggest that candidate Obama’s skillful-looking proposal to allow the tax cuts to expire only for the richest 2% of taxpayers has turned out to be very costly for President Obama and his party, despite its overall popularity. Of course, the president and his allies in Congress could still push to implement the proposal in a lame duck session. If they do, it will be a principled choice rather than a politically expedient one. For expedient politicians, an energized minority trumps a tepid majority every time.

                                      Posted by on Thursday, October 28, 2010 at 12:12 AM in Economics, Politics | Permalink  Comments (6) 

                                      Wednesday, October 27, 2010

                                      links for 2010-10-27

                                        Posted by on Wednesday, October 27, 2010 at 11:02 PM in Economics, Links | Permalink  Comments (36) 

                                        DeLong: The Humiliation of Britain

                                        Brad DeLong:

                                        The Humiliation of Britain, by J. Bradford DeLong, Commentary, Project Syndicate: ...Even though the British government’s credit is still solid gold, Prime Minister David Cameron’s administration is about to embark on what may be the largest sustained fiscal contraction ever: a plan to shrink the government budget deficit by 9% of GDP over the next four years. ...

                                        Cameron’s government used to claim that its policies would produce a boom by bringing a visit from the Confidence Fairy that would greatly reduce long-term interest rates and cause a huge surge of private investment spending. Now it appears to have abandoned that claim in favor of the message that failure to cut will produce disaster. ...
                                        What is so bad about continuing to run large budget deficits until the economic recovery is well established? Yes, the debt will be higher and interest on that debt will have to be paid, but the British government can borrow now at extraordinarily favorable terms. When interest rates are low and you can borrow on favorable terms, the market is telling you to pull government spending forward into the present and push taxes back into the future.
                                        Advocates of austerity counter that confidence in the government’s credit might collapse, and the government might have to roll over its debt on unfavorable terms. ...

                                        To be sure, back in the 1970’s, confidence in the credit of the British government collapsed, forcing it to borrow from the IMF... But that is why Keynes and Harry Dexter White established the IMF in the first place. An IMF program restores confidence in the fiscal soundness of governments that markets distrust. The lending allows the necessary medium- and long-term spending cuts and tax increases to be undertaken at a more appropriate time.
                                        Borrowing from the IMF may be humiliating for government officials. But businesses establish lines of credit for future contingencies all the time, and they don’t think there is anything humiliating about resorting to them when those contingencies come to pass. And what, really, is so humiliating about borrowing from your own citizens? ...
                                        To borrow from your own people is especially non-humiliating when your economy is in depression, when the interest rates at which you can borrow are at near-record lows, and when every economic argument cries out for spending now and taxing later.
                                        What is humiliating is to have a government that cuts a half-million public-sector jobs and causes the loss of another half-million jobs in the private sector. In an economy of 30 million jobs, that translates into an increase in the unemployment rate of 3.5 percentage points – at a time when no sources of expanding private-sector demand exist to pick up the slack. Britain’s finest hour this is not.

                                        As I noted yesterday, my worry is that the outcome of the midterm elections will make it more likely that we'll catch the austerity bug and begin trying to balance the budget before the economy is ready.

                                          Posted by on Wednesday, October 27, 2010 at 11:23 AM in Economics, Fiscal Policy | Permalink  Comments (84) 

                                          Fed Watch: Too Little

                                          Sudeep Reddy reports on the Fed's plans for another round of quantitative easing:

                                          The Federal Reserve is likely to announce a new bond-buying program next week structured around smaller purchases that can be adjusted over time, rather than the shock-and-awe approach it employed in 2009. It’s a cautious strategy that considers the uncertainty around both the pace of the recovery and the costs of embarking on another round of purchases.

                                          He also notes that an old speech from Bernanke helps us to understand why the Fed is adopting a gradual approach:

                                          ...Then he [Bernanke] gets into miniature golf:
                                          “Imagine that you are playing in a miniature golf tournament and are leading on the final hole. You expect to win the tournament so long as you can finish the hole in a moderate number of strokes. However, for reasons I won’t try to explain, you find yourself playing with an unfamiliar putter and hence are uncertain about how far a stroke of given force will send the ball. How should you play to maximize your chances of winning the tournament?
                                          “Some reflection should convince you that the best strategy in this situation is to be conservative. In particular, your uncertainty about the response of the ball to your putter implies that you should strike the ball less firmly than you would if you knew precisely how the ball would react to the unfamiliar putter. This conservative approach may well lead your first shot to lie short of the hole. However, this cost is offset by the important benefit of guarding against the risk that the putter is livelier than you expect, so lively that your normal stroke could send the ball well past the cup. Since you expect to win the tournament if you avoid a disastrously bad shot, you approach the hole in a series of short putts (what golf aficionados tell me are called lagged putts). Gradualism in action!”
                                          Bernanke tends to spend much of his free time watching baseball, not golf, so give him some credit for this one

                                          But is gradualism always best? If the putt is up a steep hill and the flag is just over the crest, and there is a large flat spot behind it, gradualism is the wrong approach. In this case, you'd want to be sure to clear the crest of the hill. There's still a sense in which you would play conservatively, especially after clearing the hill, but the point is that the first shot should guard against undershooting. The putter may be deader than you expect, and to guard against this you'd want to give the putt a little extra force so as to be sure to clear the hill. If the putter turns out to be lively instead of dead and you overshoot, that's still better than an outcome where the ball rolls all the way back down the hill and you have to try it all over again.

                                          This has come up before. As I noted in January 2009 during the debate over the size of the fiscal stimulus package:

                                          the stimulus package is like driving up an icy hill. If you don't have enough momentum from the start and fail to provide enough "stimulus" to get the car over the crest of the hill, you can slide all the way back to the bottom, crashing into things along the way and end up worse off than when you started. Maybe you can give it more gas along the way if needed without spinning out, and perhaps you can hold your position if you don't make it to the top, and then start again from the higher level. But that's not a chance I want to take when I'm sitting at the bottom wondering if I can make it to the top without wrecking my car. The possibility of falling all the way back to the bottom and ending up worse off would make me want to start with sufficient momentum and then some.

                                          Gradualism is not always the best approach (even in miniature golf). As Paul Krugman said recently in response to a Bernanke speech indicating that the Fed is likely to be cautious in implementing unconventional policies such as quantitative easing, "half-hearted measures are a good way of guaranteeing that unconventional policy fails."

                                          A defense of the gradualist approach comes from Jim Bullard, president of the St. Louis Fed, in an email responding to Tim Duy's opposition to a "disciplined" QE program:

                                          ...on the "disciplined" QE program: The quote from Vince Reinhart, who is a great guy, gives the "shock and awe" view of QE. I do not think this is remotely correct. We know how monetary policy works: through the expected future path of policy, not through the actual move on a particular day. When we make 25 basis point moves on the federal funds rate, those are small viewed in isolation, but they have important effects for macroeconomic stabilization because they imply an expected interest rate path over the coming years. The same is true for QE. A move on a particular day may seem small, but it implies a path for future policy, and a series of smaller moves may add up to a very large move if the incoming data are consistent with such an outcome. The "shock and awe" view, if applied to interest rate targeting, would suggest very large interest rate movements in response to relatively small changes in incoming data, a policy that most would view as destabilizing for the macroeconomy. The same is true for QE. So the point is that QE moves should be commensurate with the incoming data (a.k.a. "state contingent"). Of course we can argue about the incoming data--and I know you have strong views on that--but I think my position on a "disciplined" QE program is correct and that the dangerous policy is to make destabilizing moves out of line with the incoming data.

                                          Here's the Reinhart quote Bullard refers to:

                                          I think Chairman Bernanke probably disagrees [that the Fed is out of ammunition] on two main counts. One is there's still communication. The Fed could convey they're going to keep interest rates low for a very long time. They've probably done as much as they can on that front. They maybe could do a little bit more. But that leads to one other option, which is buying stuff, buying Treasury securities. Now, Alan Binder I think, believes that that effect isn't that great, but the way you get around that is to buy in very large volume..., it will have to do very large purchases of Treasury securities.

                                          And here's Tim Duy's latest Fed Watch, which addresses this issue:

                                          Too Little, by Tim Duy: Federal Reserve policymakers must be pleased with themselves. Market participants have fallen in line like lemmings off a cliff pursuing the obvious trades as the excitement over quantitative easing builds. Equities, bonds, commodities are all up. Dollar is down. Perhaps more importantly, measured inflation expectations have trended higher. Psychology is a powerful thing. Like leverage.

                                          But like leverage, psychology can turn against you. The psychology of market participants forms on the back of expectations, which in this case is for the Fed to announce a significant expansion of the balance sheet on November 3. If the Wall Street Journal is correct, the Fed is poised to disappoint those expectations with an announcement of "a few billion dollars over several months." This looks like a clear effort to temper expectations.

                                          How can Federal Reserve Chairman Ben Bernanke not view this as anything but yet another major policy error? The first supposedly "shock and awe" balance sheet expansion failed to reflate the economy. What kind of expectations should we have for the "shock and disappoint" strategy? And the stakes are even greater. Market participants already dutifully followed the first reflation attempt, and have eagerly embraced the second. Just exactly how many bites at the apple does Bernanke expect he is going to get? Fool me once….

                                          Moreover, the Fed's communication strategy will almost certainly become more muddled in future months. A reminder from the Wall Street Journal:

                                          In the next few months, internal opposition to Mr. Bernanke's approach could intensify as presidents of three regional Fed banks who have expressed skepticism about the plan—Narayana Kocherlakota of Minneapolis, Richard Fisher of Dallas and Charles Plosser of Philadelphia—take voting positions on the Fed's policy-making body.

                                          To be sure, Fed policymakers will argue that they are trying to preserve flexibility. Why is it that "flexibility" means the ability to scale up? Why can't "flexibility" mean the ability to scale down? Seriously, it is not as if the Fed is in any danger of hitting either of the objectives in the dual mandate anytime soon. And does Bernanke really believe that it will be any easier to offer a credible commitment to scale up once Dallas Federal Reserve Chairman Richard Fisher is a voting member of the FOMC?

                                          And to what extent does a smaller than anticipated QE reflect a concern about a precipitous fall in the Dollar? Is this part of the G20 "agreement" to end currency battles? Taking currency effects off the table will greatly reduce the effectiveness of any QE strategy. Does Bernanke expect to win this battle on expectations alone, without actually having to live up to those expectations?

                                          Bottom Line: Right now, I have more questions than answers. The US economy is operating below potential to the tune of about a trillion dollars give or take. The Obama Administration is poised to turn its attention to deficit reduction, seemingly oblivious to the historical errors of Japanese fiscal policy, not to mention the US experience in the Great Depression. For better or worse, that leaves monetary policy to bear the burden. But the Federal Reserve is signaling they are poised to deliver far less than necessary to meet expectations, expectations that already were likely overly optimistic. Truly, it boggles the mind, and suggests that Bernanke is far more worried about the specter of inflation than the real pain of unemployment.

                                            Posted by on Wednesday, October 27, 2010 at 01:17 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (58) 

                                            Tuesday, October 26, 2010

                                            links for 2010-10-26

                                              Posted by on Tuesday, October 26, 2010 at 11:02 PM in Economics, Links | Permalink  Comments (51) 

                                              The Dangers of Gridlock in Economic Policy

                                              At MoneyWatch, I have a new post:

                                              The Dangers of Gridlock in Economic Policy

                                              It gives three reasons to worry if Republicans make significant gains in the midterm elections.

                                                Posted by on Tuesday, October 26, 2010 at 11:52 AM in Economics, Fiscal Policy, Monetary Policy, MoneyWatch, Politics | Permalink  Comments (19) 

                                                How Quantitative Easing Can Help State and Local Governments

                                                I have a new column explaining how quantitative easing can help state and local governments:

                                                Stimulus from the Fed Can Yield a High Return to Taxpayers

                                                The column also discusses how the federal government might be be induced to give state and local governments help in solving their budget problems.

                                                  Posted by on Tuesday, October 26, 2010 at 08:28 AM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (25) 

                                                  What Impact Did the Stimulus Package Have on the Unemployment Rate?

                                                  Here's the question I asked in the latest blogger survey from the Kaufman Institute:

                                                    Posted by on Tuesday, October 26, 2010 at 01:06 AM in Economics, Fiscal Policy, Unemployment | Permalink  Comments (16) 

                                                    Feldstein: Why Has America’s Economic Recovery Stalled?

                                                    Martin Feldstein is not very bullish on the economy:

                                                    Why Has America’s Economic Recovery Stalled?, by Martin Feldstein, Commentary, Project Syndicate: ...[It] was good news for everyone when the US economy began expanding in the summer of 2009... Unfortunately, the recovery has turned out to be very anemic. Now, 15 months into the expansion, the level of real GDP is still lower than it was when the recession started. Even more worrying, the rate of GDP growth has been declining almost from the start of the recovery. ...
                                                    This recovery has been much weaker than previous ones... Because the downturn was not caused by high interest rates, lowering them could not lift the economy out of recession. The Obama administration therefore turned to fiscal policy... Unfortunately, the fiscal stimulus was not well enough designed to get the economy onto a strong, self-sustaining growth path. And, now that those stimulus programs are coming to an end, there is a danger that the economy will slide back into slow growth or even recession.
                                                    One key to the US economy’s future is household demand. Although consumer spending has increased during the past four quarters, helped by substantial government transfer payments, the pace of spending growth ... was less than ... GDP growth, because households were increasing their rate of saving. ...
                                                    If the saving rate continues to rise at the same pace in the future as it has over the past three years, the overall GDP growth rate could turn negative after a few quarters. ... A significantly higher saving rate would help the US economy in the long run, but it would be a barrier to robust growth in the next few years.
                                                    A major obstacle to higher consumer spending is the current condition of the housing market. The rapid rise in house prices until 2006 caused households to increase their spending, financed in part by converting home equity into cash. But house prices have since fallen some 40% on average... And the recent end of a special tax subsidy for first-time homebuyers has caused house prices to start falling again. If that decline continues, it will inevitably reduce the pace of consumer spending.
                                                    Earlier this year, economic forecasters were predicting that annual GDP growth would reach 3% or more in the second half of 2010. Now those projections have been cut to less than 2%, which is too slow to make a dent in the very high rate of unemployment. The forecasters have now shifted their predictions of 3%-plus growth to 2011. Let’s hope that they are right this time.

                                                      Posted by on Tuesday, October 26, 2010 at 01:06 AM in Economics | Permalink  Comments (23) 

                                                      "The Politics of Populist Outrage Versus the Politics of Building"

                                                      Jonathan Simon at the Berkeley Blog:

                                                      The politics of populist outrage versus the politics of building, by Jonathan Simon, Berkeley Blog: The narrative choices faced by the Obama Administration in confronting the Great Recession were nicely outlined yesterday in the editorial pages of the New York Times. Columnist Frank Rich offered a blistering critique of the Administration for ceding populist outrage to the right by failing to go after Wall Street executives responsible for the financial crash with investigations and stiff punishments, going so far as to say that “the Obama administration seems not to have a prosecutorial gene”...
                                                      Rich’s editorial colleague Tom Friedman voices a different kind of disappointment. Obama’s focus on the future, and his talk of investing in rebuilding America, has turned out to be just talk. The billions spent on stimulus turned out to include only tinkering on the edges of a massive need for reinvestment. ...
                                                      The critiques suggest an Obama Presidency caught in between its reluctance to embrace the old politics of governing through crime, and its inability to launch new politics of infrastructure. After his health care defeat in 1994, Bill Clinton made himself into a the Prosecutor-in-Chief, supporting harsh and punitive laws on crime, immigration, and welfare. Clinton was reelected, but he accomplished little of importance for the nation. Since the 2008 campaign I have been impressed with Obama’s commitment to avoiding a politics based on demonizing. He could have framed Wall Street leaders as felons and sought to build legitimacy by sending as many of them to prison as possible and he might be more popular now if he had. It may be that he was simply too cozy with Wall Street (which did send him a lot of campaign support in 2008) but I prefer to believe Obama rejects a politics that converts fear into anger by demonizing an enemy and than seeking to punish it. Everything about President Obama’s style as a speaker and a leader, cuts against his effectiveness as a prosecutorial President. The bigger question is why Obama did not try to lead the kind of infrastructure rebuilding politics he promised during the campaign.
                                                      Ironically, both the politics of punishment and the politics of building draw on fear which is the essential source of energy in liberal governance. Think of the way FDR drew on fear of the Great Depression and fear of European fascism to create the New Deal and US involvement in the World War II. Obama has not lacked for similar threats against which to mobilize America. Both the financial crisis and last summer’s Gulf oil spill provided powerful examples of the threat posed by decades of underinvestment in infrastructure and under-regulation of corporate greed. Without demonizing either Wall Street or oil companies, Obama could have used the Oval office to make a sustained campaign for rebuilding American infrastructure and regulatory capacity.
                                                      It is not too late for both. A stronger Republican hold on congress will make new legislation impossible, but it will frame a stark choice between a government that actively seeks to protect ordinary Americans and one that leaves them to their fates. The Republican effort to repeal the health care reform and the privatize social security will pose this choice starkly come January. ...

                                                      Paul Krugman argues that the election is all about economic conditions, and I have no quarrel with that. The shape of the economy is the biggest factor in the election, and Obama's failure to put a stimulus package of sufficient size in place predetermined the outcome of the midterm elections. The question is whether Obama could have gotten a larger package through Congress, or another round of stimulus.

                                                      Many people argue that Obama as much as he could get with the stimulus package even if it was too small, the politics would not allow anything more. Perhaps so, but what about additional stimulus? Could he have exploited threats associated with events like the oil spill to argue for a second round of infrastructure spending, perhaps even seeking out examples of crumbling infrastructure to exploit in the media George Bush like through photo ops and other means? A "Make America Strong and Safe" campaign for infrastructure, something like that? Coalitions in support of action need to be built, they don't just happen, and if the administration wanted to get more infrastructure spending to help with the recovery, more help for state and local governments, more regulation, a larger stimulus package to begin with, a jobs program, whatever, it needed to get out and make the case. Maybe it still wouldn't have worked, but at least people would know that they tried.

                                                      [I don't really like framing this in terms of fear. Creating undue fear, or fear where there is no threat, to create support for a desired course of action is not what I'm calling for. Not at all. Politicians often make arguments in dramatic style to capture people's attention and "mobilize America," but holding people accountable for their actions, even if they are "Wall Street leaders," making people aware of legitimate concerns about the state of the Nation's infrastructure, or explaining the harm that can come from inadequate regulation and too large too fail banks does not cross the undue and false fear line.]

                                                        Posted by on Tuesday, October 26, 2010 at 01:05 AM in Economics, Politics | Permalink  Comments (36) 

                                                        Monday, October 25, 2010

                                                        links for 2010-10-25

                                                          Posted by on Monday, October 25, 2010 at 11:02 PM in Economics, Links | Permalink  Comments (31) 

                                                          Should the US Government Encourage Banks to Write Down the Principal on Underwater Mortgages?

                                                          The Economist asks:

                                                          Should the US government encourage banks to write down the principal on underwater mortgages? And if so, how?

                                                          I didn't have anything to say, but I answered anyway:

                                                          Only in ways that avoid using taxpayer cash Mark Thoma

                                                          Here are the other responses:

                                                          Yes, it's the best route to household deleveraging Viral Acharya 
                                                          Banks must mark their assets to market Laurence Kotlikoff 
                                                          The sooner banks acknowledge losses, the better Hans-Werner Sinn
                                                          [all responses]

                                                            Posted by on Monday, October 25, 2010 at 01:37 PM in Economics, Housing | Permalink  Comments (29) 

                                                            "Scary New Wage Data"

                                                            David Cay Johnston:

                                                            Scary New Wage Data: Now for some really scary breaking news, from the latest payroll tax data.

                                                            Every 34th wage earner in America in 2008 went all of 2009 without earning a single dollar, new data from the Social Security Administration show. Total wages, median wages, and average wages all declined, but at the very top, salaries grew more than fivefold. ...

                                                            Measured in 2009 dollars, total wages fell to just above $5.9 trillion, down $215 billion from the previous year. Compared with 2007, when the economy peaked, total wages were down $313 billion or 5 percent in real terms.

                                                            The number of Americans with any wages in 2009 fell by more than 4.5 million compared with the previous year. Because the population grew by about 1 percent, the number of idle hands and minds grew by 6 million.

                                                            These figures show, far more powerfully than the official unemployment measure known as U3, how both widespread and deep the loss of jobs was in 2009. ...
                                                            Only 150.9 million Americans reported any wage income in 2009. That put us below 2005, when 151.6 million Americans reported wages, and only slightly ahead of 2004, when 149.4 million Americans held at least one paying job.

                                                            For those who did find work in 2009, the average wage slipped to $39,269, down $243 or 0.6 percent, compared with the previous year in 2009 dollars.

                                                            The median wage declined by the same ratio, down $159 to $26,261, meaning half of all workers made $505 a week or less. Significantly, the 2009 median wage was $37 less than in 2000.

                                                            To give this some perspective, from 1992 to 2000 the number of people earning any wages grew by 21 million, but nine years later just 2.8 million more people had any work.

                                                            These wage data, based on the Medicare flat tax on all compensation, tell us only about the number of people who earned wages and how much. They tell us nothing about whether these individuals were underemployed, had to work more than one job, earned fringe benefits, or were employed at a level commensurate with their abilities.

                                                            But they do give us a stunning picture of what’s happening at the very top of the compensation ladder in America.
                                                            The number of Americans making $50 million or more, the top income category in the data, fell from 131 in 2008 to 74 last year. But that’s only part of the story.

                                                            The average wage in this top category increased from $91.2 million in 2008 to an astonishing $518.8 million in 2009. That’s nearly $10 million in weekly pay!

                                                            You read that right. In the Great Recession year of 2009 (officially just the first half of the year), the average pay of the very highest-income Americans was more than five times their average wages and bonuses in 2008. And even though their numbers shrank by 43 percent, this group’s total compensation was 3.2 times larger in 2009 than in 2008, accounting for 0.6 percent of all pay. These 74 people made as much as the 19 million lowest-paid people in America, who constitute one in every eight workers. ...
                                                            Back in 1994, when the top category the government reported on was $20 million or more of compensation, only 25 people were in that rarefied atmosphere, and their average earnings came to just under $45 million in 2009 dollars.

                                                            What does this all mean? It is the latest, and in this case quite dramatic, evidence that our economic policies in Washington are undermining the nation as a whole. ...[continue]...

                                                              Posted by on Monday, October 25, 2010 at 09:58 AM in Economics, Income Distribution | Permalink  Comments (50) 

                                                              Paul Krugman: Falling Into the Chasm

                                                              When it comes to elections, it's the economy that matters:

                                                              Falling Into the Chasm, by Paul Krugman, Commentary, NY Times: This is what happens when you need to leap over an economic chasm — but either can’t or won’t jump far enough, so that you only get part of the way across.
                                                              If Democrats do as badly as expected in next week’s elections, pundits will rush to interpret the results as a referendum on ideology. President Obama moved too far to the left, most will say, even though his actual program — a health care plan very similar to past Republican proposals, a fiscal stimulus that consisted mainly of tax cuts, help for the unemployed and aid to hard-pressed states — was more conservative than his election platform.
                                                              A few commentators will point out, with much more justice, that Mr. Obama never made a full-throated case for progressive policies, that he consistently stepped on his own message, that he was so worried about making bankers nervous that he ended up ceding populist anger to the right.
                                                              But the truth is that if the economic situation were better — if unemployment had fallen substantially over the past year — we wouldn’t be having this discussion. We would, instead, be talking about modest Democratic losses, no more than is usual in midterm elections.
                                                              The real story of this election, then, is that of an economic policy that failed to deliver. Why? Because it was greatly inadequate to the task. ... If you look back..., economies that have experienced a severe financial crisis generally don’t heal quickly. ... And that has been true even when, as in the case of Sweden, the government moved quickly and decisively to fix the banking system.
                                                              To avoid this fate, America needed a much stronger program than what it actually got — a modest rise in federal spending that was barely enough to offset cutbacks at the state and local level. ...
                                                              Could the administration have gotten a bigger stimulus through Congress? Even if it couldn’t, would it have been better off making the case for a bigger plan, rather than pretending that what it got was just right? We’ll never know.
                                                              What we do know is that the inadequacy of the stimulus has been a political catastrophe. Yes, things are better than they would have been without the American Recovery and Reinvestment Act:... But voters respond to facts, not counterfactuals, and the perception is that the administration’s policies have failed.
                                                              The tragedy here is that if voters do turn on Democrats, they will in effect be voting to make things even worse.
                                                              The resurgent Republicans have learned nothing from the economic crisis, except that doing everything they can to undermine Mr. Obama is a winning political strategy. Tax cuts and deregulation are still the alpha and omega of their economic vision.
                                                              And if they take one or both houses of Congress, complete policy paralysis — which will mean, among other things, a cutoff of desperately needed aid to the unemployed and a freeze on further help for state and local governments — is a given. The only question is whether we’ll have political chaos as well, with Republicans’ shutting down the government at some point over the next two years. And the odds are that we will.
                                                              Is there any hope for a better outcome? Maybe, just maybe, voters will have second thoughts about handing power back to the people who got us into this mess, and a weaker-than-expected Republican showing at the polls will give Mr. Obama a second chance to turn the economy around.
                                                              But right now it looks as if the too-cautious attempt to jump across that economic chasm has fallen short — and we’re about to hit rock bottom.

                                                                Posted by on Monday, October 25, 2010 at 01:08 AM in Economics, Politics | Permalink  Comments (60) 

                                                                Sunday, October 24, 2010

                                                                links for 2010-10-24

                                                                  Posted by on Sunday, October 24, 2010 at 11:01 PM in Economics, Links | Permalink  Comments (21) 

                                                                  One More Time with Gusto: Tax Cuts Do Not Pay for Themselves

                                                                  Republicans are selling snake oil once again:

                                                                  Some Republican Senate candidates have suggested that extending the Bush tax cuts — which are scheduled to expire at the end of the year — will actually be good for the country’s bottom line, as the economic growth that results will more than offset the trillions of dollars in lost revenue. “By extending tax cuts you pay down the deficit, you grow the economy by giving people more money,” said Colorado Republican Ken Buck.
                                                                  Today, on Fox News Sunday, Pennsylvania’s Republican Senate nominee Pat Toomey joined this club, telling Fox’s Chris Wallace that “it’s not clear” that extending the Bush tax cuts — while also lowering the corporate tax rate — would increase the deficit...

                                                                  But, of course, the Bush tax cuts did not even come close to paying for themselves. The Bush tax cuts cost us around $1.7 trillion in revenue from 2001 through 2008, in part because of weak output and job growth following the cuts (contrary to assertions about how the tax cuts would stimulate economic growth).

                                                                  As for the cost of extending the tax cuts to the wealthy, the Tax Policy Center estimates that making all the Bush tax cuts permanent, as opposed to extending them only for the middle and lower classes, would cost $680 billion over the next decade. 

                                                                  The disappointing part is that the press still lets them get away with this. At best, the press generally says something like "some economists claim this isn't true," implying there's a debate about this issue -- that some credible economists think the tax cuts will, in fact, pay for themselves -- when there is no debate and the answer is clear. Tax cuts don't pay for themselves.

                                                                  If the press won't call them on this obvious falsehood, how can we trust them on anything? Instead of reflecting poorly on the press, this ought to bring the general credibility of the people making these claims into question. The press ought to ask something like, "Are you this ignorant about economics, in which case why should anyone vote for you, or are you deliberately misleading people? I'll assume you aren't ignorant, so here's the question. If you are willing to make false claims about the revenue generated from tax cuts in order to promote them for the wealthy, what other falsehoods will you be willing to promote in order to serve political ends? If voters can't trust you to tell the truth about tax cuts, how can they trust you on anything?"

                                                                    Posted by on Sunday, October 24, 2010 at 11:25 AM in Economics, Politics, Taxes | Permalink  Comments (105) 

                                                                    "One Reality, Many Interpretations?"

                                                                    This is from Angus at Kids Prefer Cheese, who leans toward the libertarian side of politics:

                                                                    One reality, many interpretations?: The progressive drumbeat that the Dems are in trouble because Obama was too conservative continues.

                                                                    Mark Thoma gives a clear articulation of the view:

                                                                    "I don't know if the centrist, bipartisan seeking, compromising Obama we have seen to date can actually embrace an encompassing vision. He seems afraid to be a Democrat.."

                                                                    It's hard for me to understand this sentence coming from a person (i.e. Mark) who I like and respect. From my perspective, Obama is pretty far left and uncompromising.

                                                                    So let me invoke Robin Hanson and try to list things Obama has done that qualify as evidence for Mark's view.

                                                                    I would say on economic policy the closest thing to centrist & compromising that he's done is appoint Summers and Geithner.

                                                                    Can you count not pushing for single payer as bipartisan seeking or compromising?

                                                                    Then there's Guantanamo, renditions, wiretaps, and the like. I view the continuation of these policies as wrong, but are they being continued as a compromise? Or out of bipartisanship?

                                                                    Oh and then there are the wars. Do they count?

                                                                    Oh my, there's also no action on immigration reform and the monstrosity that is DADT.

                                                                    Holy Crap! Maybe Mark has a point.

                                                                    I see Obama as the worst possible policy mix. Wrong on economic issues, wrong on foreign policy and wrong on social issues too. A Dem should at least get the social issues right!

                                                                    That Robin H. sure is a smart fellow.

                                                                      Posted by on Sunday, October 24, 2010 at 11:15 AM in Economics, Politics | Permalink  Comments (14) 

                                                                      Who are the Undeserving?

                                                                      There is a long history of dividing the poor into those deserving help (e.g. becasue they are disabled and unable to work), and those who are undeserving (e.g. they are fully capable of work, and if they are unemployed it must be because they are lazy and aren't trying, not because jobs aren't available -- we heard echoes of this in the debate over extending unemployment insurance). It allows those who might be asked to pay the bills to support the unemployed -- those who benefit so much from a system that can displace workers into the ranks of the unemployed, workers who have done nothing wrong exept be employed in the wrong industry -- to deflect responsibility onto the poor themselves. Attempts to draw such distinctions have led, in the past, to things such as workhouses. Chris Dillow wonders why, if we are going to make such distinctions, we don't also point to the underserving rich:

                                                                      Chris Dillow:

                                                                      A few days ago, the great Paul Sagar noted an asymmetry in the Tory attitude to "fairness" - that whereas they are keen to point to the "undeserving poor", they are silent about the undeserving rich.

                                                                        Posted by on Sunday, October 24, 2010 at 11:07 AM in Economics, Social Insurance | Permalink  Comments (17) 

                                                                        Saturday, October 23, 2010

                                                                        links for 2010-10-23

                                                                          Posted by on Saturday, October 23, 2010 at 11:01 PM in Economics, Links | Permalink  Comments (30) 

                                                                          Romer: Now Isn’t the Time to Cut the Deficit

                                                                          Christina Romer doesn't even bother to try to make an argument for additional fiscal intervention with an eye toward job creation. She has, apparently, given up all hope that fiscal policymakers will provide the additional help that the economy needs. Instead, she is doing her best to prevent Congress from making things worse:

                                                                          Now Isn’t the Time to Cut the Deficit, by Christina Romer, Commentary, NY Times: The clamor to cut the budget deficit is deafening. Blue Dog Democrats, Tea Party Republicans and doomsday economists are calling for immediate action. And the demands for austerity coming from abroad are even louder.
                                                                          Make no mistake: persistent large budget deficits are a significant problem. ... And our projected long-run deficits are simply unsustainable. So, the question is not whether we need to reduce our deficit. Of course we do. The question is when.
                                                                          Now is not the time. Unemployment is still near 10 percent in the United States and in Europe. ... Immediate moves to lower the deficit substantially would likely result in a 1937-like “double dip” as we struggle to recover from the Great Recession.
                                                                          Some advocates of austerity argue that ... fiscal tightening now would lower long-term interest rates and improve confidence so much that the impact could be positive. But an ambitious new study in the World Economic Outlook of the International Monetary Fund confirms that fiscal consolidations — that is, deliberate deficit reductions — typically reduce growth substantially. ...
                                                                          Taking budget actions now that would further increase unemployment would be not only cruel, but also short-sighted. The longer unemployment remains high, the more likely it is to become permanent as workers’ skills deteriorate and they gradually drop out of the labor force. Such a situation would be terrible for both the affected workers and the long-run budget situation. ...
                                                                          Today, markets are willing to lend to the American government at the lowest 20-year interest rate since 1958. In the crisis of 2008 and 2009, money flowed to the United States because it was seen as the safest spot in the storm. There is no evidence that we have to act immediately. ...
                                                                          While immediate fiscal tightening isn’t wise for the United States, we do need to address the deficit. The best thing would be for Congress to pass a plan now that will reduce deficits when the economy is back to normal. ... History shows that well-designed backloaded plans are credible. ...
                                                                          Such backloaded deficit reduction would not hurt growth in the short run — and could raise it. If uncertainty about future budget policy is harming confidence, as some business leaders suggest, spelling out future spending and tax changes could be helpful. More important, showing that policy makers can come together and make essential decisions about our fiscal challenges would reassure all Americans that our economic future is better than the current grim reality.

                                                                            Posted by on Saturday, October 23, 2010 at 03:24 PM in Budget Deficit, Economics, Fiscal Policy, Politics | Permalink  Comments (52) 

                                                                            Too Much Focus on the Yuan?

                                                                            Auerbach and Obstfeld argue that "Chinese revaluation – whether forced of voluntary – will not be a free lunch for the US," and that we "should first consider further fiscal expansion":

                                                                            Too much focus on the yuan?, by Alan J Auerbach and Maurice Obstfeld, Vox EU: China’s trading partners have long criticized the country’s policy of maintaining a weak renminbi. These complaints have intensified in the face of continuing high unemployment and slow recovery in high-income industrial countries (see recent contributions by Caballero 2010 and Huang 2010). Threats of trade sanctions by the US Congress have resulted in periods of measured and limited renminbi appreciation – most recently, a 2.3% rise against the dollar between early September and mid-October 2010. But such gestures by the Chinese authorities fall far short of the 20%-or-better, maxi-revaluation demanded by China’s critics in the US and elsewhere.
                                                                            International tensions have intensified as a number of other emerging market economies, following China, are likewise resisting currency appreciation. But promoting domestic economic growth at the expense of other countries through currency devaluation raises the fear that a “currency war” escalates into a war of administrative trade barriers that would severely harm the international trading system.
                                                                            Why are pro-aggregate demand devaluations so popular?
                                                                            Why is currency devaluation perennially so attractive as a way to stimulate aggregate demand? One reason is the perception that its cost – in terms of higher prices paid for imports relative to those charged for exports – is moderate and spread quite broadly among consumers, so that the cost per household is small. But other policies to stimulate demand, such as fiscal policies, also have costs that would be shared quite broadly among households. If the goal of policy in the current slowdown is to achieve a given stimulus at the lowest aggregate cost, then it is not obvious that pressuring China over its exchange-rate intervention policies is the most efficient way to go.

                                                                            Continue reading "Too Much Focus on the Yuan?" »

                                                                              Posted by on Saturday, October 23, 2010 at 12:40 AM in Economics, International Finance, International Trade | Permalink  Comments (21) 

                                                                              What's the Big Idea?

                                                                              I started this blog shortly after George Bush was reelected, and though many people assume that it was the presence of Republicans in power that was the primary motivation, that isn't the whole story. That was part of the motivation, no doubt, but there were two other factors that were more important. The first was how economic issues such as Social Security and tax cuts were being portrayed in the media, for example the false perceptions being generated about Social Security's long-run stability and the silly idea that tax cuts would pay for themselves that I heard so often.

                                                                              But the biggest factor was that I felt Democrats were being misrepresented in the media. CNN in particular comes to mind. In the run-up to the election, it was the same people day after day representing Democrats in the media, and I did not feel they were doing a good job -- at all -- of representing the Party's views on economics or anything else. The voices I heard most often were far, far to the left of me, and, I thought, far too easy to dismiss. I wasn't persuaded by their arguments -- often wanting to tear my hair out when they didn't make the obvious rebuttal to crazy claims from the other side, and instead often sounded a bit crazy themselves -- so how could people on the fence be convinced that Democrats had better ideas? It was as though the TV shows would pick the most clueless, outlandish, easiest people to dismiss whenever they interviewed Democrats or pitted Democrats against Republicans. If only people knew who we really are, I would think, and what we actually stand for, certainly they would be persuaded. I never thought it would go anywhere, but starting the blog was part of the reaction to the feeling that Democrats in the silent majority needed to start speaking up and making their voices heard.

                                                                              Now I'm frustrated again. Though I didn't always agree with it, prior to the Bush reelection at least there was a voice representing Democrats. Right now, there is no voice, at least not one I can hear. There are plenty of Democrats talking with loud voices, more than ever I'd guess, but there is no leadership to coordinate those voices and pull them into an harmonious whole with broad based appeal. We finally have control of the ship, and the captain is wandering aimlessly. What is Obama's vision? Where are we trying to go? What is the grander goal that is being served by the polices and strategies he is pursuing? Yes, he gives good speeches, but what is the single theme that runs through them all to coordinate and steer the party toward this larger vision? What is the big idea behind it all that is supposed to unite us? Without effective leadership, the unified vision the party needs to be successful will not emerge from the many strong voices seeking to provide the direction the party seems to lack.

                                                                              The problem, however, is that I don't know if the centrist, bipartisan seeking, compromising Obama we have seen to date can actually embrace an encompassing vision. He seems afraid to be a Democrat, as though standing uncompromisingly for an idea will scare people away rather than attract them, and that needs to change.

                                                                                Posted by on Saturday, October 23, 2010 at 12:36 AM in Economics, Politics | Permalink  Comments (117) 

                                                                                Friday, October 22, 2010

                                                                                links for 2010-10-22

                                                                                  Posted by on Friday, October 22, 2010 at 11:01 PM in Economics, Links | Permalink  Comments (29) 

                                                                                  Paul Krugman: British Fashion Victims

                                                                                  Britain is determined to repeat the mistakes of the past:

                                                                                  British Fashion Victims, by Paul Krugman, Commentary, NY Times: In the spring of 2010, fiscal austerity became fashionable. I use the term advisedly: the sudden consensus among Very Serious People that everyone must balance budgets now now now wasn’t based on any kind of careful analysis. It was more like a fad, something everyone professed to believe because that was what the in-crowd was saying.
                                                                                  And it’s a fad that has been fading lately, as evidence has accumulated that the lessons of the past remain relevant, that trying to balance budgets in the face of high unemployment and falling inflation is still a really bad idea. Most notably, the confidence fairy has been exposed as a myth. There have been widespread claims that deficit-cutting actually reduces unemployment because it reassures consumers and businesses; but multiple studies ... have shown that this claim has no basis in reality.
                                                                                  No widespread fad ever passes, however, without leaving some fashion victims in its wake. In this case, the victims are the people of Britain, who have the misfortune to be ruled by a government that took office at the height of the austerity fad and won’t admit that it was wrong. ...
                                                                                  The ... British government seems determined to ignore the lessons of history. Both the new British budget announced on Wednesday and the rhetoric that accompanied the announcement might have come straight from the desk of Andrew Mellon, the Treasury secretary who told President Herbert Hoover to fight the Depression by liquidating the farmers, liquidating the workers, and driving down wages. Or if you prefer more British precedents, it echoes the Snowden budget of 1931, which tried to restore confidence but ended up deepening the economic crisis.
                                                                                  The British government’s plan is bold, say the pundits... But it boldly goes in exactly the wrong direction. It would cut government employment by 490,000 workers — the equivalent of almost three million layoffs in the United States — at a time when the private sector is in no position to provide alternative employment. It would slash spending at a time when private demand isn’t at all ready to take up the slack.
                                                                                  Why is the British government doing this? The real reason has a lot to do with ideology: the Tories are using the deficit as an excuse to downsize the welfare state. But the official rationale is that there is no alternative.
                                                                                  Indeed, there has been a noticeable change in the rhetoric of the government of Prime Minister David Cameron over the past few weeks — a shift from hope to fear. In his speech announcing the budget plan, George Osborne, the chancellor of the Exchequer, seemed to have given up on the confidence fairy — that is, on claims that the plan would have positive effects on employment and growth.
                                                                                  Instead, it was all about the apocalypse looming if Britain failed to go down this route. Never mind that British debt as a percentage of national income is actually below its historical average; never mind that British interest rates stayed low even as the nation’s budget deficit soared, reflecting the belief of investors that the country can and will get its finances under control. Britain, declared Mr. Osborne, was on the “brink of bankruptcy.”
                                                                                  What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it.

                                                                                    Posted by on Friday, October 22, 2010 at 12:18 AM in Budget Deficit, Economics, Politics | Permalink  Comments (103) 

                                                                                    $60 Billion Lost Annually to Tax Loophole

                                                                                    We're losing quite a bit of tax revenue to transfer pricing strategies:

                                                                                    Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes, by Jesse Drucker, Bloomberg: Google Inc. cut its taxes by $3.1 billion in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda.
                                                                                    Google’s income shifting -- involving strategies known to lawyers as the “Double Irish” and the “Dutch Sandwich” -- helped reduce its overseas tax rate to 2.4 percent...
                                                                                    Google, the owner of the world’s most popular search engine, uses a strategy that has gained favor among such companies as Facebook Inc. and Microsoft Corp. The method takes advantage of Irish tax law to legally shuttle profits into and out of subsidiaries there, largely escaping the country’s 12.5 percent income tax. ... The earnings wind up in island havens that levy no corporate income taxes at all. ...
                                                                                    The tactics of Google and Facebook depend on “transfer pricing,” paper transactions among corporate subsidiaries that allow for allocating income to tax havens while attributing expenses to higher-tax countries. Such income shifting costs the U.S. government as much as $60 billion in annual revenue...
                                                                                    Google is “flying a banner of doing no evil, and then they’re perpetrating evil under our noses,” said Abraham J. Briloff, a professor emeritus of accounting at Baruch College in New York who has examined Google’s tax disclosures.
                                                                                    “Who is it that paid for the underlying concept on which they built these billions of dollars of revenues?” Briloff said. “It was paid for by the United States citizenry.”
                                                                                    The U.S. National Science Foundation funded the mid-1990s research at Stanford University that helped lead to Google’s creation. Taxpayers also paid for a scholarship for the company’s cofounder, Sergey Brin, while he worked on that research. ...
                                                                                    Technically, multinationals that shift profits overseas are deferring U.S. income taxes, not avoiding them permanently. The deferral lasts until companies decide to bring the earnings back to the U.S. In practice, they rarely repatriate significant portions, thus avoiding the taxes indefinitely...
                                                                                    U.S. policy makers, meanwhile, have taken halting steps to address concerns about transfer pricing. In 2009, the Treasury Department proposed levying taxes on certain payments between U.S. companies’ foreign subsidiaries.
                                                                                    Treasury officials, who estimated the policy change would raise $86.5 billion in new revenue over the next decade, dropped it after Congress and Treasury were lobbied by companies...
                                                                                    The rules for transfer pricing should be replaced with a system that allocates profits among countries the way most U.S. states with a corporate income tax do -- based on such aspects as sales or number of employees in each jurisdiction, said Reuven S. Avi-Yonah, director of the international tax program at the University of Michigan Law School.
                                                                                    “The system is broken and I think it needs to be scrapped,” said Avi-Yonah... “Companies are getting away with murder.”

                                                                                    The plan was "dropped it after Congress and Treasury were lobbied by companies." What a surprise.

                                                                                      Posted by on Friday, October 22, 2010 at 12:16 AM in Economics, Taxes | Permalink  Comments (19) 

                                                                                      Slides for "Shadow Bank Runs and Balance Sheet Recessions"

                                                                                      For anyone who might be interested, here are the slides to the talk I gave yesterday on bank runs in the shadow banking system and balance sheet recessions.

                                                                                        Posted by on Friday, October 22, 2010 at 12:12 AM in Economics | Permalink  Comments (12) 

                                                                                        Thursday, October 21, 2010

                                                                                        links for 2010-10-21

                                                                                          Posted by on Thursday, October 21, 2010 at 11:01 PM in Economics, Links | Permalink  Comments (22) 

                                                                                          "Are You Happy Or Angry That The Government Has Made 8.2% on TARP?"

                                                                                          Stan Collender has a question for you:

                                                                                          Are You Happy Or Angry That The Government Has Made 8.2% on TARP?, by Stan Collender: This story from Bloomberg reporters Yalman Onaran and Alexis Leondis is making the rounds in the blogosphere today.  According to an analysis conducted by Bloomberg...

                                                                                          The U.S. government’s bailout of financial firms through the Troubled Asset Relief Program provided taxpayers with higher returns than they could have made buying 30-year Treasury bonds -- enough money to fund the Securities and Exchange Commission for the next two decades.

                                                                                          The government has earned $25.2 billion on its investment of $309 billion in banks and insurance companies, an 8.2 percent return over two years, according to data compiled by Bloomberg. That beat U.S. Treasuries, high-yield savings accounts, money- market funds and certificates of deposit.

                                                                                          But as the story also notes, "Democrats are struggling to turn those gains into political capital..."

                                                                                          How is it possible that an investment that makes the federal government look like it has the smarts of Warren Buffet is such a hard sell with voters?

                                                                                          Part of the reason may be that voters think the 8.2 percent is coming out of their rather than the financial institutions' pockets.  At least that's what I heard at several focus groups I observed earlier in the year.  The participants in the focus groups bristled when they were asked about the profits the government was making on TARP.  Rather than be happy about it, they insisted that the banks were repaying the TARP funds and interest with higher fees that customers were being charged rather than by reducing other costs or lowering dividends.

                                                                                          It was almost a perfect example of a total no-win situation.  They would have been angry if the government lost money and they were definitely angry that it was getting paid back.  They would also have been angry if the government had made no attempt to deal with the situation, that is, if there had been no TARP, and they were clearly irate at everyone who had anything to do with it being enacted.

                                                                                          Because of this, not only is turning the latest TARP results into political capital always going to be difficult, but just keeping it from being a complete negative may be impossible.

                                                                                          People I talk to, people I think should know better, tell me that it would have been better to let the system crash and burn. As far as I can tell, and this is admittedly anecdotal, the idea that TARP saved us from a greater catastrophe hasn't taken hold with the public.

                                                                                            Posted by on Thursday, October 21, 2010 at 12:42 AM in Economics, Financial System | Permalink  Comments (82) 

                                                                                            "Shared Prosperity Lost"

                                                                                            Shared prosperity seems to have ended in the mid 1970s:

                                                                                            Shared Prosperity Lost, by Chad Stone, CBPP: Describing the social and economic costs of growing income inequality, economist Robert Frank explained in yesterday’ New York Times that while the first three decades after World War II were a time of broadly shared prosperity, income gains over the next three decades went almost entirely to the very wealthy. You can see the striking contrast in the graph below. ...
                                                                                            The chart shows the divergent trends between the rich and everyone else since the 1970s that we have analyzed in greater detail here and here. ...

                                                                                            Why has this happened? Since time is short, here's a debate from the past on this topic among Paul Krugman, Brad DeLong, Dean Baker, Greg Mankiw, Alex Tabarrok, me, and others (much of the debate is in the links referenced in the posts): Policy and Income Inequality, Krugman: Gilded Age II, Here We Come, Why Oh Why is Income Inequality Increasing?.

                                                                                              Posted by on Thursday, October 21, 2010 at 12:34 AM in Economics, Income Distribution | Permalink  Comments (76) 

                                                                                              Does Male Performance Advantage in Competitive Environments Explain the Pay Gap?

                                                                                              Can the pay gap between men and women be explained by differences in how men and women respond to competitive environments? According to this, the answer is no:

                                                                                              Can gender differences in competition explain the achievement gap?, by Christopher Cotton, Frank McIntyre, and Joseph Price, voxeu.org: Last week the World Economic Forum released its Global Gender Gap Report (Hausmann et al. 2010). As expected, the data in the report illustrates a significant and persistent pay and achievement gap between males and females around the world.

                                                                                              • The gap exists in all countries, although some countries (e.g., those in Scandinavia) had a smaller gap than others (e.g., those in the Middle East).
                                                                                              • In every single country for which there are data, females tend to earn less than males in similar jobs, and in all but four countries, females account for less than half of the senior positions in business and government.
                                                                                              • Even if we account for gender differences in labor force participation, in only 11 countries (representing just 2.4% of the world population) do females account for their share of senior positions in business and government.

                                                                                              This evidence is consistent with Bertrand and Hallock (2001), who show that women make up only 2.5% of the top executives in S&P 1500 firms, and Wolfers (2006), who shows that females make up only 1.3% of CEOs of the same firms. These differences even persist in developed countries, where females are more likely to attend college than males (e.g., women make up 58% of college enrolment in both the US and UK according to the World Economic Forum report).

                                                                                              What accounts for these persistent gender differences in professional achievement and pay remains an open question. Explanations range from discrimination to differences in preferences. Gneezy et al. (2003) and Gneezy and Rustichini (2004) propose a novel explanation for the differences in achievement based on the idea that females perform worse than males in competitive environments. In Gneezy et al. (2003) college students race to complete mazes, and Gneezy and Rustichini (2004) consider footraces between children. Both studies show that males increase their performance by more than females when faced with competition.

                                                                                              A closer look at the male advantage during competition

                                                                                              In recent research (Cotton et al. 2010a), we consider this explanation for the gender achievement gap in detail. At the heart of our analysis is a series of in-classroom competitions we conducted with 505 primary school students. The contests involved students completing math quizzes in competition against randomly assigned opponents. Each student participated in up to five sequential rounds of competition. Each round involved a new opponent and new quiz questions selected from past year standardized tests for their current age.

                                                                                              Our experimental approach has four primary advantages over past studies.

                                                                                              Continue reading "Does Male Performance Advantage in Competitive Environments Explain the Pay Gap?" »

                                                                                                Posted by on Thursday, October 21, 2010 at 12:26 AM in Economics | Permalink  Comments (12) 

                                                                                                What Would Milton Friedman Say? What Did Milton Friedman Say?

                                                                                                David Beckworth and William Ruger on what Friedman would have said:

                                                                                                What Would Milton Friedman Say About Fed Policy Under Bernanke?, by David Beckworth and William Ruger, Business Insider: Four years after his death, Milton Friedman's thoughts on monetary policy remain as relevant today as they were 30 years ago. Even Fed Chairman "Helicopter Ben" Bernanke (whose nickname comes from Friedman's famous "helicopter drop" idea for overcoming deflation) has referenced the Chicago don as an inspiration for his actions. ... [continue] ...

                                                                                                Brad DeLong on what Friedman did say:

                                                                                                It Is Not Just John Maynard Keynes, It Is Milton Friedman Who Is Being Thrown Over the Side, by Brad DeLong: Any time that the views of Milton Friedman are denounced as those of a left-wing semi-socialist kook, something has gone very, very wrong.
                                                                                                Has something gone very very wrong? Yes, it has.
                                                                                                Landon Thomas covers the train wreck, includes my observations about not Keynes, but not Friedman: ... [continue] ...

                                                                                                  Posted by on Thursday, October 21, 2010 at 12:15 AM in Economics | Permalink  Comments (10) 

                                                                                                  Wednesday, October 20, 2010

                                                                                                  links for 2010-10-20

                                                                                                    Posted by on Wednesday, October 20, 2010 at 11:01 PM in Economics, Links | Permalink  Comments (39) 

                                                                                                    The Dollar, Multiple Reserve Currencies, and Obama at Halftime

                                                                                                    Due to travel today, a reception this evening, a talk in the early morning, a class to teach late tomorrow afternoon after returning, and the cold I caught yesterday, I don't know how much I'll be able to do until late tomorrow. So here's a few things from Project Syndicate that might be of interest in the interim (I also haven't been able to get to comments for the last two days, and I apologize for that I'll catch up as soon as I can):

                                                                                                    The Future of the Dollar, by Martin Feldstein, Commentary, Project Syndicate: ...The goal of a strong dollar at home has guided the Federal Reserve at least since Paul Volcker crushed inflation in the early 1980’s. ... For decades, US Treasury officials have insisted that “A strong dollar is good for America.” But that slogan has never been a guide to official US action in international markets.
                                                                                                    The Treasury does not intervene in currency markets to bolster the dollar, and the Fed does not raise interest rates for that purpose. Instead, the US stresses to foreign governments that an effective global trading system requires not only the removal of formal trade barriers, but also the absence of policies aimed at causing currency values that promote large trade surpluses.
                                                                                                    In recent years, countries around the world have accumulated very large volumes of foreign exchange, topped by China with more than $2 trillion... The US dollar is and will remain these countries’ major investment currency...
                                                                                                    The major risk to the sustained role of the dollar is the large and growing US national debt. ... Foreign investors might ... fear that future US administrations will be tempted to reduce the real value of that debt by allowing a higher inflation rate. But that is unlikely, given the Fed’s general anti-inflationary consensus...
                                                                                                    But foreign investors ... could still have reason to worry that the US might someday try to reduce the value of its debt in a way that adversely affects them but not Americans... This need not mean outright default; a plan to repay principal and interest with low-interest securities rather than cash – or to withhold income tax on interest earned from government bonds, crediting those taxes against the obligations of American taxpayers – would achieve the same result.
                                                                                                    While such policies are extremely unlikely, fear of such possibilities could cause foreign investors to shun the dollar. ... The best protection of the dollar’s future role – and of the health of the US economy – will be policies that reduce the growth of the national debt.

                                                                                                    Barry Eichengreen continues the discussion on whether the dollar will remain the world's reserve currency:

                                                                                                    A World of Multiple Reserve Currencies, by Barry Eichengreen, Commentary, Project Syndicate: The competition for reserve-currency status is conventionally portrayed as a winner-take-all game. There is room, in this view, for just one full-fledged international currency. ...
                                                                                                    Market logic, it is argued, dictates this result. For importers and exporters, quoting prices in the same currency ... as other importers and exporters avoids confusing one’s customers. For central banks, holding reserves in the same currency as other central banks means holding the most liquid asset. With everyone else buying, selling, and holding dollars, it pays to do the same...
                                                                                                    But this premise is wrong, for three reasons. First... Once upon a time, comparing prices in dollars and euros might have been beyond the capacity of all but the most sophisticated traders and investors. Nowadays, “Currency Converter” is one of the Apple app store’s top ten downloads.
                                                                                                    Second, the sheer size of today’s global economy means that there is now room for deep and liquid markets in more than one currency.
                                                                                                    Finally, the view that there can be just one international and reserve currency at any point in time is inconsistent with history. Before 1914, there were three international currencies: the British pound, the French franc, and the German mark. ...
                                                                                                    The implication is that the dollar, the euro, and the renminbi will share the roles of invoicing currency, settlement currency, and reserve currency in coming years. To be sure, all three currencies have their critics. ... But the very fact that there are questions about all three currencies means that none of them will obviously dominate. ...
                                                                                                    Some worry about the stability of this world of multiple international currencies. They shouldn’t: a more decentralized international monetary system is precisely what is needed to prevent a replay of the financial crisis. ... No one country will be able to run current-account deficits and use foreign finance to indulge in financial excesses as freely as the United States did in recent years. This will make the world a safer place financially. ...

                                                                                                    Finally, Michael Spence on what the Obama administration could have don differently during its first two years:

                                                                                                    Obama at Halftime, by Michael Spence, Commentary, Project Syndicate: In September 2008, the global economy and financial system was hit by an earthquake, whose epicenter was in the United States. ... The presidential election was two months away. The timing, from the point of view of crisis management, could not have been worse. ...
                                                                                                    The Obama administration ... assumed responsibility for organizing the government’s efforts to boost recovery, the centerpiece being a large stimulus package... After its enactment in late February 2009, the markets’ downward plunge began to decelerate, and prices stabilized...
                                                                                                    The Obama administration was not responsible for poor US economic performance in the immediate post-crisis period; that was inevitable. But it was responsible for allowing flawed expectations of a sharp recovery ... to persist. And that left the administration open to the charge that bad policy was the cause of poor economic performance.
                                                                                                    The administration needed to see – and to say – that the debt-fueled pre-crisis economy was on a dangerously unsustainable path, and that the challenge now, having averted a depression, was to make a difficult transition to a new path. Instead, it treated the Great Recession as similar to others in the recent past, albeit deeper. ...
                                                                                                    And now, as the administration shifts to a more central focus on restoring growth and employment, it risks getting bogged down as declining economic performance relative to expectations translates into waning political support.
                                                                                                    The administration is not entirely to blame... It has had to deal with a widespread and understandable loss of confidence in elites – academics, policy analysts, Wall Street, business leaders, regulators, and politicians – which makes implementing pragmatic, centrist policies more difficult. This phenomenon precedes the crisis, but the crisis has certainly made it worse. Elites, after all, failed to see the crisis coming and to take steps to prevent it, and some of them appear to be the only ones who are recovering: profits are up, but employment is not.
                                                                                                    Moreover, many Americans’ anxiety is rooted in deepening income inequality. The economic and political implications of this long-term trend have been widely discussed but left largely unattended, betraying the general lack of concern for distributional issues that shadows elites’ excessive faith in markets to provide beneficial outcomes.
                                                                                                    Indeed, a lack of clarity about means and ends spans American politics. Markets, regulatory frameworks, and public-sector investments are means to attain shared goals. The administration, political and policy elites, and private-sector leaders need to state clearly that the main goal of domestic economic policy and strategy is to reestablish a pattern of inclusive growth and employment. ...
                                                                                                    Obama needs to take the lead in redirecting a highly polarized political environment engaged in a debate about the appropriate role and size of government toward a more pragmatic, results-oriented agenda.

                                                                                                      Posted by on Wednesday, October 20, 2010 at 02:07 PM in Economics | Permalink  Comments (12)