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Sunday, December 19, 2010

"Sunshine: at the IMF, of all Places"

A new paper argues that the best solution to a financial crisis like the one we just experienced is to increase the share of income going to labor:

Sunshine: at the IMF, of all places, by Alex Harrowell, A Fist Full of Euros: So, here we are, after a 2010 of economic horrors. There is extensive debate as to whether the standard tools of economics are even valid... But is anyone at least trying to do something original with the standard toolkit? The DSGE model may be one of John Quiggin’s zombies..., but zombies are notoriously resilient. ...

The answer on this occasion is yes, at least as far as Michael Kumhof and Romain Ranciére, go. In a new paper, they present a DSGE model... Then, they run a simulation of the macro-economy assuming that there is a negative shock to the bargaining power of labor resulting in a shift in the income distribution.

The simulation results were that the financial sector balloons in size, that total private debt in the economy expands hugely, and that credit acts as a substitute for rising average wages in the short run. Eventually, the model produced a massive financial crisis and a brutal recession, followed by a blow-out of the government budget.

Your keen and agile minds will not have missed that flat real wages, an increased share of national income going to the top 5%, enormous growth in the financial sector, and a credit-financed consumer boom are exactly what happened to the macroeconomy in the last 30 years. ...

So, what should we do about it? Kumhof and Ranciére have something to say about that as well. ... They considered a scenario in which the government took the pain, accepting a large government deficit in order to minimize the impact of the crisis on the real economy. This had the advantage of reducing the fall in GDP, and therefore allowing growth to reduce households’ leverage. They also considered the option of just suffering, which actually increased leverage as incomes fell and the stock of debt remained.

Then they considered two more positive responses to the crisis. One was a debt restructuring, or to be brutal about it, widespread default and bankruptcy. This had the advantage that it does, indeed, reduce the leverage burden and does so cheaply. It also implies the end of the big banks...

The other was to increase labor's share of income. They found that this achieved a faster, bigger, and more lasting reduction in leverage and a reduced probability of crises. In their own words:

...For long-run sustainability a permanent flow adjustment, giving workers the means to repay their obligations over time, is therefore much more successful... But without the prospect of a recovery in the incomes of poor and middle income households over a reasonable time horizon, the inevitable result is that loans keep growing, and therefore so does leverage and the probability of a major crisis that, in the real world, typically also has severe implications for the real economy.

They also argue that the inequality-finance-lending transmission mechanism might also explain the global imbalances... However, they haven’t extended the model to include the international dimension yet, although it’s on their agenda for further research.

I’ve waited for this moment, 752 words on, to mention the key detail: this cell of dangerous subversive Bolsheviks is embedded in the International Monetary Fund, and their poisonous hate-writings were published as an IMF Working Paper. Perhaps DSK really has had an influence on the institution? ...

    Posted by on Sunday, December 19, 2010 at 09:54 AM in Academic Papers, Economics, Fiscal Policy, Income Distribution | Permalink  Comments (29) 


    Where Does Hate Come From?

    Daniel Little has a question:

    Hate as a social demographic : Every democracy I can think of has a meaningful (though usually small) proportion of citizens who fall on the extreme right by any standard: racist, White supremacist, hateful, anti-immigrant, anti-Semitic, anti-Muslim, nativist, nationalist, or violently anti-government individuals and groups. In the United States we have many, many organizations that are basically racist and potentially violent hate groups. They provide a basis for cultivating, recruiting and mobilizing like-minded followers, and they are sometimes co-opted by opportunistic politicians for their own narrow purposes. The Southern Poverty Law Center and the Anti-Defamation League do a great job and a needed service in tracking many of these organizations. (For example, SPL monitors 26 hate groups in the state of Michigan.)  The umbrella term for these organizations and individuals is "hate groups" -- individuals and organizations who organize their views of the social world around intolerance of other groups and a motivation to harm or subordinate those other people.

    A recent report by the Institute for Research and Education on Human Rights provides a detailed snapshot of how some of these racist groups have shown up in the Tea Party movement. The NAACP made a very careful statement about racist statements and provocations that had occurred at Tea Party protests in 2009 and 2010, including the egregious incident that occurred in Washington in which Representatives Emanuel Cleaver, John Lewis, and Barney Frank were showered with vitriol. And this temperate and careful statement was derided by Tea Party leaders. The IREHR study goes a long way to document the concerns raised in the NAACP statement.

    The maps of Tea Party membership are genuinely interesting. Here is an aggregate map including six factions of Tea Party organizations around the country (p. 14):

    Here is a summary finding from the IREHR report:

    Tea Party organizations have given platforms to anti-Semites, racists, and bigots. Further, hard-core white nationalists have been attracted to these protests, looking for potential recruits and hoping to push these (white) protestors towards a more self-conscious and ideological white supremacy. One temperature gauge of these events is the fact that longtime national socialist David Duke is hoping to find money and support enough in the Tea Party ranks to launch yet another electoral campaign in the 2012 Republican primaries. (7)

    What I find really worth considering is the question of the fact of the very existence of these pockets of virulent racists and anti-semites in our society. I'm not thinking here of garden-variety racial stereotyping and prejudice, which is surely much more widespread, but of a kind of racism that extends to overt hostility and sometimes violence against the other group. It is hard to estimate the percentage of our society that falls in this category, though there are some public opinion surveys that help us make a crude estimate (Howard Schuman, Charlotte Steeh, Lawrence Bobo, Racial Attitudes in America: Trends and Interpretations, Revised Edition and Schuman and Bobo, "Survey-Based Experiments on White Racial Attitudes towards Residential Integration" (link); Pew Research Center, "Race, Ethnicity & Campaign '08" (link)).

    Continue reading "Where Does Hate Come From?" »

      Posted by on Sunday, December 19, 2010 at 09:45 AM in Economics | Permalink  Comments (26) 


      Saturday, December 18, 2010

      links for 2010-12-18

        Posted by on Saturday, December 18, 2010 at 10:11 PM in Economics, Links | Permalink  Comments (10) 


        Thaler: Time to Rethink the Charity Deduction

        Richard Thaler says we should rethink the deduction for charitable giving:

        It’s Time to Rethink the Charity Deduction, by Richard Thaler, Commentary, NY Times: Now that Congress has actually managed to enact tax legislation, it may be time to consider some bigger issues. I hope that broad-based tax reform will be high on the list of both major parties. ...
        Two deductions are likely to be central in any debate on tax reform: those for mortgage interest and for donations to charity. ... I will concentrate on charitable giving. ...
        It would be reasonable to ask why the government should subsidize charitable contributions at all. But for now, let’s discuss this simpler and more politically relevant question: If we are going to continue subsidizing these donations, what is the best way to do it?
        First,... strictly speaking, your eligibility to deduct a charitable contribution doesn’t depend on whether you have a big mortgage. But it might as well. You can deduct charitable contributions only if you itemize..., and the most common way a household collects enough deductions to make itemizing worthwhile is to have a big mortgage. ...
        But I challenge anyone to justify a system in which we essentially subsidize contributions made by people with big mortgages. For one thing, this set-up magnifies the already large distortion created by the mortgage interest subsidy...
        It is equally hard to justify subsidizing the gifts of rich people more than those of poor people. ... In the overall debate, we should be consistent above all else. If we think that high marginal tax rates are bad because they distort incentives, the same is then true for tax subsidies. If people want to give money to a worthy organization, applaud them. But let them do it on their own dime. I don’t think it says anywhere in the Bible that tithing should be calculated on a before-tax basis.

        The one thing I wonder is the extent to which substantially reducing or ending the subsidy would cause charitable giving to decline and, in turn, how much it would reduce help for those in need. The government relies upon the private sector to provide social services, and it encourages this behavior through a tax subsidy for charitable giving. Soup kitchens financed by donations are a good example of this. If those subsidies end and services decline, the federal government is unlikely to step in and provide the services itself given the current political climate.

          Posted by on Saturday, December 18, 2010 at 02:07 PM in Economics, Social Insurance | Permalink  Comments (68) 


          "Springtime for Hypocrites"

          Paul Krugman:

          Just two weeks ago, the deficit was the great evil, and all the VSPs insisted that we needed fiscal austerity now now now. Then, magically, a big tax cut — increasing federal debt by more than the original Obama stimulus, and substantially raising the probability of making unaffordable tax cuts permanent — was the greatest thing since sliced bread.

          Why, it’s almost as if all the concern about the deficit was a front for opposing anything progressives might want, to be dropped as soon as debt was being run up on behalf of conservative goals. But that can’t be true, can it?

          Many Republicans are still playing starve the beast. The next step for the GOP is to use the deficit problems that are created by the tax cut legislation as evidence that government spending is out of control. The biggest target for cuts will be social insurance programs. I wonder how many people realize that the revenue loss from the tax cuts will be more than three times the shortfall in Social Security (the tax cuts to those making over $250,000 alone would eliminate the Social Security shortfall)?

            Posted by on Saturday, December 18, 2010 at 11:34 AM in Budget Deficit, Economics, Politics | Permalink  Comments (51) 


            Nominal GDP Growth Targeting

            In 1997, Ben Bernanke and Frederic Mishkin explained why they do not think that targeting nominal GDP growth is better than targeting inflation:

            Is Inflation the Right Goal Variable for Monetary Policy? The consensus that monetary policy is neutral in the long run restricts the set of feasible long-run goal variables for monetary policy, but inflation is not the only possibility. Notably, a number of economists have proposed that central banks should target the growth rate of nominal GDP rather than inflation (Taylor (1985); Hall and Mankiw (1994)). Nominal GDP growth, which can be thought of as "velocity-corrected" money growth (that is, if velocity were constant, nominal GDP growth and money growth would be equal, by definition), has the advantage that it does put some weight on output as well as prices. Under a nominal GDP target, a decline in projected real output growth would automatically imply an increase in the central bank's inflation target, which would tend to be stabilizing.[14] Also, Cecchetti (1995) has presented simulations that suggest that policies directed to stabilizing nominal GDP growth may be more likely to produce good economic outcomes, given the difficulty of predicting and controlling inflation:
            Nominal GDP targeting is a reasonable alternative to inflation targeting, and one that is generally consistent with the overall strategy for monetary policy discussed in this article. However, we have three reasons for mildly preferring inflation targets to nominal GDP targets. First, information on prices is more timely and frequently received than data on nominal GDP (and could be made even more so), a practical consideration which offsets some of the theoretical appeal of the nominal GDP target. Although 20 collection of data on nominal GDP could also be improved, measurement of nominal GDP involves data on current quantities as well as current prices and thus is probably intrinsically more difficult to accomplish in a timely fashion. Second, given the various escape clauses and provisions for short-run flexibility built into the inflation-targeting approach, we doubt that there is much practical difference in the degree to which inflation targeting and nominal GDP targeting would allow accommodation of short-run stabilization objectives. Finally, and perhaps most important, it seems likely that the concept of inflation is better understood by the public than the concept of nominal GDP, which could easily be confused with real GDP. If this is so, the objectives of communication and transparency would be better served by the use of an inflation target. As a matter of revealed preference, all central banks which have thus far adopted this general framework have chosen to target inflation rather than nominal GDP.

            Here's the question I have, and a shot at the answer. If we link the growth of nominal GDP to the federal funds rate (as opposed to the money supply), then it shares many characteristics of a Taylor rule. That is, the growth rate of nominal GDP is equal to the growth rate of output plus the growth rate of prices, i.e. output growth plus inflation. Thus, an interest rate rule connected to the growth rate of nominal GDP would be of form i = f(output growth, inflation) which is very close to a standard Taylor rule formulation.

            My intuition was that nominal GDP targeting based upon a rule of this type would exhibit indeterminacy. However, surprisingly to me, this is not the case. In 2003, Kaushik Mitra showed that a rule where the interest rate is adjusted so as to keep nominal GDP growth as close as possible to a constant value does not suffer from this problem. The rational expectations equilibrium is locally unique under nominal GDP growth targeting (essentially, the rule satisfies the Taylor principle of moving the nominal interest rate more than one-to-one with expected inflation). Furthermore, the equilibrium is stable under learning. This is important because, as Mitra notes:

            [Howitt] explicitly warned that, in general, any RE analysis of monetary policy should be supplemented with an investigation of its stability under learning. He emphasized that the assumption of RE can be quite misleading in the context of a fixed monetary regime; if the regime is not conducive to learnability, then the consequences can be quite different from those predicted under RE

            Note, however, an important exception to the encouraging results for nominal GDP growth targeting using interest rate rules. Some people define nominal GDP targeting as setting expected nominal GDP growth one period ahead equal to a fixed value. This version of nominal interest rate targeting does not satisfy the Taylor principle (i.e. indeterminacy is a problem) and it is not stable under learning. Thus, this shows that the form of the nominal GDP targeting rule matters, and some rules can perform very badly.

            I have not said much about the Taylor rule versus nominal GDP growth targeting debate, in part because if GDP growth is linked to money, i.e. if we use a money rule rather than an interest rate rule, then, while that is fine theoretically, there are big problems with defining and measuring the appropriate monetary aggregate to target (such an aggregate may very well be dynamic as well as difficult to measure, i.e. it changes over time, further complicating this approach). As I've discussed here in the past, and others have discussed recently as well, the relationship between money and nominal GDP appears to break down in the early 1990s (you can see this in a graph of M2 velocity). Thus, a rule linked to money runs into the problem of how to define money, and it's not a problem we have solved. So there didn't seem to be much reason to think hard about these kinds of rules.

            The other reason I have not embraced nominal GDP targeting is the one discussed above. If an interest rate rule is used instead of a money rule, it seemed like a version of a Taylor rule with different coefficients (and a different measure of output -- the Taylor rule uses percentage deviation from full employment, while under nominal GDP targeting the variable is output growth), so it wasn't clear that it could resolve the known problems with these kinds of rules. In fact, I thought it would make problems such as indeterminacy even worse. But that turns out not to be the case, nominal GDP targeting seems to do better in terms of determinacy and stability under learning. (The results are, of course, model dependent so it's as much a debate about the proper model of the macroeconomy as it is a debate about monetary policy rules. Some rules seem to be robust across a wide variety of models, and due to our uncertainty over the correct macro model to use, my evaluation of alternative policy rules gives large weight to the robustness feature).

            My bias has been toward Taylor rules rather than nominal GDP targeting, mostly because I think of GDP targeting as linked to the money supply rather than the interest rate. But given results such as Mitra's on interest rate rules, I think we need to keep an open mind on the optimal form of the monetary policy rule.

            So, for those of you who are advocates of nominal GDP targeting and have studied nominal GDP targeting in depth, (a) what important results concerning nominal GDP targeting have I left out or gotten wrong? (b) Why should I prefer one rule over the other? In particular, for proponents of nominal GDP targeting, what are the main arguments for this approach? Why is targeting nominal GDP better than a Taylor rule? I don't think I've seen a simple, bullet-point type summary of the pros and cons of nominal GDP targeting versus a Taylor rule (while you're at it, setting aside issues of measurement, under what conditions is nominal GDP a better nominal anchor than money?). Also, I didn't talk about targeting the level of nominal GDP at all, just the growth rate, but some of you advocate level targeting rather than growth targeting. This comes up with Taylor rules as well, and whether to target growth rates or levels, or both, depends upon how persistence is modeled and the type of rigidity that is imposed on the model. Is the same true for nominal GDP targeting? When is level targeting better than growth targeting, or vice-versa?  The main question here is the relative merits of nominal GDP targeting versus a Taylor rule, but how the results vary with level versus growth targeting (and other factors such as the presence of forward or backward looking elements in the rule) is also of interest.

            [I'm very interested in this question, so I'll post (or link to) all reasonable responses that discuss of the merits of alternative policy rules.]

            Update: Andy Harless in comments:

            I like NGDP level (or "path") targeting largely because it separates the Fed from the politically contentious issue of what the inflation rate should be. If the inflation rate turns out to be too high or too low for someone's taste, the Fed can say, "Hey, we did our job. Complain to the real economy about that." Of course, it's no accident that I've come to this position recently, at a time when the Fed could really use some political cover for aggressive unconventional policies designed to stimulate recovery from a particularly deep recession. All this nonsense about how QE2 (and more importantly QE3 and QE4 -- since QE2 is not aggressive enough) is potentially inflationary: the answer should be, "Yeah, so what. It's not our job to set the inflation rate. If the real economy responds, then great. If inflation responds instead, then the real economy is behaving badly. Somebody else needs to fix that, maybe. Not us." I believe, however, that NGDP growth rate targeting is a very bad idea. While some shocks are indeed persistent, this persistence (a) is not always present and (b) often ought to be resisted when it is. A big increase in the unemployment rate may result in a permanently lower real output path as workers lose their skills, but monetary policy ought to lean against this tendency, even at the expense of temporarily raising the inflation rate. With NGDP growth rate targeting, you basically try to avoid recovering from a recession unless the inflation rate goes down. That's clearly bad policy. Right now we have some people arguing that QE2 was unnecessary because NGDP already appears to be rising at a normal rate. That's clearly a silly way to think. NGDP needs to rise at a higher than normal rate now, or the unemployment rate will remain unnecessarily high. I don't see how anyone can advocate NGDP growth rate targeting after looking at the situation we're in today.

            ...To clarify..., my preference over 4 possible policy regimes would be: best: NGDP level targeting second best: Price level targeting second worst: Inflation rate targeting worst: NGDP growth rate targeting Let me say, also, that NGDP level targeting has an advantage over a Taylor rule in that it never breaks. When the Taylor rule implies an interest rate below zero, the appropriate course of action is unclear, and there is a lot of room for dispute. With NGDP targeting, there is less room for dispute: just look at your forecast; if it says NGDP will be below target, then you need a more aggressive policy.

            Update: Scott Sumner's reply, and my response.

              Posted by on Saturday, December 18, 2010 at 11:07 AM in Economics, Monetary Policy | Permalink  Comments (16) 


              Friday, December 17, 2010

              links for 2010-12-17

                Posted by on Friday, December 17, 2010 at 10:01 PM in Economics, Links | Permalink  Comments (66) 


                "The Obama Renaissance"

                James Kwak argues that Obama hasn't compromised his principles in recent deals with the GOP -- he was always far more conservative than his supporters were willing to acknowledge:

                The Obama Renaissance, by James Kwak: President Obama is enjoying something of a political resurgence, at least among the commentariat. Ezra Klein points out that his approval ratings remain higher than those of his Congressional opposition, as opposed to Clinton in 1994 and Bush in 2006. In The New York Times, Michael Shear says the lame-duck session of Congress could be a “big win” for Obama, and Matt Bai hails the tax cut compromise as “responsible governance” and says it could lead to a successful presidency.
                Obama is certainly in a decent position politically, and I would bet on him to be reelected comfortably in 2012. First off, his opponents in Congress are deeply irresponsible (admittedly: “The single most important thing we want to achieve is for President Obama to be a one-term president.”) and face a huge political problem within their own party: a significant portion of the conservative base really does want lower deficits, yet the only thing the Republican caucus knows how to do is cut taxes. ... Second, the Tea Party and Sarah Palin mean that Obama is likely to face an opponent who has been pulled dangerously close to the lunatic fringe during the primary (or, even better yet, Palin  herself). And third, there’s triangulation.
                Bai basically parrots the Obama administration’s line: they did the tax cut deal because it was good policy, it would stimulate the economy, and they got a good deal. In other words, it’s not a cynical political tactic, it’s good governance. And as I’ve said before, I think the Obama team may actually believe that, because their idea of good policy was centrist to begin with. ...
                So no, I don’t think Obama is abandoning his principles for political advantage; I think these are his principles. And while I’m upset at him, I’m upset at him for being wrong on the policy level, not for abandoning anything or selling out. I think a lot of the bitterness on the left comes from people who thought he was more progressive than he is, and now feel betrayed. As I said in January, I always thought Obama was a moderate who looked like a progressive..., and, as Nate Silver said, “what Obama has wound up with is an unpopular, liberal sheen on a relatively centrist agenda.” What’s happening now, if his good run continues, is he is shedding the liberal sheen and getting a centrist sheen on a centrist agenda. And politically, that’s all good for him. Combine that with his obvious political skills, and the future looks bright for him.

                The GOP will do its very best to take ownership of anything positive that comes out of deals with Obama -- they will claim they forced him to do the good things against his and the Democrat's will -- and they will try to pin him with anything negative, real or imagined. In any case, I think the most important question is whether just under two years (until the election) is enough time for labor markets to recover. People won't care much about what happens now, "what have you done for me lately" is the more important consideration, so the condition of the economy around the election is the key factor.

                I think two years would be enough time for labor markets to recover if we could expect policy supporting employment along the way. But we are likely to get just the opposite, deficit cutting measures and other policies that work against employment and hence work against electoral success for the Democrats. Toss in a compromise on Social Security that angers the Democratic base, a possibility that cannot be dismissed as Obama follows up on what appears to be a successful move to the center, and the future does not look as bright. Obama may think he is playing the game well now, but the game is far from over.

                Update on what's ahead: The failure of the 1.1 trillion dollar omnibus spending bill gives the GOP an opportunity to insist on budget cuts early next year, and they plan to do just that:

                Speaker-designate John Boehner (R, Ohio) Friday gave a nod to tea party activists, pointing out that the “untimely death” of Senate Democrats’ $1.1 trillion bill to fund the government through September came on the anniversary of the Boston Tea Party.

                Tea party groups led the outcry this week when some Senate Republicans appeared ready to vote for the Senate omnibus... Those activists now may turn their attention to Mr. Boehner and his House colleagues, who have promised to cut about 20% of the federal spending not allocated to the military or entitlement programs, such as Social Security or Medicare.

                Those cuts will likely face opposition from Senate Democrats, the Obama administration and interest groups. Mr. Boehner, meeting with reporters Friday, didn’t name any specific programs he’d cut. But he did hint House that Republicans would try to approve the promised cuts as early as January or February, if the Senate passes a stop-gap spending measure that runs out early next year. ...

                Asked if they wanted to implement those cuts early next year – or wait until the next fiscal year – Mr. Boehner said: “We’d like to do it as soon as possible.”

                That would put an end to any stimulus due to the tax compromise. Stimulating the economy was never the intent of th e GOP when they agreed to the tax compromise, it was all about the estate tax and tax cuts for the wealthy. They will do what they can to decrease government spending over the next two years, starting in January, and if they are successful it will reverse any benefit the economy might have received from the compromise.

                  Posted by on Friday, December 17, 2010 at 10:53 AM in Economics, Politics | Permalink  Comments (84) 


                  Paul Krugman: Wall Street Whitewash

                  When the facts are inconsistent with the conservative narrative, conservatives "adjust the facts":

                  Wall Street Whitewash, by Paul Krugman, Commentary, NY Times: When the financial crisis struck, many people — myself included — considered it a teachable moment. Above all, we expected the crisis to remind everyone why banks need to be effectively regulated.
                  How naïve we were. We should have realized that the modern Republican Party is utterly dedicated to the Reaganite slogan that government is always the problem, never the solution. And, therefore, we should have realized that party loyalists, confronted with facts that don’t fit the slogan, would adjust the facts.
                  Which brings me to the case of the collapsing crisis commission. The bipartisan Financial Crisis Inquiry Commission ... has broken down along partisan lines, unable to agree on even the most basic points. It’s not as if the story of the crisis is particularly obscure. ... It’s a straightforward story, but a story that the Republican members of the commission don’t want told. Literally.
                  Last week,... all four Republicans on the commission voted to exclude the following terms from the report: “deregulation,” “shadow banking,” “interconnection,” and, yes, “Wall Street.”
                  When Democratic members refused to go along with this..., the Republicans went ahead and issued their own report... That report ... tells a story that has been widely and repeatedly debunked...
                  In the world according to the G.O.P. commissioners, it’s all the fault of government do-gooders, who used various levers — especially Fannie Mae and Freddie Mac... — to promote loans to low-income borrowers. Wall Street — I mean, the private sector — erred only to the extent that it got suckered into going along with this government-created bubble.
                  It’s hard to overstate how wrongheaded all of this is. For one thing,... the housing bubble was international — and Fannie and Freddie weren’t guaranteeing mortgages in Latvia. Nor were they guaranteeing loans in commercial real estate, which also experienced a huge bubble. Beyond that... During the peak years of housing inflation, Fannie and Freddie were pushed to the sidelines; they only got into dubious lending late in the game, as they tried to regain market share.
                  But the G.O.P. commissioners are just doing their job, which is to sustain the conservative narrative ... that absolves the banks of any wrongdoing... Last week, Spencer Bachus, the incoming G.O.P. chairman of the House Financial Services Committee, told The Birmingham News that “in Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks.”
                  He later tried to walk the remark back, but there’s no question that he and his colleagues will do everything they can to block effective regulation of the people and institutions responsible for the economic nightmare of recent years. So they need a cover story saying that it was all the government’s fault.
                  In the end, those of us who expected the crisis to provide a teachable moment were right, but not in the way we expected. Never mind relearning the case for bank regulation; what we learned, instead, is what happens when an ideology backed by vast wealth and immense power confronts inconvenient facts. And the answer is, the facts lose.

                    Posted by on Friday, December 17, 2010 at 01:02 AM in Economics, Financial System, Housing, Politics | Permalink  Comments (35) 


                    Business Inventories

                    Business-inventories
                    [via]

                      Posted by on Friday, December 17, 2010 at 12:42 AM in Economics | Permalink  Comments (8) 


                      Thursday, December 16, 2010

                      links for 2010-12-16

                        Posted by on Thursday, December 16, 2010 at 10:03 PM in Economics, Links | Permalink  Comments (60) 


                        Initital Claims for Unemployment Fell Last Week. Why Should We Care?

                        I have a new post at MoneyWatch reacting to today's data on initial claims for unemployment insurance:

                        Initital Claims for Unemployment Fell Last Week. Why Should We Care?

                        There is also a discussion of why it's worthwhile to track this series.

                          Posted by on Thursday, December 16, 2010 at 11:07 AM in Economics, Unemployment | Permalink  Comments (23) 


                          How Will the GOP Regulate Wall Street?

                          Regulation is rarely flawless when it is first imposed. Adjustments are needed to make sure that the intent of the original legislation is carried out, and to plug any new holes that are discovered. However, any new regulatory initiatives will face a tough hurdle -- a Republican chairman of the House Financial Services Committee and Republican control of the House.

                          In fact, the battle will be to stop current regulatory initiatives from being watered down or eliminated. Democratic control of the Senate and White House should be able to prevent this from happening, and the outcome is likely to be a standoff. However, a standoff can still lead to watered down or ineffective legislation. Since there won't be any way to fix regulatory problems that emerge over time as the industry evolves and attempts to evade existing restrictions, or to fix new problems that are discovered, gridlock will work in favor of the banks:

                          This is how the GOP Congress will regulate Wall Street?, by Andrew Leonard: Rarely do you see a politician quite this honest: Last Wednesday, just hours after securing the position of chairman of the House Financial Services Committee, Spencer Bachus, R-Ala., told the Birmingham News that "in Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks."

                          In the very next paragraph, the newspaper reported that Bachus "later clarified his comment to say that regulators should set the parameters in which banks operate but not micromanage them." But the damage was already done. ...

                          The candor of Bachus' initial statement is eyebrow-raising, no doubt about it, but the fuss and bother over his revelation is a little bit disingenuous. ... Together with his fellow Alabaman Republican, Sen. Richard Shelby, the powerful ranking member of the Senate Banking Committee, he's part of a dynamic duo of market fundamentalist crusaders who will likely set the tone for how banking reform and regulatory oversight aimed at Wall Street are implemented for the next two years.

                          Immediately after the midterm elections were over, and long before his confirmation as chairman, Bachus got quickly to work on his anti-regulation agenda. The day after the election, in fact, Bachus sent a letter to the Financial Stability Oversight Council, that, as I wrote last month, was written as if dictated by bank lobbyists. His main target: the so-called Volcker rule...

                          Three weeks later, Bachus co-authored letters to the inspector general offices at the Treasury Department and the Federal Reserve, demanding detailed information about how the Consumer Financial Protection Bureau is being set up. ...

                          Let's recap: Who hates the Volcker rule the most? The banks. Who is most annoyed by the Consumer Financial Protection Agency? The banks. Whose agenda is Spencer Bachus already serving to the best of his ability? The banks'.

                          With a Democratic majority still controlling the Senate and Obama in the White House, Bachus and Shelby won't be able to completely subvert bank reform and gut regulatory oversight. But ... Alabama ... is set to exert a disproportionate influence on how Washington rides herd on Wall Street. ...

                          The most famous Alabaman to influence how Washington regulated Wall Street was probably Henry Steagall, whose name resonates through history from its inclusion as part of the name of the Glass-Steagall Act that separated investment and commercial banking for the better part of 60 years. Both Bachus and Shelby voted to repeal Glass-Steagall, and both of them have worked hard to make sure that the spirit of regulation birthed in the Great Depression, and revivified by the Great Recession, dies stillborn. Henry Steagall was no flaming liberal, but it is hard to imagine he'd be too pleased by today's Alabama agenda.

                            Posted by on Thursday, December 16, 2010 at 02:34 AM in Economics, Financial System, Politics, Regulation | Permalink  Comments (22) 


                            "Why Aren't More Bankers Going To Jail?"

                            David Zaring has a question:

                            Why Aren't More Bankers Going To Jail?, by David Zaring: Jesse Eisenger and Andrew Ross Sorkin have both written about the surprising lack of convictions in the wake of the financial crisis. Surely someone made public statements of confidence immediately before the bank collapsed?

                            I'm as surprised as anyone, mostly on political economy grounds. You've heard before on this blog some concern about the criminalization of corporate governance, and in my view, even the prosecutors of Enron could have done a better job explaining why the CEO and Chairman had to walk the plank... But they did go to jail, so did S&L executives numbering in the four figures - and the S&L crisis is one that many people blame more on Paul Volcker than on thousands of surprising concurrent cases of fraud.

                            But the SEC and DOJ don't always win these cases, as Peter Henning reports. He thinks that these cases really are difficult to win. ...

                            The [Ninth Circuit last Friday] overturned the conviction of Prabhat Goyal, the former chief financial officer of Network Associates, on 15 counts of securities fraud, making false filings with the Securities and Exchange Commission and making false statements to the company’s auditors. The court concluded that the government simply failed to produce evidence to back up its claims that he intentionally inflated revenue and misled the accountants.

                            So maybe this kind of judicial reception, and the jury in Bear Stearns test case that failed, has made the government gun shy. Maybe New York defense lawyers are worth every penny, or maybe DC government types can't imagine throwing a wide swath of the financial community in jail. Maybe Madoff and Galleon distracted everyone. But I remain surprised. There's the flexible statutes available to the government, surely one could stop at AIG, Lehman, and Bear and satisfy the public ... My own tentative view is that it could be that for really high-ranking people to go to jail, someone has to have done something obviously criminal. So Lay and Skilling had Andy Fastow, Michael Milken had Ivan Boesky. But the out and out crook, for whatever reason has not turned up yet, which means that all the captains who went down with their Titanics can breath a bit more easily.

                            But that's speculation in the service of being as surprised as Sorkin et al, without necessarily wanting a parade of handcuffs.

                              Posted by on Thursday, December 16, 2010 at 02:24 AM in Economics, Financial System | Permalink  Comments (30) 


                              A Tax on Saving?

                              Bob Cringely says a tax on saving by high income individuals would jump start the economy:

                              Motivating Miss Daisy, by Bob Cringley: ...I’ll throw out one last idea that ... relies entirely on greed and self-interest to succeed. Those are two commodities we appear to have in limitless amounts. ...

                              Rich interests have ... shown an amazing willingness to do the most arcane and complex things to avoid paying taxes. Remember the tax shelters of the 1980s? ... The ... logical solution to restarting the economy, then, ... is a short-term tax (or tax credit — they are the same thing if you squint) on savings. Forget about accelerated depreciation — make all non-reimbursed expenses of any kind 100 percent deductible in the current tax year.
                              It’s ass-backward, I know, but it would work. Give rich people a short term incentive to spend like poor people, then phase it out over time.
                              If we are metaphorically in the same position as FDR in 1938, this wacky policy would please the right while giving a financial boost equivalent to World War II but without the war. Recession over.

                                Posted by on Thursday, December 16, 2010 at 02:23 AM in Economics, Saving, Taxes | Permalink  Comments (53) 


                                Wednesday, December 15, 2010

                                links for 2010-12-15

                                  Posted by on Wednesday, December 15, 2010 at 10:01 PM in Economics, Links | Permalink  Comments (50) 


                                  "Economy Still Fragile"

                                  Tyler Atkinson of the Dallas Fed says "The recovery remains fragile." The figures and discussion below suggest concerns about future growth, the recovery of labor markets, and falling inflation:

                                  Economy Still Fragile, by Tyler Atkinson, FRB Dallas, National Economic Update: Economic indicators released early in November suggested that the U.S. economic outlook was brightening. Since then, releases have been mixed. Real activity appears to be gaining momentum, yet not rapidly enough to provide consistently strong job gains.

                                  Continue reading ""Economy Still Fragile"" »

                                    Posted by on Wednesday, December 15, 2010 at 03:33 PM in Economics | Permalink  Comments (8) 


                                    (Lack of) Inflation Watch

                                    The latest estimte of the CPI was released today. Via the Atlanta Fed's Inflation Project:

                                    Though most CPI indexes rose slightly in November, core measure remains near historical low, Atlanta Fed: The Bureau of Labor Statistics reported that the all-items consumer price index (CPI) rose an annualized 1.5 percent in November. The indexes for energy, food, and core prices all increased slightly. The core CPI edged up 0.1 percent in November after no change in the past several months. In fact, the core CPI is up only 0.7 percent from a year earlier, nearly its slowest year-to-year advance in more than 50 years.

                                    And, from the Cleveland Fed:

                                    Cleveland Fed Estimates of Inflation Expectations: The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.64 percent. In other words, the public currently expects the inflation rate to be less than 2 percent on average over the next decade. ... Estimates are updated once a month, on the release date of the CPI.
                                    Latest Estimates

                                    10-year-expected-inflation
                                    (Click on the image to enlarge.)

                                    [Update: I echoed this post at MoneyWatch, and added a few comments about what this means for monetary policy (this will increase the Fed's confidence as it implements QEII). I also added graphs and a few comments on today's data showing that both industrial production and capacity utilization increased slightly last month. See here.]

                                      Posted by on Wednesday, December 15, 2010 at 11:26 AM in Economics, Inflation | Permalink  Comments (5) 


                                      Words Will Never Hurt Us (Or Our Cronies) If We Don't Allow Them To Be Used

                                      As a follow up to the post below this one, it's even worse than I thought. Republican economists on the Financial Crisis Inquiry Commission (FCIC) voted to ban the words Wall Street, shadow banking, interconnection, and deregulation from the final report:

                                      Keith Hennessey, Douglas Holtz-Eakin vote to remove phrases “Shadow Banking”, “Interconnectedness”, “Deregulation” from FCIC Report, by Mike Konzcal: ...So the Financial Crisis Inquiry Commission (FCIC), the bipartisan panel created to study and issue a report on the financial crisis, imploded. The four Republican appointees – Peter Wallison, Keith Hennessey, Bill Thomas and Douglas Holtz-Eakin – have decided to go it alone and issue their own report Wednesday. ...

                                      This will no doubt play into a “Democrats say one thing, Republicans say another thing, who can really tell?” narrative, but what is leaking out of the Republican worldview on the financial crisis is disturbing. Shahien Nasiripour ... catches this gem:

                                      During a private commission meeting last week, all four Republicans voted in favor of banning the phrases “Wall Street” and “shadow banking” and the words “interconnection” and “deregulation” from the panel’s final report, according to a person familiar with the matter and confirmed by Brooksley E. Born, one of the six commissioners who voted against the proposal.

                                      “I think a number of us had really pulled for” bipartisan consensus, said Born... “But this action by the Republicans indicates they have decided to go their own way.”…

                                      ...That they would vote to not even use the words says all you need to know.

                                      For fun, Keith Hennessey, October 17th, What caused this financial mess? (my bold):

                                      Some of these large financial institutions were so big and so interconnected with other institutions, that their failure would create a domino effect. This is what we call “too big to fail”, which should more precisely be called “too big and interconnected to fail suddenly”. ...

                                      I wonder if Hennessey is going to scrub his blog of words he doesn’t think are appropriate for describing the financial crisis – like “interconnected” – in the government report he is writing.

                                      Do you think it's an accident that these words are key descriptors of accounts of the crisis that place the blame on banks and their behavior along with the failure of regulators to rein in risky behavior? The goal here is to promote a false account of the crisis -- government support of poor people did it -- and allow Republican cronies in the banking industry to pick up where they left off before the crisis so rudely interrupted their ever so profitable activities. Peter Wallison, Keith Hennessey, Bill Thomas and Douglas Holtz-Eakin ought to be ashamed of themselves for going along with this.

                                        Posted by on Wednesday, December 15, 2010 at 10:28 AM in Economics, Politics | Permalink  Comments (30) 


                                        "Republican Members of FCIC to Promote Crisis Urban Legends"

                                        I've taken on the "CRA and Fannie and Freddie did it" myth so many times that I hardly have the energy to do it again (e.g. see here and here for several posts debunking this idea). So let me turn it over to Yves Smith:

                                        Republican Members of FCIC to Promote Crisis Urban Legends, Shift Blame From Bank, by Yves Simth: Lordie, the Big Lie is with us in force. The New York Times reports that the Republican members of the Financial Crisis Inquiry Commission are going to pre-empt the report (due in mid-January) and issue their own 13 page screed later today focusing blame for the crisis on…Fannie and Freddie, and no doubt the CRA too.
                                        Let’s look at a few inconvenient facts. We had housing bubbles in the UK, Australia, Ireland, Spain, Iceland, Latvia, Canada, and a lot of Eastern Europe. Can we blame the CRA and Fannie and Freddie for that? How about the M&A boom, which resulted in a ton of leveraged loans being issued at super low spreads? If the Fed and other central banks had not driven rates to the floor, we’d see a good bit more distress and dislocation in this sector of the market. Oh, and how about the fact that banks in Continental Europe, which had no housing bubble in their home markets, and no evil Fannie or Freddie analogues, also nearly keeled over in the crisis?
                                        This whole line of thinking is garbage, the financial policy equivalent of arguing that the sun revolves around the earth. Yes, the US and other countries provide overly generous subsidies to housing, and curtailing them over time would not be a bad idea. But that’s been our policy for decades. Calling that a major, let alone primary, cause of the crisis, is simply a highly coded “blame the poor” strategy...[continue reading]...

                                          Posted by on Wednesday, December 15, 2010 at 12:36 AM in Economics, Financial System, Housing, Politics | Permalink  Comments (54) 


                                          Fed Watch: Turning Tide

                                          It wasn't quite as Tim describes, but glad he could do this:

                                          [Note: I apologize for being missing in action. I have been deep in the weeds at work for the last month. I hadn't even really realized how long it had been since I last wrote until Mark cornered me Monday afternoon, and none-too-subtlety suggested that I was supposed to be busy writing a post, what with the impending FOMC meeting and all. So, with acknowledgement of Mark's wisdom….]

                                          For the past three years, it has paid to bet on the pessimistic side of the outlook. For the past few months, I have privately fretted that this bet would soon wear thin. And it sure looks like it has. The flow of data in recent weeks has been, on net, very positive, offering a vision of a sustainable recovery.

                                          The Fed, however, has not yet gotten that memo. From today's FOMC statement:

                                          Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment. Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have continued to trend downward.

                                          The Fed remains locked into a forecast that anticipates output growth hovering near potential. Contrast this with rising expectations for, at a minimum, solid near term growth:

                                          In the most recent Wall Street Journal forecasting survey, conducted last week, the 55 economists on average expected GDP to grow 2.6% at a seasonally adjusted annual rate in the fourth quarter from the third. But on the back of today’s retail report and a strong increase in October exports reported Friday, many are revising their estimates to more than 3%. Of seven revised forecasts, the average expected fourth-quarter growth forecast is now 3.3%, compared to 2.6% before the retail release.

                                          Despite all the weights on the consumer - the FOMC statement reiterates that list - consumer spending is accelerating, pulling the post-recession trend rate close to that pre-recession:

                                          Over the last four months, the rate for nonauto retail sales less gas has accelerated to an monthly average gain of 0.8%. That is nothing to sneeze at, and easily explains rising forecasts.

                                          Still, the gap between the old trend and the new remains. Moreover, earlier this year, I would have tended to dismiss higher consumer spending on the grounds that it would simply be offshored in the form of higher import spending, a reemergence of the global imbalance that plagued output growth in the second and third quarters of this year. The most recent trade report indicates the opposite - that maybe, just maybe, the external sector will behave as it should in the wake of a financial crisis and provide a sustained boost to growth. To be sure, we would prefer not to see imports collapse, as this would signal a rather nasty demand shock. Instead, we are looking for import growth to stall as import competing firms become more competitive while export growth continues unabated. That has been the general trend of the last few months, giving rise to a more supportive trend in the trade balance:

                                          This year, the external drag was an important factor in limiting the US recovery. Ending that drag would provide a significant boost - note that trade contributed a negative 2.63 percentage points to GDP growth, on average, in the second and third quarters. Thus, just going flat means a large gain to output. It's simply a big deal - it's enough to put output growth solidly in the sustainable region, not to mention solidly above trend.

                                          And if an improving consumer and external outlook themselves would have been sufficient to generate above trend growth, the tax cut deal is icing on the cake. On net, it is more than anti-contractionary. It offers some real stimulus - for example, the payroll tax holiday will be less easily saved than a lump-sum check in the mail. To be sure, we can debate the political wisdom of the move from the Democrat's perspective, not to mention the long-term consequences of no real baseline for the US tax code, but in the short run, it is another shot in the arm.

                                          And a shot in the arm is desperately needed. I do not intend to dismiss the real challenges the economy still faces. The plight of the 99er's in an economy of near double-digit unemployment rates is an obvious reminder. And, for that matter, so is the most recent employment report. Of course monthly changes in nonfarm payrolls are notoriously volatile, and the average of the last two months revealed that payrolls are growing just above 100k a month. The right direction, but not fast enough. More demand is clearly needed - and a solid consumer sector bolstered by external support and fresh stimulus would clearly help in that regard.

                                          In this environment, it is not really much of a surprise that long term interest rates are headed higher. I tend to agree with those analysts echoed by Jim Hamilton and Brad DeLong - rising rates are a signal that the economy is strengthening. And strengthening enough that, despite the pessimistic tone of today's FOMC statement, it seems likely that the Fed will not feel compelled to extend large scale asset purchases beyond the existing plans. Without the Fed to serve as an excuse to keep buying Treasuries, traders are sending rates exactly where they should be going.

                                          But won't rising rates slow the housing recovery, thereby putting the recovery in jeopardy? Seriously, what housing recovery is there left to protect? Should we really care at this point? Housing is SOOO 2005. The consumer is getting over it - the retail sales numbers tell that tale. Consumer spending is growing solidly in the absence of easy credit. I think we are finally in the acceptance phase when it comes to the housing market. Just like we eventually got to the acceptance phase in the wake of the tech collapse. We use even more technology, but that still doesn't justify the valuations we saw in the late 1990s. Same for housing - it is reverting back to an asset that provides primarily a service for the household rather than an investment. And that reversion will leave the economy healthier in the long run.

                                          Will the Fed shift course, even in a rosier environment? Doubtful, at least near term. They will likely see the current plan through to its fruition, while holding rates at rock bottom levels until it is quite evident that the output gap is closing, which will take a few years even if growth accelerates sustainably to 4%. Will more be forthcoming? Also doubtful, especially as the composition of the FOMC turns more hawkish. Moreover, enough risks remain to keep Fed officials from sleeping too soundly at night. The European debt crisis runs hot and cold. The trade story could turn against us. Again. And uncertainty over the economic direction of China will be an ongoing challenge. I suspect the Fed will adopt the widely accepted view that a China slowdown would be a net negative to the global economy. Michael Pettis makes a convincing argument to the contrary.

                                          In short: In general, the data flow of the last eight weeks is clearly encouraging. To be sure, not every release, like the employment report, is perfect. But enough are perfect that forecasters are quickly reversing the downgrades made just a few months ago during the mid-year slowdown. Will the data suddenly turn on us again? Always possible, always something to watch for, but I don't think that should be the expected path. Right now, the data suggest the US economy might start firing on more than just a few of its eight cylinders. A little optimism is justified. Don't expect the Fed to reverse course soon - they have yet to embrace the possibility that the economy is set to grow at something above trend. But a data flow like this cannot be ignored forever. Look for more glimmers of hope creeping into Fedspeak in the weeks ahead.

                                            Posted by on Wednesday, December 15, 2010 at 12:17 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (18) 


                                            Index of Hours Worked

                                            There seems to be a lot of optimism building about the recovery lately and I hope it's justified, but we still face risks and we still have a lot of ground to make up. Thus, recovery is to yet assured and it's much too soon for policymakers to begin withdrawing support for the economy:

                                            Hours [Log scale. Levels here.]

                                              Posted by on Wednesday, December 15, 2010 at 12:16 AM in Economics, Unemployment | Permalink  Comments (10) 


                                              Tuesday, December 14, 2010

                                              links for 2010-12-14

                                                Posted by on Tuesday, December 14, 2010 at 10:12 PM in Economics, Links | Permalink  Comments (15) 


                                                The Fed Leaves the Target Rate and QEII Unchanged

                                                At MoneyWatch, I have a reaction to today's decision by the FOMC to leave policy unchanged, and a forecast for how long it will be until the Fed changes course:

                                                The Fed Leaves the Target Rate and QEII Unchanged

                                                  Posted by on Tuesday, December 14, 2010 at 11:53 AM in Economics, Monetary Policy | Permalink  Comments (5) 


                                                  Why We Need an Individual Mandate for Health Insurance

                                                  Posting the reaction to the FOMC meeting at MoneyWatch reminded me of this:

                                                  Since the individual mandate for health insurance is being challenged in court, an issue that will likely need to be settled by the Supreme Court, here's a post I did awhile back for MoneyWatch on why an individual mandate is needed:

                                                  Why We Need an Individual Mandate for Health Insurance

                                                    Posted by on Tuesday, December 14, 2010 at 11:52 AM in Economics, Health Care, Market Failure | Permalink  Comments (80) 


                                                    "Peak Oil is Stupid"

                                                    Tim Haab at Environmental Economics:

                                                    'Peak Coaler' just doesn't have the same ring, but I bet it raises the same vitriol for stupid economists: Time for some snark:

                                                    When will production of oil and coal peak? 

                                                    Better question: Who cares? 

                                                    Betterer question:  When will oil and coal run out?

                                                    Even betterer question: When will oil and coal reserves be depleted to the point that prices adjust to make investments in renewables make economic sense without the need for goofy (laymen speak for inefficient) government policies?

                                                    After the peak, production will decline because supplies are being depleted and no new sources are to be found. ...

                                                    Peak oil is the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline. 

                                                    Terminal Decline? A sequel to a 1990's Charlie Sheen movie?

                                                    Optimistic estimations of peak production forecast the global decline will begin by 2020 or later, and assume major investments in alternatives will occur before a crisis, without requiring major changes in the lifestyle of heavily oil-consuming nations. These models show the price of oil at first escalating and then retreating as other types of fuel and energy sources are used.

                                                    I think they just called me an optimist.

                                                    Pessimistic predictions of future oil production operate on the thesis that either the peak has already occurred, that oil production is on the cusp of the peak, or that it will occur shortly. 

                                                    Who cares?  Oh wait, I already asked that.

                                                    Must be time to update my semi-regular 'peak oil is stupid' rant.  So here goes...

                                                    I don't care when oil (OR COAL) peaks, I care when we run out, which we won't because, as production declines, prices WILL rise. As prices rise, people WILL figure out alternatives. They might not be happy alternatives. They might not be as productive alternatives. They might not support the same lifestyle to which we are accustomed. But there WILL be alternatives, forced by higher prices--and no other mechanism is that powerful. 

                                                    See, I'm an optimist.

                                                    It's the end of the world as we know it...

                                                    And I feel fine.

                                                      Posted by on Tuesday, December 14, 2010 at 10:06 AM in Economics, Environment | Permalink  Comments (91) 


                                                      Roubini: Fiscal Follies

                                                      Political problems stand in the way of the economic policies we need, and may even result in counterproductive policy responses: 

                                                      Fiscal Follies, by Nouriel Roubini, Commentary, Project Syndicate: Note: Project Syndicate posted this too soon and has since removed the Stiglitz and Roubini articles from its site. They have also asked me to remove the articles until they are reposted. [The link no longer works, but it's in the Google cache.]

                                                      [The article makes the case that against the premature movement toward austerity.]

                                                      Austerity is already here. In the US, as Larry Summers points out, the sum of total and private debt has been declining as a result of consumer deleveraging (increased saving and reduced consumption in order to pay debts and rebuild damaged balance sheets):

                                                      Even with all the fiscal measures of the last several years, total borrowing in the American economy has failed to grow for the last 2 years. That is the first two year period since the Second World War when total borrowing in the U.S. economy has not increased.
                                                      Let me be clear: Even with our deficits, the amount of extra debt is less than the amount of reduced borrowing in the private sector.  Increased federal borrowing has offset, but only partially, deleveraging in the private sector.

                                                      Or, to say it another way, the stimulus package was not large enough to fully offset the decline in aggregate demand brought about by deleveraging and other causes. Thus, we shouldn't be surprised that, instead of helping the economy bounce back toward full employment, the stimulus package merely slowed the fall.

                                                      There's something else we shouldn't be surprised about. Since more help is needed now than we'll get from the poorly targeted tax agreement, and since that help won't be forthcoming from Congress -- we'll be lucky to prevent deficit reduction over the next year -- the boost to employment from the tax agreement will be much, much smaller than needed to change the expectation of a very slow climb back to full employment.

                                                        Posted by on Tuesday, December 14, 2010 at 12:42 AM in Budget Deficit, Economics, Fiscal Policy, Politics | Permalink  Comments (23) 


                                                        "Diagrams and Economic Thought"

                                                        Daniel Little discusses a new book by Mark Blaug and Peter Lloyd, "Famous Figures and Diagrams in Economics":

                                                        Diagrams and economic thought, by Daniel Little:


                                                        Source: The Paretian System (link)

                                                        The most vivid part of any undergraduate student's study of economics is probably the diagrams. Economists since Walras, Pareto, and Marshall have found it useful to express their theories and hypotheses making use of two-axis diagrams, allowing for very economical formulation of fundamental relationships. Supply-demand curves, production functions, and a graph of diminishing marginal product all provide a way of making geometrical sense of a given economic principle or hypothesis. They allow us to visualize the relationships that are postulated among a set of factors.
                                                        Mark Blaug has made a long and fruitful career out of his remarkable ability of placing economic thought into its context (Economic Theory in Retrospect (1962), The Methodology of Economics: Or, How Economists Explain (1992)). Now he has collaborated with Peter Lloyd to produce Famous Figures and Diagrams in Economics (2010), and the book is a marvelous contribution.
                                                        The book is organized into several large sections: Demand and supply curve analysis; Welfare economics; Special markets; General equilibrium analysis; Open economies; Macroeconomic analysis; and Growth and income distribution. Experts have been recruited to write short, technical but accessible essays on some 58 topics, including discussion of about 150 diagrams.
                                                        The figures that the book considers pretty much reproduce the history of modern economic thought. And, indeed, some figures have been repeatedly rediscovered; Blaug attributes the "Marshallian cross" to Cournot (1838), Rau (1841), Dupuit (1844), Mangodt (1863), and Jenkin (1870). Almost all the examples are drawn from the history of orthodox neo-classical economics; rare exceptions are Joan Robinson's "graph of discrimination" and August Losch's "market areas". The main insights of classical economics are equally amenable to presentation through diagrams, so it is interesting that the classical economists (including Marx) were not particularly inclined to use them. Here is a diagram not included in the book, representing Michio Morishima's effort to express some of Ricardo's central economic intuitions:

                                                        Continue reading ""Diagrams and Economic Thought"" »

                                                          Posted by on Tuesday, December 14, 2010 at 12:06 AM in Economics, Methodology | Permalink  Comments (13) 


                                                          Monday, December 13, 2010

                                                          links for 2010-12-13

                                                            Posted by on Monday, December 13, 2010 at 10:04 PM in Economics, Links | Permalink  Comments (23) 


                                                            Summers: Our Best Days Still Lie Ahead

                                                            This is the conclusion of a speech given by Larry Summers at the Economic Policy Institute (his final address before stepping down as Obama's economic advisor):

                                                            ...America's history, in a certain sense, has been one of self-denying prophecy – a history of alarm and concern, but alarm and concern averted by decisive actions to assure our prosperity.
                                                            As one former CIA director warned of our largest competitor, that industrial growth rates of eight or nine percent per year for a decade would dangerously narrow the gap between our two countries.
                                                            That was Allen Dulles in 1959 referring to the Soviet Union.
                                                            And when the Soviet Union collapsed instead, the Harvard Business Review of 1990 proclaimed in every issue – every issue – in one way or another that the Cold War was over, and that Germany and Japan had won.
                                                            Now we hear the same thing with respect to China.
                                                            Predictions of America's decline are as old as the republic. But they perform a crucial function in driving the kind of renewal that is required of each generation of Americans.
                                                            I submit to you that as long as we're worried about the future, the future will be better.
                                                            We have our challenges. But we also have the most flexible, dynamic, entrepreneurial society the world has ever seen. If we can make the right choices, our best days as competitors and prosperous citizens still lie ahead.

                                                            During the Q&A, he explains what he has in mind:

                                                            If our college graduates or our high school graduates find themselves embedded in an individualistic competition with workers from around the world, or if they develop skills for which the demand is going to fall due to possible replacement by technology, their wages are not going to rise. A necessary strategy for increasing wages is that we develop areas of unique strength that are less subject to international competition. That means the vast range of activities described in my speech where the market is inherently local. That also means maintaining the capacity for innovation so that our production is producing things that are not in what business strategists call commoditized businesses where that competition is going to be much more brutal.

                                                            No matter how hard we try, some people are still going to be in competition with workers around the world and their wages are going to stagnate relative to others. This will lead to an increasingly divided society in terms of the haves and the have nots, and how we choose to deal with this reality -- the steps we take to close the gap, or not -- is one of the more important questions we face.

                                                              Posted by on Monday, December 13, 2010 at 03:06 PM in Economics | Permalink  Comments (44) 


                                                              The Microeconomic Foundations of Macroeconomics

                                                              I meant to note this post from Rajiv Sethi on the microfoundations of macroeconomic models when it was first posted a few weeks ago -- a post that quotes Duncan Foley describing the rational expectations assumption put forward by Lucas and Sargent as "a boring and predictable retracing of an already discredited path" -- but I'm only just getting to it. So let me take advantage of the fact that Rajiv has said it's okay to reprint his posts and highlight it now:

                                                              Foley, Sidrauski, and the Microfoundations Project, by Rajiv Sethi: In a previous post I mentioned an autobiographical essay by Duncan Foley in which he describes in vivid detail his attempts to "alter and generalize competitive equilibrium microeconomic theory" so as to make its predictions more consonant with macroeconomic reality. Much of this work was done in collaboration with Miguel Sidrauski while the two were members of the MIT faculty some forty years ago. Both men were troubled by the "classical scientific dilemma" facing economics at the time: the discipline had "two theories, the microeconomic general equilibrium theory, and the macroeconomic Keynesian theory, each of which seemed to have considerable explanatory power in its own domain, but which were incompatible." This led them to embark on a "search for a synthesis" that would bridge the gap.

                                                              This is how Duncan describes the basic theoretical problem they faced, the strategies they adopted in trying to solve it, the importance of the distinction between stock and flow equilibrium, and the desirability of a theory that allows for intertemporal plans to be mutually inconsistent in the aggregate (links added):

                                                              My intellectual preoccupation at M.I.T. was what has come to be called the "microeconomic foundations of macroeconomics." The general equilibrium theory forged by Walras and elaborated by Wald (1951), McKenzie (1959), and Arrow and Debreu (1954) can be used, with the assumption that markets exist for all commodities at all future moments and in all contingencies, to represent macroeconomic reality by simple aggregation. The resulting picture of macroeconomic reality, however, has several disturbing features. For one thing, competitive general equilibrium is efficient, so that it is incompatible with the unemployment of any resources productive enough to pay their costs of utilization. This is difficult to reconcile with the common observation of widely fluctuating rates of unemployment of labor and of capacity utilization of plant and equipment. General equilibrium theory reduces economic production and exchange to the pursuit of directly consumable goods and services, and as a result has no real role for money... The general equilibrium theory can accommodate fluctuations in output and consumption, but only as responses to external shocks to resource availability, technology or tastes. It is difficult to reconcile these relatively slowly moving factors with the large business-cycle fluctuations characteristic of developed capitalist economies. In assuming the clearing of markets for all contingencies in all periods, general equilibrium theory assures the consistency... of individual consumption, investment, and production plans, which is difficult to reconcile with the recurring phenomena of financial crisis and asset revaluation that play so large a role in actual capitalist economic life...

                                                              Continue reading "The Microeconomic Foundations of Macroeconomics" »

                                                                Posted by on Monday, December 13, 2010 at 01:17 PM in Economics, Macroeconomics, Methodology | Permalink  Comments (21) 


                                                                Stiglitz: What Lies Ahead in 2011?

                                                                Joe Stiglitz looks into his crystal ball. You probably won't like what he sees:

                                                                What Lies Ahead in 2011?, by Joseph E. Stiglitz, Commentary, Project Syndicate: Note: Project Syndicate posted this too soon and has since removed the Stiglitz and Roubini articles from its site. They have also asked me to remove the articles until they are reposted. [The link no longer works, but it's in the Google cache.]

                                                                [Stiglitz makes the point that the emergence of free market idology is standing in the way of optimal policy.] As I noted here, I think that free market ideology will have more influence over policy in the future, and that is to our disadvantage. Like Stiglitz, I am also surprised that the crisis did not "undermine confidence in that ideology." Its reemergence will slow the recovery over what we could have achieved with effective short-term fiscal stimulus and longer term fiscal consolidation, so I am not looking forward to a fast recovery either. Just the opposite. But to me the more worrisome prospect is what will happen if there's another economic crisis due to a financial meltdown or some other cause and the free market ideology is dominant. If policymakers sit on their hands and do nothing when the next big crisis hits, we will look back at this recession -- as bad as it was -- and realize just how valuable policy was at preventing an even worse outcome.

                                                                  Posted by on Monday, December 13, 2010 at 10:53 AM in Economics | Permalink  Comments (61) 


                                                                  Sunday, December 12, 2010

                                                                  Paul Krugman: Block Those Metaphors

                                                                  I the tax deal a good deal?:

                                                                  Block Those Metaphors, by Paul Krugman, Commentary, NY Times: Like it or not — and I don’t — the Obama-McConnell tax-cut deal, with its mixture of very bad stuff and sort-of-kind-of good stuff, is likely to pass Congress. ... The deal, we’re told, will jump-start the economy; it will give a fragile recovery time to strengthen.
                                                                  I say, block those metaphors. ... Our problems are longer-term than either metaphor implies. And bad metaphors make for bad policy. The idea that the economic engine is going to catch or the patient rise from his sickbed any day now encourages policy makers to settle for sloppy, short-term measures when the economy really needs well-designed, sustained support. ...
                                                                  What we’ve been dealing with ... is a painful process of “deleveraging”: highly indebted Americans not only can’t spend the way they used to, they’re having to pay down the debts they ran up in the bubble years. ...
                                                                  What the government should be doing in this situation is spending more while the private sector is spending less, supporting employment while those debts are paid down. And this government spending needs to be sustained:... spending that lasts long enough for households to get their debts back under control. The original Obama stimulus wasn’t just too small; it was also much too short-lived, with much of the positive effect already gone. ...
                                                                  But wouldn’t it be expensive to have the government support the economy for years to come? Yes, it would — which is why the stimulus should be done well, getting as much bang for the buck as possible.
                                                                  Which brings me back to the Obama-McConnell deal..., the tax-cut deal is likely to deliver relatively small benefits in return for very large costs. ... Tax cuts for the wealthy will barely be spent at all; even middle-class tax cuts won’t add much to spending. And the business tax break will, I believe, do hardly anything to spur investment given the excess capacity businesses already have.
                                                                  The actual stimulus in the plan comes from the other measures, mainly unemployment benefits and the payroll tax break. And these measures (a) won’t make more than a modest dent in unemployment and (b) will fade out quickly, with the good stuff going away at the end of 2011.
                                                                  The question, then, is whether a year of modestly better performance is worth $850 billion in additional debt, plus a significantly raised probability that those tax cuts for the rich will become permanent. And I say no.
                                                                  The Obama team obviously disagrees. As I understand it, the administration believes that all it needs is a little more time and money, that any day now the economic engine will catch and we’ll be on the road back to prosperity. I hope it’s right, but I don’t think it is.
                                                                  What I expect, instead, is that we’ll be having this same conversation all over again in 2012, with unemployment still high and the economy suffering as the good parts of the current deal go away. The White House may think it has struck a good bargain, but I believe it’s in for a rude shock.

                                                                   

                                                                    Posted by on Sunday, December 12, 2010 at 10:02 PM in Economics, Politics, Taxes | Permalink  Comments (98) 


                                                                    links for 2010-12-12

                                                                      Posted by on Sunday, December 12, 2010 at 10:01 PM in Economics, Links | Permalink  Comments (29) 


                                                                      "The Village Constructs its Mythology"

                                                                      Paul Krugman and Dean Baker have effectively dismantled this I am really proud of Obama for standing up to Democrats column. For example, here's Paul Krugman:

                                                                      I don’t usually bother looking at the Washington Post. But I’m inside the Beltway right now, so I spared a peek — and for my sins ended up reading Dana Milbank, who praises Obama for punching the hippies.

                                                                      So far, so usual. But then I read this:

                                                                      This is a hopeful sign that Obama has learned the lessons of the health-care debate, when he acceded too easily to the wishes of Hill Democrats, allowing them to slow the legislation and engage in a protracted debate on the public option. Months of delay gave Republicans time to make their case against “socialism” and prevented action on more pressing issues, such as job creation. Democrats paid for that with 63 seats.

                                                                      Um, that’s not what happened — and I followed the health care process closely. The debate over the public option wasn’t what slowed the legislation. What did it was the many months Obama waited while Max Baucus tried to get bipartisan support, only to see the Republicans keep moving the goalposts; only when the White House finally concluded that Republican “moderates” weren’t negotiating in good faith did the thing finally get moving.

                                                                      So look at how the Village constructs its mythology. The real story, of pretend moderates stalling action by pretending to be persuadable, has been rewritten as a story of how those DF hippies got in the way, until the centrists saved the day.

                                                                      The worst of it is that I suspect Obama’s memory has gone down the same hole.

                                                                      Piling on helps to squeeze the air out of dumb, misleading, incorrect arguments, so let me note a different passage. Dana Milbank says:

                                                                      Liberals, if they can see beyond their pique, should realize that the emergence of Obama's forceful leadership could be good for them. This time, he stood against his Democratic colleagues, but there's reason to hope that he'll show his newly discovered spine to the Republicans the next time.

                                                                      Forceful leadership means giving in to Republican demands? That shows spine? Democrats should be encouraged by this? Contrary to Milbank's claim, this makes it less, not more likely that Obama will "show his newly discovered spine to the Republicans the next time."

                                                                      Essentially, Milbank is arguing that the president has gained credibility. But I think Andrew Samwick has it right -- the center still believes they can walk all over the president if they raise enough fuss -- and what he needed to do was something other than give in to the center-right's demands:

                                                                      ...[Suppose] the President had simply said:

                                                                      In 2006 and 2008, the Democrats gained the Congress and the Presidency by campaigning against economic policies that favored the rich at the expense of others.  In 2010, the Republicans gained the House of Representatives by campaigning against deficit spending.  I am going to respect the wishes of the electorate in all three elections.  I will not sign any legislation that extends the tax cuts on incomes over $250,000 (or $1,000,000).  Nor will I sign any legislation that widens deficits in the near term that does not close them by an equal or greater amount within ten years.  If the Republicans and Democrats want such legislation to become law, they are welcome to take the path offered by the Constitution to pass it over my veto.

                                                                      The skeptic might say that such a threat is not credible.  At the moment, it may not be. Only the President can change that.  The first time he makes a threat and then carries it out is when he gains credibility. Now would have been a great time to start.

                                                                      There are two ways to get votes. You can adopt policies and rhetoric that increase the turnout on your side, or you can move the center (and the best policies do both, they motivate supporters and capture more of the voters at the center). If you are going to go against the base and hurt turnout among supporters, you darn well better move the center more than enough to compensate. Obama has certainly ticked off his supporters but has he captured the center? The loss of 63 House seats Milbank talks about answers that.

                                                                      Obama hasn't captured the center's support for the future, the next time he proposes a policy they disagree with they will be just as adamant in opposing it as they are this time. "Pretend moderates .... pretending to be persuadable" have not been captured by the president due to his willingness to give in to their demands, and he will not be able to count on their support in the future. If anything, they will be emboldened in their opposition to the president whenever he proposes something they disagree with. It worked once, and it can work again. Thus, this will make it harder to oppose the center-right in the future, not easier. And I'm supposed to be encouraged by this?

                                                                      Update: Robert Reich:

                                                                      The Why-Should-I-Get-Out-Of-My-Chair Gap in 2012: In the 2010 midterm elections Democrats suffered from a so-called “enthusiasm gap.”
                                                                      If Dems agree to the tax plan just negotiated by the White House with Republican leaders, they’ll face a “why-should-I-get-up-out-of-my-chair” gap that will make 2010’s Dem enthusiasm seem like a pep rally by comparison.
                                                                      It’s a $70,000 gift for every millionaire, financed by a gigantic hole in the federal budget that will put on the cutting board education, infrastructure, and everything else most other Americans need and want. ...
                                                                      It’s not just the Dem base that worries about the deal. Independents who believe the dice are increasingly loaded in favor of the privileged and powerful are also concerned. ... Even Tea Partiers are convinced big government, big business, and Wall Street colluding against the rest of America. Only instead of blaming the powerful and privileged, the Tea Partiers are more comfortable taking aim at America’s so-called cultural and intellectual elites.
                                                                      The point is that with income and wealth more concentrated at the top than it’s been since 1928, with money flooding politics as never before (much of it secret), and with cynicism about government at a post-World War II high, Obama’s tax deal couldn’t come at a worse time.
                                                                      Enthusiasts on the right want to shrink government, and the deal sets them up nicely.
                                                                      Most Democrats, many Independents, and everyone else who still sees government as our last bulwork against privilege and power, are aghast by the deal. They ask: How could it have come to this? And when 2012 rolls around, why should I get out of my chair?

                                                                        Posted by on Sunday, December 12, 2010 at 10:44 AM in Economics, Politics | Permalink  Comments (88) 


                                                                        Saturday, December 11, 2010

                                                                        links for 2010-12-11

                                                                          Posted by on Saturday, December 11, 2010 at 10:11 PM in Economics, Links | Permalink  Comments (12) 


                                                                          "Yep, It's Demand"

                                                                          Paul Krugman says Keynes roolz.

                                                                            Posted by on Saturday, December 11, 2010 at 10:07 AM in Economics, Unemployment | Permalink  Comments (19) 


                                                                            Dixit: Economics and the Crisis

                                                                            This is from a profile of Avinash Dixit:

                                                                            ...Economics and the crisis Dixit ... rejects the agonizing of some chastened economists following the global economic crisis. He says they are wrong to blame the “dismal science.”
                                                                            “Actually, I think that economic theory came out of this rather better than policy practice did. . . . Economic theory and economic analysis based on pretty standard theories told everybody that the situation was unsustainable, that there was going to be a house price bust sometime. The timing is always unpredictable, but pretty much everybody knew that things were going to go bad.
                                                                            “But what we were not able to predict is the quantitative magnitude of it—how far, for example, house prices would fall. And secondly, we were not able to recognize how big an effect the financial crisis would have on the real economy.”
                                                                            In light of the crisis, how should economic research adapt?
                                                                            “Going forward, I think some of the most fruitful research will come from a better integration of financial theory and macroeconomic theory. It may be supplemented by better recognition of rare major events, something that already exists in financial theory, but is less assimilated into financial practice than it should be.
                                                                            “But the real fault was not so much in economic theory as, if you like, in the political and business world, where people actually swallowed some of the simplistic views about the wonder of markets too much without recognizing the hundreds of qualifications that Adam Smith and a number of others have told us about, and we should all have known about.” ...

                                                                            I wonder where "the political and business world" might have gotten the idea that getting the government out of the way and letting markets do whatever they want to do -- "the wonder of markets" -- is the cure for all of our ills? The disappointing part is not that the political and business world held these views to begin with, they were misled by people telling them what they wanted to hear. The disappointing part is that the financial crisis did not change this view and, worse, in some cases it has actually reinforced the idea that the key going forward is minimize government regulation and market oversight, to resist the temptation to bail out markets that pose systemic risk to the broader economy, and to resist the temptation to use monetary and fiscal policy to stabilize the economy. If these attitudes persist until the next crisis hits, as it will someday, then watch out. Although the crisis was bad this time around, the outcome could be very different -- and much, much worse -- if government takes a less active role and leaves it to the private sector to fix the problem.

                                                                              Posted by on Saturday, December 11, 2010 at 09:56 AM in Economics, Macroeconomics, Methodology | Permalink  Comments (21) 


                                                                              Friday, December 10, 2010

                                                                              links for 2010-12-10

                                                                                Posted by on Friday, December 10, 2010 at 10:01 PM in Economics, Links | Permalink  Comments (47) 


                                                                                "Fairness and Tax Policy -- A Response to Mankiw's Proposed 'Just Deserts' "

                                                                                Jonathan Weinstein:

                                                                                This essay started as a short post responding to an article by Greg Mankiw and grew longer than I expected, so to avoid cluttering the blog I switched formats. As you might guess from the potpourri in the title, the essay is intended to be readable by a broad audience. The portions which discuss the use or misuse of economic theory in the tax debate are, it is my fond hope, of interest to economists and accessible to non-economists, as is Mankiw’s article. I began this last week, so it doesn’t refer directly to this week’s big news of the Great Tax Compromise of 2010, but the ongoing negotiations were a major motivation.

                                                                                Here's the introduction to the essay:

                                                                                Fairness and Tax Policy -- a response to Mankiw's proposed "Just Deserts", by Jonathan Weinstein, Kellogg School of Management, Northwestern University: I recently came across an address by Greg Mankiw, "Spreading the Wealth Around: Reflections Inspired by Joe the Plumber." With the famous exchange between Samuel "Joe" Wurzelbacher and Barack Obama as his launching point, Mankiw suggests that the utilitarian framework1 commonly used by economists to analyze optimal taxation conflicts with moral intuition. Mankiw argues, and I agree, that most people believe that taxation should be decided by principles of fairness: the pay people keep should be proportional to their contribution to society. He calls this "Just Deserts2 Theory." He makes a very good point this far, but I must debate some implications he draws. In fact, I believe Mankiw has identified the strength of conservative rhetoric in the public debate on tax policy, and given one answer to "What's the matter with Kansas?", i.e. why the working class vote against their own interests. Conservatives have successfully caricatured the progressive position as placing value on equality of outcomes for its own sake, and this is a value which most Americans find distasteful.
                                                                                In fact, I think life in a world with equality of outcomes is fundamentally unappealing; the struggle to do better, and to be recognized fairly for achievement and productivity, is a basic human drive we would not want to lose. This is why, when conservatives convince the public of Mankiw's basic position that the free market is the ideal, perfectly fair arbiter of Just Deserts, they win broad support for their policies, even when these policies favor the few over the many. Just as serfs once accepted that their position was allotted to them by a divine order, today's growing inequality in wealth is considered acceptable if it is the outcome decreed by the ideal, uncorrupted free market. Progressives must make it clear that they support the premise of fair compensation for the contributions of each individual, but dispute the notion that fairness is best achieved by an extreme laissez-faire version of capitalism. I'll start with some verbal arguments, then, on a slightly more technical level, will point out the flaws in Mankiw's applications of classic economic theorems before suggesting a different formal approach to fairness.
                                                                                Mankiw's concluding sentence (which he is careful to qualify with "it is very possible") implies that Obama comes to his tax policy by utilitarian considerations while Joe's are based on fairness. While Mankiw is fair enough to briefly acknowledge that one could make a Just Deserts case for progressive taxation, his main argument is that fairness would favor Joe the Plumber's preferred (less progressive) tax plan over Obama's. Let's look at these claims. ...[continue reading]...

                                                                                  Posted by on Friday, December 10, 2010 at 11:01 AM in Economics, Equity, Taxes | Permalink  Comments (44) 


                                                                                  Paul Krugman: Obama’s Hostage Deal

                                                                                  Obama needs to understand that "concerns about the tax deal reflect realism, not purism":

                                                                                  Obama’s Hostage Deal, by Paul Krugman, Commentary, NY Times: I’ve spent the past couple of days trying to make my peace with the Obama-McConnell tax-cut deal. President Obama did, after all, extract more concessions than most of us expected.
                                                                                  Yet I remain deeply uneasy... Obama has bought the release of some hostages only by providing the G.O.P. with new hostages.
                                                                                  About the deal: Republicans got what they wanted — an extension of all the Bush tax cuts, including those for the wealthy. This part of the deal was bad all around...
                                                                                  In return for this bad stuff, Mr. Obama got a significant amount of short-term stimulus. Unemployment benefits were extended; there was a temporary cut in the payroll tax; and there were tax breaks for investment. ...
                                                                                  The deal essentially sets up 2011-2012 to be a repeat of 2009-2010. Once again, there would be initial benefits from the stimulus, and decent growth a year before the election. But as the stimulus faded, growth would tend to stall — and this stall would, once again, come in the months leading up to the election, with seriously negative consequences for Mr. Obama and his party.
                                                                                  You ... have to consider the situation likely to prevail a year from now, as the good parts of the Obama-McConnell deal are about to expire. Wouldn’t there be pressure on Democrats to offer Republicans something, anything, to improve economic prospects for 2012? And wouldn’t that be a recipe for another bad deal?
                                                                                  Surely the answer to both questions is yes. And that means that Mr. Obama is, as I said, paying for the release of some hostages — getting an extension of unemployment benefits and some more stimulus — by giving Republicans new hostages, which they may well use to make new, destructive demands a year from now.
                                                                                  One big concern: Republicans may try using the prospect of a rise in the payroll tax to undermine Social Security finances.
                                                                                  Which brings me back to Mr. Obama’s press conference, where — showing much more passion than he seems able to muster against Republicans — he denounced purists on the left, who supposedly refuse to accept compromises in the national interest.
                                                                                  Well, concerns about the tax deal reflect realism, not purism: Mr. Obama is setting up another hostage situation a year down the road. And given that fact, the last thing we need is the kind of self-indulgent behavior he showed by lashing out at progressives whom he feels aren’t giving him enough credit.
                                                                                  The point is that by seeming angrier at worried supporters than he is at the hostage-takers, Mr. Obama is already signaling weakness, giving Republicans every reason to believe that they can extract another ransom.
                                                                                  And they can be counted on to act accordingly.

                                                                                    Posted by on Friday, December 10, 2010 at 12:36 AM in Economics, Fiscal Policy, Politics | Permalink  Comments (191) 


                                                                                    "Supply-Side Economics: Tea Party Style"

                                                                                    Pro-Growth Liberal takes is puzzled by Michele Bachmann's complaint that extending unemployment insurance will increase the deficit:

                                                                                    Supply-side Economics: Tea Party Style: Andrew Leonard covers the opposition to the Obama-McConnell tax deal coming from Tea Party star Michele Bachmann. I’m tempted to say that her comments make me feel 30 years younger... After all, 30 years ago we were mocking supply-siders and their Laugher Curve. Andrew notes:

                                                                                    And as for what the country can afford? The total cost of the tax cut package unveiled yesterday, counting the extension of all the Bush tax cuts, the new payroll tax cut, the unemployment benefit extension and the reinstated (at a historically low level) estate tax comes to around $800 billion-$900 billion over the next two years. The cost of extending unemployment benefits for 13 months is about $60 billion. If your worry is "massive spending" then there are more appropriate places to direct your ire than unemployment benefits ... we should looking very closely at which tax cuts or social welfare policies are most likely to give us the biggest bang for the buck, in terms of encouraging economic growth. And on that score, spending money on unemployment benefits gets a very high rating. Extending unemployment benefits is a sensible move for a government when it is stretched for funds when economic growth is slow and the goal is to increase demand.

                                                                                    In Michele Bachmann’s world – is $60 billion much larger than $800 billion? Or does she really believe reducing taxes does not add to the deficit? The latter seems to be the world Art Laffer lives in. ...

                                                                                    While Tea Party types say they’d like to reduce unemployment, they oppose even modest increases in government spending. And while they say they abhor deficits, they want large tax cuts with little bang for the buck. Go figure!

                                                                                      Posted by on Friday, December 10, 2010 at 12:06 AM in Economics, Politics, Social Insurance, Unemployment | Permalink  Comments (38) 


                                                                                      Thursday, December 09, 2010

                                                                                      links for 2010-12-09

                                                                                        Posted by on Thursday, December 9, 2010 at 10:11 PM in Economics, Links | Permalink  Comments (35) 


                                                                                        The Nobel Prize in Economic Sciences Lecture Presentations

                                                                                        This years Nobel Prize lectures:

                                                                                          Posted by on Thursday, December 9, 2010 at 11:42 AM in Economics, Unemployment | Permalink  Comments (19) 


                                                                                          Unemployment and Food Stamps

                                                                                          Two statistics from the Wall Street Journal. First, 6 million people were unable to find work last year.

                                                                                          Nearly 6 million Americans looked for work but weren’t able to find employment at all last year,... an increase of 2.7 million from a year earlier. ...

                                                                                          That makes it thard to swallow stories where the high unemployment rate is caused by an unwillingness to work due to government programs such as unemployment compensation.

                                                                                          Second:

                                                                                          More people tapped food stamps to pay for groceries in September as the recession and lackluster recovery have prompted more Americans to turn to government safety net programs to make ends meet.
                                                                                          Some 42.9 million people collected food stamps last month, up 1.2% from the prior month and 16.2% higher than the same time a year ago...
                                                                                          Nationwide 14% of the population relied on food stamps as of September...

                                                                                          That means the presently about one out of every seven people relies on food stamps.

                                                                                          Also, more from the first link on the 6 million people who have been searching unsuccessfully for work (and may be relying upon food stamps) -- a benefit of unemployment compensation that isn't always recognized is its ability to keep people connected to the labor market. Without it, more people would leave the labor force permanently during downturns, and that can be quite costly:

                                                                                          Turning to disability benefits is a common path for those who become disheartened by the job search. Once they start receiving those benefits, they’re likely to stay on the program for the rest of their lives — which comes with a hefty price tag. Extended unemployment benefits have been touted as a way to keep those who have been out of a job engaged in the labor market because unemployed individuals must continue applying for positions in order to receive their benefits. ...
                                                                                          Programs like extended unemployment benefits and job training for those who have been out of work the longest don’t tend to get a lot of political attention. That could be because those most affected by unemployment are not among those most likely to vote. ...

                                                                                          It's not just whether they vote, money matters in politics. Workers generally, and the unemployed in particular, cannot match the contributions to political campaigns that those who get more attention are able to make. Mechanisms such as unions that served to concentrate the power of individuals are no longer effective countervailing forces.

                                                                                            Posted by on Thursday, December 9, 2010 at 12:33 AM in Economics, Social Insurance, Unemployment | Permalink  Comments (48) 


                                                                                            "The Sorrow and the Self-Pity"

                                                                                            Paul Krugman:

                                                                                            The Sorrow And The Self-Pity: There is a case for the tax cut deal, as the best of a very bad situation. But Obama did not help that case yesterday by lashing out at “purists”.
                                                                                            Leave aside the merits for a moment: what possible purpose does this kind of lashing out serve? Will activists be shamed into recovering their previous enthusiasm? Will Republicans stop their vicious attacks because Obama is lashing out to his left? It was pure self-indulgence; even if he feels aggrieved, he has to judge his words by their usefulness, not by his desire to vent. This isn’t about him.
                                                                                            And beyond that, who are these purists? Yes, a few people on the left refused to support health reform over the lack of a public option — but not many. To the extent that Obama has had trouble selling that plan, “purists” weren’t a factor; his own lack of effective messaging was.
                                                                                            On taxes: there might be more forgiveness now if Obama had shown any sign of fighting..., the administration really didn’t push Congress to take up the issue... Let me add that Obama has never, as far as I can recall, pointed out that these horrible tax increases on the rich the GOP warns about would bring rates back to what they were under Bill Clinton — a time of enormous prosperity. But then, Obama has always had a weirdly hard time making the case that the Clinton economy refuted Reaganism.
                                                                                            Add in the White House’s repeated validations of the right-wing position on the evils of public spending, from the spending freeze to the pay freeze, the appointment of a conservative Democrat and a paleo-conservative Republican to head the debt commission, etc. — and now Obama expects trust and praise from progressives?
                                                                                            What’s particularly striking is that Obama seems passionate about denouncing his progressive critics, even as he has nice words for the people who have spent two years trying to destroy him.
                                                                                            So look: there’s a policy issue here, and it’s a tough one; you trade off the stimulus Obama extracted now for the increased likelihood that low taxes for the rich will be made permanent, crippling policy for decades to come. But there’s also a character issue: what we really don’t need right now is a president who blames everyone but himself, and seems more concerned with self-justification than with sustaining the alliances he needs.

                                                                                            Obama is missing that the reaction from the left is not specifically about the public option, it's the more general issue of what it says about his presidency. Many Democrats were already frustrated over Obama's acceptance of conservative positions on the wars in Iran and Afghanistan, torture, Guantanamo, government wiretaps, data mining, the refusal to temporarily nationalize banks, and other issues (I can't recall if the offshore drilling decision came before or after health care was passed), and this fed into a larger narrative. To interpret the reaction of Democrats as just about narrow issues such as health care and the public option is a mistake.

                                                                                              Posted by on Thursday, December 9, 2010 at 12:24 AM in Economics, Iraq and Afghanistan, Politics | Permalink  Comments (90) 


                                                                                              Wednesday, December 08, 2010

                                                                                              links for 2010-12-08

                                                                                                Posted by on Wednesday, December 8, 2010 at 10:02 PM in Economics, Links | Permalink  Comments (57) 


                                                                                                Is the Tax Deal Targeted, Timely, and Temporary?

                                                                                                At CBS MoneyWatch, does the tax deal satisfy the "three T's" for good policy?:

                                                                                                Is the Tax Deal Targeted, Timely, and Temporary?

                                                                                                  Posted by on Wednesday, December 8, 2010 at 08:51 AM in Economics, Fiscal Policy, MoneyWatch, Taxes | Permalink  Comments (22) 


                                                                                                  Obama’s Belt-Tightening Plan Won’t Help the Economy

                                                                                                  I have a new column:

                                                                                                  Obama’s Belt-Tightening Plan Won’t Help the Economy

                                                                                                  The column argues that we are unlikely to return to full employment anytime soon, and that, if we are wise, we will take advantage of idle resources in the interim to set the stage for robust future growth. It also argues that Obama's belt-tightening plans will be counterproductive if they are implemented prior to recovery. It was written in response to Obama's federal pay freeze and his fiscal commission, but before details of the tax deal emerged. The tax deal may have temporarily suspended the deficit reduction fever that has gripped politicians lately, but the push for deficit reduction has not ended and the danger of premature austerity remains.

                                                                                                    Posted by on Wednesday, December 8, 2010 at 12:42 AM in Economics, Fiscal Policy | Permalink  Comments (43) 


                                                                                                    "Barack Obama's Time Consistency Problem?"

                                                                                                    Did Obama make it more likely that there will be "future political 'hostage' situations"?

                                                                                                    Barack Obama's Time Consistency Problem?, Twenty-Cent Paradigms: When I explain the time-consistency problem to my students, I begin by asking them what the stated position of the government is about negotiating with hostage takers. They know, of course, that the official line is that the government will not negotiate.

                                                                                                    The reason why governments always say they will not negotiate with hostage takers is that, if they won't negotiate, there is no incentive to take them in the first place. But, once hostages have been taken, the government has a strong incentive to negotiate because they don't want to be responsible for the hostages getting killed. And the problem is that the would-be hostage takers understand this, and therefore do not believe the government will follow its announced policy of not negotiating.

                                                                                                    That example may not work next semester, if my future students saw President Obama's press conference:

                                                                                                    I’ve said before that I felt that the middle-class tax cuts were being held hostage to the high-end tax cuts. I think it’s tempting not to negotiate with hostage-takers, unless the hostage gets harmed. Then people will question the wisdom of that strategy. In this case, the hostage was the American people and I was not willing to see them get harmed.  

                                                                                                    One of the implications of the time consistency problem is that a better outcome would be achieved if the government didn't have discretion to negotiate with the hostage takers. In the real world, no perfect "commitment technology" exists so, in practice, we think about "credibility". That is, how can the government behave so that the prospective hostage takers believe the authorities really mean it when they say they won't negotiate?

                                                                                                    So, the question is: did President Obama diminish his credibility, thereby increasing the likelihood of future political "hostage" situations, or did he just say what everyone already knows?  And was the Republican threat credible to kill the hostages let the tax code revert to its 2000 levels if the tax cut extension for incomes over $250,000 wasn't included?  (John Boehner's slip in September notwithstanding). ...

                                                                                                      Posted by on Wednesday, December 8, 2010 at 12:34 AM in Economics, Politics | Permalink  Comments (24)