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Wednesday, December 08, 2010

"The Tax Cut Backstory"

Noam Scheiber has some of the backstory on the internal divisions over the Bush tax cut:

... Within the administration, the split over whether to mount a tax-cut offensive broke down largely along wonk-operative lines. The wonks spent the last year mystified that the White House was ducking the fight when the substantive merits were so one-sided. The operatives brooded that the politics could abruptly turn against them, despite polling showing little public appetite for the upper-income cuts. "They view it through the class warfare stuff-Kerry in 2004, Gore in 2000," says one administration official. "They worry that they'll get painted as lefties, tax-raisers."
At key moments, including one internal discussion this spring, the political team declined to make a concerted push before Election Day. "The political people were like, 'It's a mess, let's not deal with it now,' " says another official involved. ... Such was the frustration among the wonks that, when asked to explain their tax-cut strategy, they'd morbidly joke that there was no strategy, just an "approach." ...
The various corporate front groups-like Karl Rove's Crossroads GPS-spent nearly $100 million on ads in the homestretch of the midterm elections. Campaign finance laws require these groups to devote at least half their money to a "primary purpose" that's not overtly political. Which means that, by the end of their accounting year-presumably next September-they'll have to spend an equivalent amount. What will they do with it? "If I were Karl Rove and I had $100 million at my disposal, I'd go up in twenty media markets for an entire year," says the consultant. "Nothing that mentions Obama. Just pisses on the economy. ... Even if unemployment does get better by a point, point and a half, no one believes it." ...

    Posted by on Wednesday, December 8, 2010 at 12:33 AM in Economics, Politics | Permalink  Comments (23) 


    Tuesday, December 07, 2010

    links for 2010-12-07

      Posted by on Tuesday, December 7, 2010 at 10:02 PM in Economics, Links | Permalink  Comments (19) 


      "Did Barack Obama Lose a Political Battle but Win a War?"

      Greg Ip at the Economist summarizes the estimates of the macroeconomic impact of the tax cut agreement:

      Did Barack Obama lose a political battle but win a war?, Free Exchange: The number crunchers have had their first stab at Monday’s tax deal and the economic impact is impressive. Goldman Sachs now thinks the economy will grow 0.5 to 1 percentage points faster next year than its current forecast of 2.7%, which was bumped up from 2% only a week ago. JPMorgan has raised its 2011 forecast (fourth quarter compared to a year earlier) to 3.5% from 3%. Moody’s Economy.com sees growth next year at 4%. All of these forecasts imply some decline in the unemployment rate. ...
      The initial reaction, in particular among liberal commentators, was that this was a political loss for Barack Obama, since he gave up more than the Republicans. I initially shared that view, but a colleague notes that this constitutes a loss only by narrow Beltway-based accounting. What will ultimately matter in 2012 is how the economy performs, not whose policies are responsible for that performance. If the economy is booming a year from now, Mr Obama may be seen to have lost the battle but won the war. ...
      Outside the beltway, it doesn’t matter who wins or loses but whether it’s good for the economy. In the short run the answer is, unambiguously, yes. In the long run, there’s not much comfort to be taken from the fact that Democrats and Republicans have once again proven they can come together to run up the deficit. ...
      In some ways this deal might make thoughtful long-term fiscal reform harder. Mark Thoma worries that the payroll tax cut may be difficult to reverse a year from now, with bad consequences for both the deficit and, ultimately, Social Security...

      The estimated impact seems a bit high to me given that the net stimulus is all tax cuts, spending on items such as infrastructure are not included in the deal. So I hope the estimates -- which rely upon a presumption about how much of the tax cuts will be spent rather than saved -- are correct. The worry is that this will be used as an excuse to avoid even thinking about doing anything further to help labor markets recover faster even though under the most optimistic estimates of the effects of the tax deal full recovery of labor markets will still take a very long time.

        Posted by on Tuesday, December 7, 2010 at 01:11 PM in Economics, Fiscal Policy, Taxes | Permalink  Comments (61) 


        A Few Reactions to the Tax Cut Agreement

        Update -- More Reactions:

        Paul Krugman:

        So the tax deal is out. Obama extracted some concessions, with the big surprise being a payroll tax cut. How much better do these concessions make the thing? ...[T]his raises GDP by 0.7 percent relative to otherwise; rule of thumb is that one point on GDP is half a point on unemployment, so add 0.35 points to the CBO numbers.
        That’s a two-year average; what about timing? Both the payroll tax break and the unemployment extension are for the first year only. So, a bigger boost next year, fading out in 2012. Since all the evidence says that elections depend on the rate of change of unemployment, not its level, this is actually bad news for Obama: he’s setting himself up for an economic stall in the months leading into the 2012 election.
        Oh, and he’s overpromising again:
        “It’s not perfect, but this compromise is an essential step on the road to recovery,” Mr. Obama said. “It will stop middle-class taxes from going up. It will spur our private sector to create millions of new jobs, and add momentum that our economy badly needs.”
        Millions of new jobs? Millions? Not by my arithmetic.
        So, was this worth it? I’d still say no, although it’s better than what I expected over the weekend. It still greatly increases the chances of the Bush tax cuts being made permanent — especially because the front-loading of the stimulative stuff actually worsens Obama’s 2012 electoral prospects.
        Overall, enough sweetener has been added to diminish, but not eliminate, the bitterness of the disappointment.

        He adds:

        A further thought on the tax deal: didn’t the administration repeat exactly the same mistake it made on the original stimulus? The stimulus was too small; but it also too short-lived, with the maximum impact on growth coming in the winter of 2009-2010, then turning negative just in time for the midterm election.
        Now we have unemployment insurance and payroll tax cuts for 2011, going away in 2012 — just in time to put the administration in big trouble as the election looms.
        This only makes sense if you believe we’ll be in a self-sustaining, strong recovery by late 2011. Stranger things have happened, but …
        And remember, mistaken forecasts of self-sustaining recovery taking hold were a big part of the original stimulus mistake.

        Greg Mankiw:

        I am generally pleased with the compromise over taxes the President and Republicans struck yesterday. (The President should be too, but he seemed dejected at his news conference. Buck up, Mr President! You don't want anyone to start thinking of the word "malaise.") ...
        As the policy was described yesterday, this payroll tax cut goes entirely to the worker. This increases work incentives, but the main motivation is probably to increase take-home pay, consumer spending, and aggregate demand. CEA chair Austan Goolsbee recently said, “We’re not saying that our long-term recovery ought to be built on trying to increase consumer spending.” Maybe not, but the plans for short-run recovery are very definitely consumption-based.
        An alternative would have been to reduce the employer's share of the payroll tax, at least to some degree. Given a sticky wage, this policy would have reduced the cost of hiring and, to the extent labor demand curves slope downward, increased employment. It would also have increased business cash-flow and, to the extent that firms are cash-constrained, increased business investment.
        I should note that, as part of the deal, the President also got his proposal to allow businesses to expense investment spending. As I have said previously, this is a good idea, but the impact is likely to be modest.

        Lane Kenworthy:

        On policy grounds, I’m not happy about President Obama’s decision to go along with a two-year extension of the Bush tax cuts for those making over a million dollars a year and with a scaled-back estate tax. But there’s an economic and political logic to it.
        Economic: The most important thing our federal government can do at the moment is to help the economy. Fiscal policy options are limited; there’s no chance of a second stimulus package. Extending the tax breaks for the richest will help — not a lot, since much of the money the rich get to keep will be saved rather than spent, but a little. More important, in exchange the administration got an extension of unemployment benefits for several million people and additional tax reductions for low- and middle-income Americans.
        Political: The general line of commentary on the left suggests that compromising with Republicans on this issue hurts Obama politically. Comparisons to Jimmy Carter are becoming commonplace. But Bill Clinton got the same kind of flak. In the end, the key difference between the Carter and Clinton presidencies wasn’t clarity of vision, a big idea, decisiveness, toughness, progressiveness, or partisanship. It was how the economy performed as each approached reelection. If our economy gets back on its feet, President Obama and his party are likely to fare well in the 2012 elections, and images of Obama as Carter redux will be a distant memory.

        Ryan Avent:

        ...In this imperfect political world, the agreement to temporarily extend all of the Bush tax cuts, extend unemployment insurance, and temporarily reduce payroll tax rates and allow enhanced business expensing looks like a pretty good outcome for the American economy. The sharp criticisms levied at it by both the Democrat base and the country's real deficit hawks are both overstated. ...

        [End of update.]

        Brad DeLong:

        Most of this round of stimulus does look to be relatively low bang-for-buck, and it is not paid for over ten years, but it does look to me as though it is better than a poke in the eye with a sharp stick.

        Dean Baker:

        It is important to realize that most of the money in this package is maintaining tax cuts in place that were scheduled to expire. This will prevent tax increases from having a contractionary impact on the economy, however there is very little, if any, net stimulus in this package compared with current levels of taxation and spending.

        Larry Mishel of the EPI:

        Who got what out of the deal is clear. The Republicans got tax cuts for the best-off two percent and lower estate taxes for the very wealthiest families, neither of which will do much if anything to create jobs.
        President Obama won policies that will put or keep money in the pockets of the families of the unemployed and middle and low-income families, which will increase spending and create jobs. That’s what a payroll tax holiday for workers, unemployment benefits and the various tax credits will do: create customers for business and create jobs, which is our biggest need right now.
        In two years, the American people will have a clear choice about who the tax code will favor. That debate will, I hope, highlight the hypocrisy of those wanting to deepen the deficit by extending tax cuts for the rich while simultaneously cutting health care, Social Security and domestic public investments in the name of deficit reduction.

        Ezra Klein:

        So is this a good deal? It's a lot better than I would've told you the White House was going to get if you'd asked me a week ago. There's some new stimulus in the form of the payroll-tax cut and the expensing proposals. The older stimulus programs that are getting extended -- notably the unemployment insurance and the tax credits -- probably would've expired outside of this deal. The tax cuts for income over $250,000 are a bad way to spend $100 billion or so, and the estate tax deal is really noxious.
        It's bad news for the deficit, though the White House and Congress are right to make the deficit less of a priority than economic recovery. And speaking of that economic recovery? This isn't enough, and it's not well targeted. The ... end result is between $200 and $300 billion more in tax breaks, tax credits and unemployment insurance than there would've been if not for this deal... That's better than nothing -- or to be more specific, better than backsliding.
        Most of the money just keeps programs that are currently in effect from expiring, so in some ways, it would be more accurate to say that this money is anti-contractionary rather than stimulative. It's important that the White House doesn't repeat the mistake it made in the original stimulus and overpromise how much this will do for the economy. ...
        And finally, it's something of a hopeful sign: The White House sat in a room with Republicans and Democrats and managed to negotiate an actual compromise. The final deal includes some things that Democrats will like and some things they won't like, and it includes some things Republicans will like and some things they won't like. But it's a deal, and ... if you want to be optimistic, this process suggests that the next two years might be a bit more productive than some of us have been predicting.

        Tom Bozzo:

        Maynard at Creative Destruction has the optimist’s take on the reported tax cut deal:

        [T]he deal supposedly struck between Obama and the Republicans is not too bad and better than was to be expected. We give the rich about $60 billion a year, and in return get about as much economic stimulus, focused on low- and moderate-income people, as we could hope to get.

        ...I tend to agree. ...

        Felix Salmon:

        The outlines of the tax-cut negotiations have finally come into focus: basically, it’s a kitchen-sink approach where Republicans and Democrats all get the tax cuts they want. The Bush tax cuts get extended for people earning more than $250,000 a year — and unemployment insurance gets extended, along with various tax credits. On top of that, there’s a 2% cut in payroll taxes, and the reintroduction of the estate tax at the Republicans’ preferred level: 35% of estates over $5 million. There’s even a nice new tax deduction for businesses making new investments. This is tax cutting, Oprah-style: you get a tax cut! And you get a tax cut! And you! And you! You all get a tax cut!
        This is clearly a win for the Republicans, who get everything they want for the rich. ... Meanwhile, all the Congressional opposition to this deal is going to come from Democrats, who are basically being asked to sign off on exactly the same bill that George W Bush would have asked for, with a spoonful of unemployment-benefit sugar to help the medicine go down. ...

        My reaction:

        The estate tax and the extension of high end tax cuts are causing the most heated reactions, and the payroll tax cut is generally being applauded. But I see the payroll tax reduction as potentially troublesome as well. Though the revenue the Social Security system loses due to the tax cut will be backfilled from general revenues, the worry is that the tax cut will not expire as scheduled -- temporary tax cuts have a way of turning permanent. That's especially true in this case since labor markets are very unlikely to recover within the next year and it will be easy to argue against the scheduled "tax increase" for workers. In fact, it will never be a good time to increase taxes on workers and if the tax cut is extended once, as it's likely to be, it will be hard to ever increase it back to where it was. That endangers Social Security funding -- relying on general revenue transfers sets the system up for cuts down the road -- and for that reason I would have preferred that this be enacted in a way that produces the same outcome, but has different political optics. That is, leave the payroll tax at 6% on the books and keep sending the money to Social Security, and fund a 2% tax "rebate" out of general revenues. The rebate would come, technically, as a payment from general revenues rather than through a cut in the payroll tax, but in the end the effect would be identical. But the technicality is important since it preserves the existing funding mechanism for Social Security even if the taxes are permanently extended.

          Posted by on Tuesday, December 7, 2010 at 01:54 AM in Economics, Politics, Taxes | Permalink  Comments (101) 


          Median Duration of Unemployment

          Duration

            Posted by on Tuesday, December 7, 2010 at 01:51 AM in Economics, Unemployment | Permalink  Comments (14) 


            Construction Jobs from the First Stimulus "Drying Up"

            The small amount of stimulus from the tax cuts in the agreement Obama reached with Republicans may not be enough to offset the reductions in employment from the end of the first round of stimulus, let alone spur new employment:

            After stimulus, construction industry seeing private-sector and state projects drying up, by Annys Shin, Washington Post: ...The end of the stimulus - the $787 billion that Washington approved last year in an effort to forestall another Great Depression - is more than a year away. But for ... thousands of other workers in the road construction industry, it has already arrived.
            Road construction workers were among the first to benefit from the 2009 American Reinvestment and Recovery Act, which pumped hundreds of millions of dollars into "shovel-ready" road resurfacing projects in order to save or create millions of jobs.
            The bulk of highway-related work will be done within a year...
            Without the stimulus, thousands of workers who build and maintain America's roadways could soon join the 1.6 million construction workers who are unemployed. The construction industry lost an additional 5,000 jobs in November, the latest U.S. Labor Department data show, bringing the sector's unemployment rate to 18.8 percent. ...

              Posted by on Tuesday, December 7, 2010 at 01:51 AM in Economics, Fiscal Policy, Unemployment | Permalink  Comments (9) 


              Monday, December 06, 2010

              links for 2010-12-06

                Posted by on Monday, December 6, 2010 at 10:11 PM in Economics, Links | Permalink  Comments (29) 


                Deal Reached to Extend All the Bush Tax Cuts

                Here are the details of the agreement on the Bush tax cuts:

                1) The Bush tax cuts get extended for two years -- with one ugly surprise: For the next two years, estates up to $5,000,000 will be protected from the estate tax, and the tax rate for the few estates that are taxed will be 35 percent. ... The difference in expected revenue between the 2009 levels and the compromise levels is $10 billion or so.

                2) The refundable tax credits are extended: The Earned Income Tax Credit, the Child Tax Credit and the American Opportunity Tax Credit were all pumped up in the stimulus, but set to expire this year. All of them will be extended. Price tag? $40 billion or so.

                3) Unemployment insurance gets extended for 13 months: ... In perhaps the most important part of the deal, there's going to be a 13-month extension at a cost of $56 billion.

                4) A 2 percent cut in the payroll taxes paid by employees: This is perhaps the most unexpected part of the compromise. Rather than extending the administration's Making Work Pay tax credit for two years, which would've been worth about $60 billion a year, they've agreed to a one-year cut in the payroll taxes paid by employees, which'll raise $120 billion in 2011. ...

                5) Business expensing: Remember back in September, when the White House announced a proposal to give businesses two years in which they could deduct 100 percent of the cost of new investments? That's in the deal, too. The cost of this is a bit complicated -- it's $30 billion over 10 years, but it works by offering huge tax cuts in the next two years and then paying that back over the next eight. ...

                On net, the package probably adds around $200 billion in new stimulus for the economy, maybe a bit more. Notice, however, that it is entirely tax cuts.

                The estate tax and the extension of high end tax cuts are causing the most heated reactions, and the payroll tax cut is generally being applauded. But I see the payroll tax reduction as potentially troublesome as well. Though the revenue the Social Security system loses due to the tax cut will be backfilled from general revenues, the worry is that the tax cut will not expire as scheduled -- temporary tax cuts have a way of turning permanent. That's especially true in this case since labor markets are very unlikely to recover within the next year and it will be easy to argue against the scheduled "tax increase" for workers. In fact, it will never be a good time to increase taxes on workers and if the tax cut is extended once, as it's likely to be, it will be hard to ever increase it back to where it was. That endangers Social Security funding -- relying on general revenue transfers sets the system up for cuts down the road -- and for that reason I would have preferred that this be enacted in a way that produces the same outcome, but has different political optics. That is, leave the payroll tax at 6% on the books and keep sending the money to Social Security, and fund a 2% tax "rebate" out of general revenues. The rebate would come, technically, as a payment from general revenues rather than through a cut in the payroll tax, but in the end the effect would be identical. But the technicality is important since it preserves the existing funding mechanism for Social Security even if the taxes are permanently extended.

                  Posted by on Monday, December 6, 2010 at 07:11 PM in Economics, Politics, Social Insurance, Social Security, Taxes, Unemployment | Permalink  Comments (48) 


                  Stiglitz: Alternatives to Austerity

                  Joseph Stiglitz proposes a deficit reduction package that "boosts efficiency, bolsters growth, and reduces inequality," but it has little chance of being enacted because it goes against "corporate and other special interests that have come to dominate America’s policymaking":

                  Alternatives to Austerity, by Joseph E. Stiglitz, Commentary, Project Syndicate: In the aftermath of the Great Recession, countries have been left with unprecedented peacetime deficits and increasing anxieties about their growing national debts. In many countries, this is leading to a new round of austerity...
                  Technically, reducing a deficit is a straightforward matter: one must either cut expenditures or raise taxes. It is already clear, however, that the deficit-reduction agenda, at least in the US, goes further: it is an attempt to weaken social protections, reduce the progressivity of the tax system, and shrink the role and size of government – all while leaving established interests, like the military-industrial complex, as little affected as possible.
                  In the US..., any deficit-reduction agenda has to be set in the context of what happened over the last decade: a massive increase in defense expenditures...; growth in inequality...; underinvestment in the public sector, including in infrastructure...; and growth in corporate welfare, from bank bailouts to ethanol subsidies to a continuation of agricultural subsidies...
                  As a result, it is relatively easy to formulate a deficit-reduction package that boosts efficiency, bolsters growth, and reduces inequality. Five core ingredients are required. First, spending on high-return public investments should be increased. ... Second, military expenditures must be cut... Following this is the need to eliminate corporate welfare... Creating a fairer and more efficient tax system, by eliminating the special treatment of capital gains and dividends, is also needed. ... Finally, with more than 20% of all income going to the top 1%, a slight increase, say 5%, in taxes actually paid would bring in more than $1 trillion over the course of a decade.
                  A deficit-reduction package crafted along these lines would more than meet even the most ardent deficit hawk’s demands. It would increase efficiency, promote growth, improve the environment, and benefit workers and the middle class.
                  There’s only one problem: it wouldn’t benefit those at the top, or the corporate and other special interests that have come to dominate America’s policymaking. Its compelling logic is precisely why there is little chance that such a reasonable proposal would ever be adopted.

                  The successful objections to allowing the Bush tax cuts to expire for upper end taxpayers reinforces the claim that the deficit reduction agenda has been captured by powerful interests. Similarly with calls to increase the retirement age for Social Security, which is regressive, rather than the progressive solution of lifting the income cap on Social Security taxes. I'd be more confident about the deficit reduction process if I thought the White House would take strong stands to defend core Democratic interests. But it's clear that the administration folds as soon as the negotiations gets tough, and that it cannot be trusted to do this.

                    Posted by on Monday, December 6, 2010 at 10:41 AM in Budget Deficit, Economics, Politics | Permalink  Comments (40) 


                    Paul Krugman: Let’s Not Make a Deal

                    Democrats should not give in to demands to extend the Bush tax cuts for all taxpayers:

                    Let’s Not Make a Deal. by Paul Krugman, Commentary, NY Times: Back in 2001, former President George W. Bush pulled a fast one. He wanted to enact an irresponsible tax cut, largely for the benefit of the wealthiest Americans. But there were Senate rules in place designed to prevent that kind of irresponsibility. So Mr. Bush evaded the rules by making the tax cut temporary, with the whole thing scheduled to expire on the last day of 2010.
                    The plan, of course, was to come back later and make the thing permanent, never mind the impact on the deficit. But that never happened. And so here we are, with 2010 almost over and nothing resolved.
                    Democrats have tried to push a compromise: let tax cuts for the wealthy expire, but extend tax cuts for the middle class. Republicans, however, are having none of it. ... It’s all or nothing, they say: all the Bush tax cuts must be extended. What should Democrats do?
                    The answer is that they should just say no..., saying no, and letting the Bush tax cuts expire on schedule, is the lesser of two evils.
                    Bear in mind that Republicans want to make those tax cuts permanent. ... America, however, cannot afford to make those cuts permanent. We’re talking about almost $4 trillion in lost revenue just over the next decade; over the next 75 years, the revenue loss would be more than three times the entire projected Social Security shortfall. ...—... the only way to cut spending enough to pay for the Bush tax cuts in the long run would be to dismantle large parts of Social Security and Medicare.
                    So the potential cost of giving in to Republican demands is high. What about the costs of letting the tax cuts expire? ... A two-year extension of the Bush tax cuts, it estimated, would lower the unemployment rate next year by between 0.1 and 0.3 percentage points...; the effect would be about twice as large in 2012. Those are significant numbers, but not huge...
                    Oh, and what about confidence? ... Advanced countries, I’ve argued, have a lot of fiscal leeway. But anything that makes permanent extension of obviously irresponsible tax cuts more likely also sends a strong signal to investors: it says, “Hey, we aren’t really an advanced country; we’re a banana republic!” And that can’t be good for the economy.
                    Last but not least: if Democrats give in to the blackmailers now, they’ll just face more demands in the future. As long as Republicans believe that Mr. Obama will do anything to avoid short-term pain, they’ll have every incentive to keep taking hostages. If the president will endanger America’s fiscal future to avoid a tax increase, what will he give to avoid a government shutdown?
                    So Mr. Obama should draw a line in the sand, right here, right now. If Republicans hold out, and taxes go up, he should tell the nation the truth, and denounce the blackmail attempt for what it is.
                    Yes, letting taxes go up would be politically risky. But giving in would be risky, too — especially for a president whom voters are starting to write off as a man too timid to take a stand. Now is the time for him to prove them wrong.

                      Posted by on Monday, December 6, 2010 at 12:16 AM in Economics, Taxes | Permalink  Comments (74) 


                      Sunday, December 05, 2010

                      links for 2010-12-05

                        Posted by on Sunday, December 5, 2010 at 10:11 PM in Economics, Links | Permalink  Comments (23) 


                        Bernanke on CBS’s '60 Minutes'

                        [Excerpts from the interview, Transcript and unaired excerpts.]

                          Posted by on Sunday, December 5, 2010 at 04:41 PM in Economics, Monetary Policy, Video | Permalink  Comments (17) 


                          "Simpson Commission Has To Be Considered A Failure"

                          Stan Collender:

                          Simpson Commission Has To Be Considered A Failure, by Stan Collender (Under Creative Commons): I'll have much more about this on Tuesday in my weekly column in Roll Call but, for now...

                          1. The Bowles-Simpson commission was created on a pass-fail basis.  Get 14 votes and you pass; get less than 14 votes and you fail.  The plan was only supported by 11 commissioners so the math isn't that hard.
                          2. The 11 members of the commission who favored the plan likely overstates the actual amount of support.  It seems clear that at least two and maybe more announced their support only when they were certain the plan wouldn't get 14 votes.  Their approval was more about political posturing for the future than actual enthusiasm.
                          3. Don't read too much into the bipartisan support for some of the options.  If these same proposals are considered at all, they will next be debated in a very different political context and in a package that will look very different from the one the commission considered.  Support for them in the commission is no indication they will be supported again.
                          4. Don't read too much into the enthusiastic response the plan received from various deficit hawk groups.  Many of them supplied the commission with staff, helped develop what ultimately was proposed, and had a stake in its outcome.  Under these circumstances, their enthuisastic approval and attempt to define the outcome as a success was not at all suprising.  It's also not especially indicative of any larger movement toward what was proposed.

                            Posted by on Sunday, December 5, 2010 at 01:30 PM in Budget Deficit, Economics, Politics | Permalink  Comments (38) 


                            Narayana Kocherlakota: Monetary Policy Actions and Fiscal Policy Substitutes

                            On many occasions when the Fed was dragging its feet in terms of implementing a second round of quantitative easing, I made the claim that fiscal policy authorities don't have to wait for the Fed to take action, they can use tax changes to duplicate the incentives that are created when the Fed lowers the interest rate. Furthermore, while the Fed may have difficulty cutting interest rates as much as needed when the interest rate is near the zero bound, fiscal policy authorities have much more room to maneuver.

                            I missed this speech by Narayana Kocherlakota when it was given a couple of weeks ago, but it makes this point explicitly:

                            Monetary Policy Actions and Fiscal Policy Substitutes, by Narayana Kocherlakota, President, Federal Reserve Bank of Minneapolis: ...I’ll begin by discussing current macroeconomic conditions and the Federal Open Market Committee’s recent actions...
                            This is the economic situation that confronted the FOMC in its November meeting. Inflation and employment are both too low, and the pace of recovery is too slow. Economic growth is low and softening further. I think it is safe to say that, given this situation, the FOMC would have liked to have been able to cut its target interest rate. But this option is not available. ...
                            But the FOMC does have another policy instrument available: its balance sheet. ... At its November 3 meeting, the FOMC announced that it plans to buy $600 billion of long-term Treasuries in the open market by mid-2011. ... This kind of action is known as quantitative easing, or QE. ...
                            I believe that QE is a move in the right direction. However,... I also think there are good reasons to suspect that the ultimate effects of any amount of QE are likely to be relatively modest. That’s why I would have greatly preferred for the committee to have been able to cut its target rate rather than using QE. The problem is that its target rate is already essentially at zero, and so it was not possible...
                            Given this constraint on monetary policy, I believe it is important to ask if it is possible to synthesize the effects of a one-year interest rate cut of, say, 100 basis points using fiscal policy tools. In his current and past work, Minneapolis Fed staff researcher Juan Pablo Nicolini and his co-authors have answered this question in the affirmative.2 Their key insight is that there is a broad equivalence between monetary and fiscal policy. ...
                            In the remainder of my remarks, I’ll illustrate this insight by describing one particular fiscal policy plan that is equivalent to a 100-basis-point cut by the Fed. The proposal has three parts. The first part is a permanent consumption tax of 100 basis points, instituted with a one-year delay.3 The second part is a permanent decrease in labor income taxes of 100 basis points, also instituted with a one-year delay. The third part is an investment tax credit undertaken in 2011. The Nicolini et al. results demonstrate that, in a wide class of economic models, the effects of this three-part plan would be equivalent to the effects of a 100-basis-point interest rate cut. ...
                            The 1 percent permanent consumption tax that begins in 2012 stimulates consumption demand in 2011. The permanent reduction in labor income taxes ensures that this new consumption tax does not deter labor supply. Finally, the investment tax credit makes sure that the new consumption tax does not deter investment in 2011.
                            I’ll make two additional comments about this plan. First, how much would this three-pronged change in taxes cost the American taxpayer? The exact answer to this question would depend on a host of details... But let me offer a very rough calculation..., the first two parts of the plan would add about $20 billion per year to government revenue beginning in 2012. The plan also involves an appropriately sized investment tax credit..., a one-time cost in 2012 of $20 billion. These calculations, while obviously very rough, do indicate that the plan has the potential to be fiscally responsible.4
                            Second, I’ve not discussed distributional considerations. Raising consumption taxes by 1 percentage point and lowering labor income taxes by 1 percentage point for all Americans would tend to redistribute the burden of taxes toward lower-income citizens. For this reason, I believe that it would be desirable to redesign the labor income tax reduction to make it more progressive.
                            Overall, I believe that this analysis has both policy and intellectual aspects. From a policy point of view,... I find the resultant policy to be attractive because may be able to generate macroeconomic stimulus without increasing the deficit. From an intellectual point of view, the analysis demonstrates the remarkable power of public finance in addressing important macroeconomic questions. ...

                            The point is that the effects of QE are likely to be modest, and with unemployment remaining persistently high, we need to do more than monetary policy has to offer. Thus, fiscal policy has a key role to play, either through direct spending on infrastructure and other projects -- my first choice -- or through tax schemes designed to create incentives for increased economic activity.

                            Monetary policy has done all it can do, pretty much. I would like to see the Fed be even more aggressive, but even if it did implement a larger QE program, it can't do enough to solve the economic growth and unemployment problems by itself. Fiscal policy authorities need to step up and do more -- statements like the one above and those made recently by Ben Bernanke are pleas for help from fiscal authorities. But, unfortunately, Congress has fallen down on the job, there is no leadership from the White House promoting such action, and there is very little hope, none really, that more help will be forthcoming.

                              Posted by on Sunday, December 5, 2010 at 11:33 AM in Economics, Fiscal Policy, Monetary Policy, Politics | Permalink  Comments (10) 


                              Saturday, December 04, 2010

                              links for 2010-12-04

                                Posted by on Saturday, December 4, 2010 at 10:01 PM in Economics, Links | Permalink  Comments (18) 


                                Resolving Uncertainty About Future Growth

                                Christina Romer:

                                It’s the Big Questions That Slow Growth, by Christina Romer, Commentary, NY Times: Uncertainty is frequently blamed for the sorry state of the economy — for why businesses are not investing strongly in new equipment or hiring more workers, and for why consumers are not spending freely. On Wall Street, it’s even said that government meddling is the main culprit and that political gridlock is the cure.
                                This is a serious misreading of the situation. Uncertainty is likely holding back the recovery. But its sources are far more fundamental than the tax and environmental issues that typically top the list of complaints. And the solution is certainly not for the government to do less. Rather, it needs to do much more. ...
                                The deepest and most destructive uncertainty we face centers on the overall health of the economy and its prospects for growth. ... Because we are in largely uncharted territory, figuring out how and when the economy will recover is much harder than usual. ...
                                How do we resolve uncertainty about future growth? The Federal Reserve, Congress and the president need to reaffirm that they will do whatever it takes to restore the economy to full health. They could take a lesson from President Franklin D. Roosevelt, who declared in his 1933 inaugural address that he would treat the task of putting people back to work “as we would treat the emergency of a war.”
                                They should follow up with powerful fiscal and monetary actions to create jobs — coupled with a concrete plan for tackling our long-run budget problems. We are at a critical moment. With many in Congress opposed to further jobs measures and tax increases of any kind, the chances of prolonged gridlock are high.
                                But such policy paralysis would be a disaster. It would make uncertainty more acute by leaving us to the unpredictable forces of natural recovery and with no prospect of resolving our unsustainable deficits. Aggressive action to restore growth and face up to our long-run challenges is the only true and lasting solution.

                                  Posted by on Saturday, December 4, 2010 at 07:22 PM in Economics, Policy | Permalink  Comments (15) 


                                  FRBSF: Disinflation - It's Not Just Housing

                                  This "Data Dive" from the San Francisco Fed (no permalink) shows that, contrary to some claims, disinflation is "not just housing":

                                  Disinflation

                                    Posted by on Saturday, December 4, 2010 at 07:22 PM in Economics, Inflation | Permalink  Comments (20) 


                                    Off Message Watch: "I Don't Know That for Sure"

                                    The administration just cannot admit that it made a mistake in proposing a stimulus package that was too small. This is from a Q&A with Austan Goolsbee::

                                    Q. Would our economy be in better shape right now if the initial stimulus when the administration took office had been bigger?
                                    A. I don’t know the answer to that for sure. There’s a bit of a crystal ball in that. It obviously depends on what the things were.

                                    The right answer here is "of course if would have been better," and to then talk about how Republicans blocked any hope of additional stimulus once it was clear the economy was doing much worse than anticipated. But because the administration refuses to admit its mistake and concede that the stimulus was too small, it cannot bring itself to argue that the economy needs more help from fiscal authorities. There were nods in this direction now and again, but the administration never really tried to make this argument, a strong push for a job creation program for example, and it has thus given up the chance to make clear which party is standing in the way of providing more help for distressed households.

                                    Update: I see that Paul Krugman, referring to this statement by Jared Bernstein, is thinking along the same lines:

                                    Getting Obama’s Drift: I felt sorry for Jared Bernstein, who surely knows better, having to convey the administration’s attempt to downplay the terrible jobs numbers.
                                    I know what’s going on: the administration decided, more or less a year ago, that rather than admit that its stimulus package was inadequate and call for more, it would put on a happy face and hope for better news. But here’s the thing: by now we know that this strategy has been a political disaster. So you would think that the administration would change its line.
                                    But to do that, someone at the top has to make the decision to change direction. And clearly, nobody has. I don’t think there was a deliberate decision to persist in an obviously losing strategy; I just think top management has gone missing. And so the administration drifts …

                                      Posted by on Saturday, December 4, 2010 at 10:54 AM in Economics, Fiscal Policy, Politics | Permalink  Comments (34) 


                                      "Fiscal Patriotism"

                                      Floyd Norris objects to framing budget reductions that could make recovery from the recession more dificult as patriotic:

                                      Fiscal Patriotism: Pete Peterson, the former cabinet secretary turned private equity billionaire, has been the No. 1 crusader against deficit spending. The fact that there seems to be a political consensus to cut spending when the economy is weak is a testament to his success.

                                      Today he put out a statement on the deficit reduction commission vote. I have italicized one phrase.

                                      The work of this commission has clearly demonstrated the need to address our nation’s unsustainable long-term fiscal challenges, and it has shown that we should begin now. The time for denial, inaction and political gamesmanship is over. The time for fiscal patriotism is now.

                                      There is a long and ignoble history in America of the misuse of the word patriotism, in which those who disagree with the speaker are not just misguided, but unpatriotic.

                                      I hope Mr. Peterson will think better about the use of that phrase, and that others will not pick it up.

                                      The deficit is now large in significant part because the financial system blew up and the government had to pick up the bill at the same time the recession caused by the financial crisis caused tax revenue to fall and social safety net spending to rise. ...

                                      Mr. Peterson did say earlier this week that “we can all agree on goals and objectives such as promoting economic recovery and growth, protecting the most vulnerable and keeping our country competitive.” It would be nice if he made it clear that he does not deem it unpatriotic to think that now is the time to focus on “promoting economic recovery” and “protecting the most vulnerable” rather than on slashing spending.

                                        Posted by on Saturday, December 4, 2010 at 10:44 AM in Budget Deficit, Economics | Permalink  Comments (29) 


                                        Friday, December 03, 2010

                                        links for 2010-12-03

                                          Posted by on Friday, December 3, 2010 at 10:22 PM in Economics, Links | Permalink  Comments (16) 


                                          The Employment Report

                                          This is not the report we've been waiting for. Unemlpoyment has risen from 9.6 percent to 9.8 percent, and job growth is very low:

                                          The unemployment rate edged up to 9.8 percent in November, and nonfarm payroll employment was little changed (+39,000)

                                          We should have done something about this months and months ago. But instead, it was easier to rely on the hope that things were getting better and avoid the hard work and difficult politics of trying to spur job creation. What do we hear from the White House now? Are they ready to embrace a less optimistic but more realistic path for employment? Nope. The White House view is that "one month does not a new trend make." When bad news is always discounted as an aberration, and good news embraced as though it is the trend, this is the policy outcome you get -- too little, too late, if at all. The White House needed to push as hard as they could for more help, and it should have started long ago. I realize that they probably wouldn't have been successful due to opposition in Congress, but you don't know that unless you try, and the battle itself would have had value even if it wasn't successful.

                                          [Also posted at MoneyWatch.]

                                            Posted by on Friday, December 3, 2010 at 09:36 AM in Economics, Unemployment | Permalink  Comments (118) 


                                            Paul Krugman: Freezing Out Hope

                                            Obama is wasting his political capital on unreciprocated, counterproductive bipartisan gestures:

                                            Freezing Out Hope, by Pau Krugman, Commentary, NY Times: After the Democratic “shellacking” in the midterm elections, everyone wondered how President Obama would respond. Would he show what he was made of? Would he stand firm for the values he believes in, even in the face of political adversity?
                                            On Monday, we got the answer: he announced a pay freeze for federal workers. This was an announcement that had it all. It was transparently cynical; it was trivial in scale, but misguided in direction; and by making the announcement, Mr. Obama effectively conceded the policy argument to the very people who are seeking — successfully, it seems — to destroy him.
                                            So I guess we are, in fact, seeing what Mr. Obama is made of.
                                            About that pay freeze: the ... truth is that America’s long-run deficit problem has nothing at all to do with overpaid federal workers. For one thing, those workers aren’t overpaid. ... And ... employee pay is only a small fraction of federal expenses... The actual savings, about $5 billion over two years, are chump change given the scale of the deficit. Anyway, slashing federal spending at a time when the economy is depressed is exactly the wrong thing to do. ...
                                            Mr. Obama ... apparently intended the pay freeze announcement as a peace gesture to Republicans the day before a bipartisan summit. At that meeting, Mr. Obama, who has faced two years of complete scorched-earth opposition, declared that he had failed to reach out sufficiently to his implacable enemies. He did not, as far as anyone knows, wear a sign on his back saying “Kick me,” although he might as well have.
                                            There were no comparable gestures from the other side. Instead, Senate Republicans declared that none of the rest of the legislation on the table — legislation that includes such things as a strategic arms treaty that’s vital to national security — would be acted on until the tax-cut issue was resolved, presumably on their terms.
                                            It’s hard to escape the impression that Republicans have taken Mr. Obama’s measure — that they’re calling his bluff in the belief that he can be counted on to fold. And it’s also hard to escape the impression that they’re right.
                                            The real question is what Mr. Obama and his inner circle are thinking. Do they really believe, after all this time, that gestures of appeasement to the G.O.P. will elicit a good-faith response?
                                            What’s even more puzzling is the apparent indifference of the Obama team to the effect of such gestures on their supporters. ... Mr. Obama almost seems as if he’s trying, systematically,... to convince the people who put him where he is that they made an embarrassing mistake. ...
                                            So what are Democrats to do? The answer, increasingly, seems to be that they’ll have to strike out on their own. In particular, Democrats in Congress still have the ability to put their opponents on the spot — as they did on Thursday when they forced a vote on extending middle-class tax cuts, putting Republicans in the awkward position of voting against the middle class to safeguard tax cuts for the rich.
                                            It would be much easier, of course, for Democrats to draw a line if Mr. Obama would do his part. But all indications are that the party will have to look elsewhere for the leadership it needs.

                                              Posted by on Friday, December 3, 2010 at 12:39 AM in Economics, Politics | Permalink  Comments (112) 


                                              Stop the Unemployed from Becoming Unemployable

                                              As the duration of unemployment rises, the probablity of finding a job falls rapidly:

                                              Will Today’s Unemployed Become Tomorrow’s Unemployable?, by Catherine Rampell: Lots of smart economists and policy makers have been debating whether the problems in the job market are primarily cyclical (that is, temporary, and related to slack demand) or primarily structural (that is, reflecting a deeper problem in the economy, such as a tougher mismatch between the skills employers want and the skills workers have).
                                              But this discussion largely misses an important point: Cyclical unemployment can become structural unemployment because perfectly good workers become less employable the longer they are out of work.
                                              Economists have long known this to be the case, and have documented that the likelihood of finding a job falls drastically the longer a person has been unemployed. The ... University of Chicago’s Robert Shimer ... found that 51 percent of workers who had been unemployed for one week obtained work in the following month, but the share declined sharply after that.
                                              “For workers with duration less than six months, the job finding probability averages 31 percent,” he writes. “It falls to 19 percent during the next six months and just 14 percent for workers who have been unemployed for over a year.”
                                              In other words, in recent decades, a person out of work for a week was nearly four times as likely to find a job the next month as a counterpart who’d been out of work for a year. ... [note: there are graphs showing this relationship in the original post; see here too.]
                                              The exact reasons why the long-term unemployed have more trouble finding work ... are hard to disentangle. To be sure, there might be some differences between the types of workers who are short-term unemployed and those who are long-term unemployed. The better workers are more likely to get hired faster...
                                              But the experience of unemployment itself also seems to damage workers’ prospects. First of all, employers will look at a yawning gap in a worker’s resume and wonder why no one else would take this applicant. ... The fact that a person has been unemployed for so long ... is a signal that something is defective, even if the defect is not obvious to the naked eye.
                                              Employers may also worry that jobless people have gotten out of the habit of working... Unemployed people are also more likely to be depressed and to suffer from low self-respect, characteristics that may make them interview poorly. Other types of skills may atrophy ... and their Rolodexes become dated.
                                              Of course, when the economy is booming and the supply of workers is extremely tight, employers are less picky, and to some extent the marketability issues will fade. But the ... effects of long-term unemployment may be ... permanently scarring. ...

                                              I believe that the unemployment problem is predominantly cyclical, but this helps to explain one of the reasons why, even if the problem is largely structural, we still need to try to help -- structural unemployment is not an excuse for inaction as some have claimed. If we don't find a way to provide jobs for people while the cyclical and structural issues work themselves out, if we allow high unemployment rates to persist, some of the long-term unemployed will drop out of the labor force permanently. Thus, one of the costs of high unemployment is that some people will leave the labor force and never work again.

                                                Posted by on Friday, December 3, 2010 at 12:33 AM in Economics, Unemployment | Permalink  Comments (62) 


                                                Thursday, December 02, 2010

                                                links for 2010-12-02

                                                  Posted by on Thursday, December 2, 2010 at 10:02 PM in Economics, Links | Permalink  Comments (31) 


                                                  Rogoff: The Euro at Mid-Crisis

                                                  One more before heading to my next class -- Kenneth Rogoff on debt problems in Europe, followed by Niamh Hardiman, Kevin O'Rourke, and Barry Eichengreen on Ireland:

                                                  The Euro at Mid-Crisis, by Kenneth Rogoff, Commentary, Project Syndicate: Now that the European Union and the International Monetary Fund have committed €67.5 billion to rescue Ireland’s troubled banks, is the eurozone’s debt crisis finally nearing a conclusion?
                                                  Unfortunately, no. In fact, we are probably only at the mid-point of the crisis. ... The endgame is ... likely to entail a wave of debt write-downs, similar to the one that finally wound up the Latin American debt crisis of the 1980’s.
                                                  For starters, there are more bailouts to come, with Portugal at the top of the list. ... The Portuguese rightly argue that their situation is not as dire as that of Greece... But Portugal’s debt levels are still highly problematic by historical benchmarks... Portugal will likely seek help sooner rather than later.
                                                  Spain is a more difficult case. The central government is arguably solvent, but a significant chunk of municipal and provincial bank debt seems underwater. The big question in Spain is whether, as in Ireland, the central government will allow itself to be gamed into taking on private (and also municipal) debt. Here again, history gives no cause for optimism. It is very difficult for a central government to sit on the sidelines when the economy’s key players are on the brink of collapse.
                                                  But bailouts for Portugal and Spain are only the next – and not necessarily final – phase of the crisis. Ultimately, a significant restructuring of private and/or public debt is likely to be needed in all of the debt-distressed eurozone countries. ...

                                                  It sometimes seems that the only eurozone leader who is willing to face the likely prospect of future debt restructuring is German Chancellor Angela Merkel. ...
                                                  Here is where the latest Irish bailout is particularly disconcerting. What Europe and the IMF have essentially done is to convert a private-debt problem into a sovereign-debt problem. ... Have the Europeans decided that sovereign default is easier, or are they just dreaming that it won’t happen?
                                                  By nationalizing private debts, Europe is following the path of the 1980’s debt crisis in Latin America. There, too, governments widely “guaranteed” private-sector debt, and then proceeded to default on it. Finally, under the 1987 Brady plan, debts were written down by roughly 30%, four years after the crisis hit full throttle.
                                                  Most post-mortems of the Latin American crisis suggest that all parties would have been far better served had they been able to agree on partial debt forgiveness much earlier. ...
                                                  As European policymakers seek to move from one stage of denial to another, perhaps it is time to start looking ahead more realistically. As any recovering alcoholic could tell them, the first step is admitting, with Merkel, that Europe has a problem.

                                                  And, via Brad DeLong, more on Ireland from Niamh Hardiman, Kevin O'Rourke, and Barry Eichengreen.

                                                  Niamh Hardiman:

                                                  How Ireland got burned: Ireland’s recent €85bn bail-out package negotiated with the IMF and the EU is discussed in terms that verge on the apocalyptic. The rescue was supposed to serve as a break against the wildfire of market bondholder panic. And yet the upward trend in Portuguese bond rates has scarcely been slowed.... Spain is now where the line in the sand must be drawn. But we have heard this before. If Spain is vulnerable, why not Italy; and if Italy, why not Belgium, perhaps even France. Little wonder that the imagery of contagion, of financial plague, is brought into play.

                                                  Continue reading "Rogoff: The Euro at Mid-Crisis" »

                                                    Posted by on Thursday, December 2, 2010 at 12:40 PM in Economics, International Finance | Permalink  Comments (31) 


                                                    The Erosion of Employer-Based Health Coverage

                                                    A quick one between classes (last day of the quarter!). Shannon Spillane of the Center on Budget and Policy Priorities explains how the Affordable Health Care Act will help to offset large declines in employer-based health insurance coverage, and hence why repeal of the health reform law is a bad idea:

                                                    Erosion of Employer-Based Coverage Highlights Importance of Health Reform, CBPP: The health reform law (Affordable Care Act) includes a number of provisions to strengthen the employer-based insurance system and improve access to affordable health coverage in other ways. Recent Census Bureau data show why such step are so important, as a new report by my colleague Matt Broaddus explains.

                                                    The number of uninsured rose by more than 4 million in 2009 to a total of 51 million, or more than one of every six Americans. The largest single-year increase on record (these data go back to 1987), it was the result of a continued decline in private health coverage — primarily in employer-sponsored insurance (ESI). Employer coverage rates fell precipitously for both children and working-age adults:

                                                    ...These declines reflect both the large job losses resulting from the recession and the increasing difficulty that employers and workers are having in financing health care coverage as costs rise.

                                                    If implemented successfully, the Affordable Care Act will reverse the trend of eroding employer-based coverage. Small businesses will receive financial support to offer coverage to their workers, larger employers will pay a penalty if they do not offer affordable coverage to their workers, and more employees will be encouraged to take up offers of employer-sponsored insurance under the individual mandate. All of these measures will strengthen the employer-based insurance market.

                                                    Other pieces of the health reform law will improve access to coverage as well. The law’s expansion of Medicaid will provide a coverage option to poor adults, an alarmingly high share of whom are uninsured. In addition, the new health insurance exchanges will make available more high-quality, affordable private coverage options to individuals and small businesses, particularly individuals suffering from serious health conditions, who largely are shut out of the current system.

                                                      Posted by on Thursday, December 2, 2010 at 12:36 PM in Economics, Health Care | Permalink  Comments (16) 


                                                      "Making Peace in the US-China Trade War"

                                                      Dean Baker argues that mechanisms such as an "effective policy of work-sharing, like the one in Germany" can be used to redistribute the costs and benefits of China's currency policy so that "we need not be hostile to China," We won't, of course, do anything like this and the costs will continue to be concentrated rather than diffuse, but we could:

                                                      Making peace in the US-China trade war, by Dean Baker, Comment is Free: Trade disputes with China have been heating up lately, but there really is no reason for the hostility. Essentially, China's government is saying is that it has no better use for its money than subsidising the consumption of people in the United States and other wealthy countries, by propping up the value of the dollar. That may seem surprising..., but if this is what China's leaders insist, who are we to argue? ...
                                                      In effect, China is subsidising its exports to the United States. This is very generous of the Chinese government, since the United States can take advantage of China's generosity to enjoy a higher standard of living. Currently, our deficit with China is equal to 2% of GDP. This means that China is handing us goods and services that are worth roughly $280bn a year more than the value of goods and services we give them in exchange.
                                                      While this displaces a large amount of domestic production, we can ensure that the displacement does not result in unemployment by simply shortening working weeks. If everyone's working week was shortened by 2.0% (the equivalent of one week per year of vacation), we could keep the workforce fully employed even in the case of reduced demand.
                                                      This could be accomplished by having the government pay people to work shorter working weeks; in effect, paying unemployment benefits to cover a reduction in hours. This would spread the pain over many workers, rather than forcing a portion of the workforce to be completely unemployed. In this way, China could effectively subsidize the vacation of tens of millions of workers in the United States and elsewhere.
                                                      This may sound like a bad deal from China's standpoint, but it is a deal they insist upon. They have sometimes raised the question of whether they can expect to have debt to the United States lose value as a result of a falling dollar. The United States should take away this uncertainty.
                                                      China absolutely will lose money on its investments in government bonds. ... China's leaders should rest completely assured that when they ultimately sell these assets, they will be getting dollars that are worth substantially less than the dollars they bought. ...
                                                      So, we need not be hostile to China over its desire to give money to American consumers. An effective policy of work-sharing, like the one in Germany, can ensure that China's generosity leads to longer vacations, not unemployment. We should also take steps to ensure that our highest-paid workers are subjected to the same competition from China as our manufacturing workers.
                                                      And, in order to eliminate their uncertainty on this issue, we should assure the Chinese people and their government that they will be repaid in lower-valued dollars. However, if China's government thinks the best use of its money is to pay for longer vacations for workers in the United States, there is no reason for us to be upset.

                                                        Posted by on Thursday, December 2, 2010 at 12:34 AM in China, Economics, International Trade, Unemployment | Permalink  Comments (54) 


                                                        "Unimpressed" by Corporate Profits

                                                        Andy Harless of Employment, Interest, and Money discusses profits, interest, and inflation:

                                                        Profits, Interest, and Inflation, by Andy Harless: US corporate profits set a record in the third quarter. As Matthew Yglesias points out, that’s not as impressive as it sounds: profits are measured in nominal dollars... After taking a closer look at the data, Justin Fox is even less impressed: as a fraction of the national income, domestic nonfinancial corporate profits are nowhere near a new high; the big numbers are coming from financial corporations (which are bouncing back strongly from the losses they had a few years ago) and from foreign earnings of US corporations. ...
                                                        Count me with the unimpressed, but for different reasons. It’s really not appropriate, in my view, to look at profits in isolation from the rest of the national income. Profits are a form of capital income. Capital income can be roughly divided into profits and interest, depending on how the capital was financed. If we’re interested in the general profitability of business activities, rather than the narrow question of whether current stockholders are getting rich, we should be looking at total capital income. You might have noticed that interest rates are way down from where they were a few years ago, which probably means that there has been a substantial decline in the interest portion of capital income. So total capital income from domestic nonfinancial operations is almost certainly lower than it was before the recession.
                                                        It’s true that, even if capital returns are not very high, they can still be conducive to a recovery if the required return on capital has fallen. Indeed, the lowness of interest rates partly reflects attempts by the Fed to reduce the required return on capital. To that extent, we can be impressed by rising profits.
                                                        But the lowness of interest rates also reflects a decline in the expected inflation rate. This factor is not reflected in the raw profit statistics, and it does make them less impressive. In nominal terms, before the recession, corporations were expecting to see rising product prices, so, for any given nominal rate of profit, they were more likely to invest in new projects and more likely to hire. Today, product prices are not expected to rise very much, so today’s nominal profit has to “stand on its own,” as it were, as an indicator of how profitable any new project will be. So, by comparison, things are not going as well today as they might appear. As Justin Fox says, members of the domestic business community “have every right to be cranky.”
                                                        I do, however, concur with Matthew Yglesias’ conclusion that the trends are in the right direction. An increasing number of indicators suggest that things are improving, but I don’t expect the improvement to be rapid.

                                                          Posted by on Thursday, December 2, 2010 at 12:24 AM in Economics, Income Distribution | Permalink  Comments (15) 


                                                          Wednesday, December 01, 2010

                                                          links for 2010-12-01

                                                            Posted by on Wednesday, December 1, 2010 at 10:02 PM in Economics, Links | Permalink  Comments (45) 


                                                            The Employment-Population Ratio

                                                            Just a reminder of where we are:

                                                            Emp-pop

                                                              Posted by on Wednesday, December 1, 2010 at 03:04 PM in Economics, Unemployment | Permalink  Comments (53) 


                                                              Senate GOP Pledges to Block All Bills Until Tax Cuts are Extended for All

                                                              Republicans have decided to block all bills unless they get their way over extending tax cuts for the wealthy:

                                                              Senate GOP pledges to block all bills until tax dispute resolved, by Alan Silverleib, CNN: Senate Republicans promised Wednesday to block legislative action on every issue being considered by the lame-duck Congress until the dispute over extending the Bush-era tax cuts is resolved and an extension of current government funding is approved.
                                                              All 42 Senate Republicans signed a letter to Senate Majority Leader Harry Reid, D-Nevada...
                                                              Democrats and Republicans disagree sharply over whether the current tax rates should be extended just for families earning $250,000 or under per year, or should be extended for everyone regardless of income. ...
                                                              Reid blasted the GOP letter on the Senate floor Wednesday morning, calling it part of a "cynical" and transparent" Republican strategy to "obstruct" and "delay" legislative progress while blaming the Democrats for failing to effectively govern.
                                                              "Last month, the American people issued their verdict on the Democrat's priorities," replied Senate Minority Leader Mitch McConnell, R-Kentucky. ...

                                                              I think Republicans are misreading the message of the election, especially if they think it was a call to extend tax cuts for the wealthy. Democrats should say no, we're not giving in. If taxes go up for most people, it's the GOP's fault for not having the courage to fund the tax cuts when they were first enacted, and for refusing to go along with an extension for the majority of households.

                                                              If they are so worried about the "a job-killing tax hike" discussed in their letter (a distinctly Keynesian perspective by the way), then use the money gained from allowing the tax cuts to expire for the wealthy to fund an extension of the Making Work Pay tax cuts in the stimulus package that went to middle and lower class households. The GOP is refusing to extend the Making Work Pay tax cuts, apparently the jobs lost when taxes go up for the non-wealthy don't count. Since these tax cuts are likely to result in more spending than tax cuts for the wealthy, this would increase rather than decrease jobs. If the GOP really cares about jobs, they'll get on board. If they block the legislation, as they most likely would, then we'll see who is reading the "verdict" from the election correctly.

                                                                Posted by on Wednesday, December 1, 2010 at 08:31 AM in Economics, Politics, Taxes | Permalink  Comments (84) 


                                                                Bhagwati: India or China?

                                                                Who will grow faster, China or India? Jagdish Bhagwati says it depends upon whether you adopt a short or long horizon. In the short-run, China has the advantage, but in the longer run, India has the advantage:

                                                                India or China?, by Jagdish Bhagwati, Commentary, NY Times: ...Will China grow faster than India...? In fact, this contest dates back to 1947, when India gained independence and democracy..., while China turned to Communism...
                                                                As it happened, however, both giants slept on – until the 1980’s in China and the early 1990’s in India – mainly because both countries embraced a counter-productive policy framework...
                                                                Reflecting flawed economic arguments, India embraced autarky in trade and rejected inflows of equity investment. It also witnessed economic interventionism on a massive scale... In China, the results were similar, as the political embrace of Communism meant going autarkic and giving the state a massive role in the economy.
                                                                After progressively dismantling their inefficient policy frameworks in favor of “liberal” reforms, the ... race was finally on. And ... China ... grew faster, because it changed its policy framework much faster than democracy permits. But there are good reasons to suspect that China’s authoritarian advantage will not endure.
                                                                First, while authoritarianism can accelerate reforms, it can also be a serious handicap. ... Moreover,... as growth accelerates, political aspirations are aroused. Will the Chinese authorities respond to them with ever greater repression,... creating discord and disruption, or will they accommodate new popular demands by moving to greater democracy? ...
                                                                Finally, China’s growth must continue to depend on its exploitation of external markets, which makes it vulnerable.., hassles and hiccups for Chinese exports can be confidently expected.
                                                                Economic factors also militate against Chinese prospects. China was clearly able for many years to ... grow rapidly without facing a labor-supply constraint... But now,... labor is getting scarce and wages are rising. ...
                                                                By contrast, India has a far more abundant supply of labor,... so that, as India’s investment rate increases, labor will not be a constraint. India will thus become the new China of the past two decades.
                                                                Besides, in contrast to China, where economic reforms were quicker and more complete, India still has a way to go: privatization, labor-market reforms, and opening up the retail sector to larger, more efficient operators are all pending – and will give a further boost to India’s growth rate once they are implemented.

                                                                  Posted by on Wednesday, December 1, 2010 at 12:58 AM in China, Development, Economics, India | Permalink  Comments (15)