Fried and his colleagues implanted electrodes in twelve patients, recording from a total of 1019 neurons. They adopted an experimental procedure that Benjamin Libet, a pioneer of research on free will at the University of California, San Francisco, developed almost thirty years ago: They had their patients look at a hand sweeping around a clock-face, asked them to press a button whenever they wanted to, and then had them indicate where the hand had been pointing when they decided to press the button. This provides a precise time for an action (the push) as well as the decision to act. With these data the experimenters can then look for neurons whose activity correlated with the will to act. ...
[A]bout a quarter of these neurons began to change their activity before the time patients declared as the moment they felt the urge to press the button. The change began as long as a second and a half before the decision..., this activity was robust enough that the researchers could predict with over 80 percent accuracy not only whether a movement had occurred, but when the decision to make it happened. ...
Even with the above caveats,... these findings are mind-boggling. They indicate that some activity in our brains may significantly precede our awareness of wanting to move. Libet suggested that free will works by vetoing: volition (the will to act) arises in neurons before conscious experience does, but conscious will can override it and prevent unwanted movements.
Other interpretations might require that we reconstruct our idea of free will. Rather than a linear process in which decision leads to action, our behavior may be the bottom-line result of many simultaneous processes: We are constantly faced with a multitude of options for what to do right now – switch the channel? Take a sip from our drink? Get up and go to the bathroom? But our set of options is not unlimited (i.e., the set of options we just mentioned is unlikely to include “launch a ballistic missile”). Deciding what to do and when to do it may be the result of a process in which all the currently-available options are assessed and weighted. Rather than free will being the ability to do anything at all, it might be an act of selection from the present range of options. And the decision might be made before you are even aware of it. ...
Rajaratnam’s trial is remarkable... First, it is one of the few insider-trading cases ever to be brought against a professional hedge-fund manager. ... This time, we are talking about the very heart of corporate America. ...
It is so difficult to imagine that successful executives would jeopardize their careers and reputations in this way that many of us probably hope that the accusations turn out to be without merit. But recent academic research – by Lauren Cohen, Andrea Frazzini, and Christopher Malloy – shows that it is not far-fetched that university friends like Kumar, Goel, and Rajaratnam would get together to share confidential information. ...
However, even though finance has a "corrupt underbelly" and "it is not far-fetched" that this would happen:
After ten weeks of a trial like this, it will be easy for the public to conclude that all hedge funds are crooked, and that the system is rigged against the outsiders. Fortunately, this is not the case. While there are certainly some rotten apples in the hedge-fund industry, the majority of traders behave properly, and their legitimate research contributes to making the market more efficient.
Corruption does not always involve breaking the rules. Sometimes the rules themselves are corrupt, and that is the bigger worry for me. (He suggests that hedge funds "publicly report all past trades that are at least two years old" to show they are honest brokers, but that's not going to happen unless they are forced to do so.)
Bruce Bartlett explains who is really leading the Republican Party on budget issues:
Grover Norquist Vetoes Both Deficit Reduction and Tax Reform, by Bruce Bartlett: According to a report in The Hill newspaper, Americans for Tax Reform president Grover Norquist has received assurances from Republican leaders in Congress that under no circumstances will they vote for any tax increase, either as part of deficit reduction or tax reform. Apparently, the only permissible deficit reduction is spending cuts and the only permissible tax reform is tax cuts. Given that Grover has succeeded in getting all but a small handful of Republicans to sign his no-new-taxes pledge, he essentially controls tax policy by being the sole arbiter of what constitutes a violation of the pledge and what does not. And given the power of the Tea Party to upset incumbent Republicans in primaries when they are viewed as insufficiently loyal to its agenda, it would take a very confident and courageous Republican to risk being accused of violating Grover's pledge whether he or she signed it or not, since it would guarantee primary opposition from a well financed Tea Party candidate -- the Club for Growth will see to that.
Whatever one thinks about the best way to achieve deficit reduction or tax reform, such rigidity is not conducive to action on either front. Indeed, the idea that every provision of the tax code that lowers revenues must be preserved is the opposite of tax reform. But this appears to be Grover's position. I questioned him myself on this point a few weeks ago. I asked him if he would name a single provision of the tax code that is unjustified and deserving of abolition as part of a revenue-neutral tax reform that would also lower tax rates. Grover was unwilling to name one. ... I also questioned a number of other Republican tax experts who were involved in tax reform in the 1980s, and not one would endorse any actual reforms beyond rate cuts.
This is, of course, not the way Ronald Reagan did it. He proposed actual reforms in 1985 that raised revenues to offset tax rate cuts. So did Jack Kemp and Bob Kasten, whose tax reform legislation got the ball rolling. Although ATR was established for the purpose of continuing this work, in practice it would oppose legislation identical to the 1986 tax reform because every actual reform would be condemned as an impermissible tax increase, a violation of the pledge, and grounds for a primary challenge.
Let me couple this with another post from the CG&G site, this one by Stan Collender:
The Tea Party and Me: A Very True Story, by Stan Collender: ...Several weeks ago I had the extraordinary opportunity to personally see the tea party in action when I spoke at the first meeting of the tea party caucus in the House of Representatives. ... I had been invited by tea party favorite Rep. Michelle Bachmann (R-MN) ... to speak on the debt ceiling...
I didn’t actually count, but my recollection is that 15-20 members of Congress attended along with staff and other tea party supporters. ... I ... talked for about 25 minutes about the debt ceiling...
But I was just the opening act. The other three speakers were the tea party chairs from three states – Virginia, Pennsylvania, and Florida – and each one instructed the House members who were in the room what they expected them to do on budget issues.
Actually, “instructed is not strong enough; what they said to the members is best described as nonnegotiable demands. They insisted that no one vote for that first extension of the CR unless it included a provision defunding healthcare reform (they called it “Obamacare’). They also unequivocally insisted that no one vote to increase the debt ceiling. And, they were absolutely adamant that the spending cuts in the continuing resolution that the House members were so proud of were insignificant and that entitlements had to be tackled immediately.
One of the more interesting exchanges occurred when one of the House members who was there asked the tea party chairs if they really had expected them to have reformed Medicare in the first six weeks of the session. Another was when one of the members complained about having been booed at a national tea party meeting that had just been held.
But the most interesting exchange came when the tea party state chairs openly threatened the reelection of the tea party supporting members of Congress who attended. This was anything but subtle. One of the chairs specifically pointed at the members and told them that the tea party had elected them and would run someone against them in the next election if they didn’t vote as expected. ...
As I keep saying, this isn't really about deficit reduction. This is an ideologically based attack on government programs in the name of deficit reduction ("entitlements had to be tackled immediately"), and an attempt to lower taxes on the wealthy in the name of economic growth (and when they can get away with it, the false claim that a cut in taxes will help with the deficit).
The future shift extrapolates current trends. This is iffy given how individual country growth is mean-reverting, but I will leave that for another day.
If the Economy indeed continued East this way, is this really bad for the West? Professor Quah does not address this in the article, but ... the ... answer is: Of course not. Economic growth is not an elimination tournament like the current NCAA basketball madness, where one team wins and the other goes home. When a previously poor part of the world gets richer, everybody wins.
Temporarily and illegimately assuming the role of official spokesman for the West,... the richer are our trading partners, other things equal, the more demand for our products, the more and better jobs created thereby, the more gains from trade, the more innovation as the extent of the world market grows, and the more we can benefit from the additional human capital and innovation happening in the East.
And then temporarily and illegimately becoming development spokesman: higher growth in the poorer East means catching up to the richer West. Isn’t that what we always wanted?
Reagan's Legacy and the Current Malaise, by Steve Forbes, Commentary, WSJ: ...Art Laffer, scribbled a single—and now legendary—curve on a cocktail napkin to illustrate to a group of President Ford's advisers why a proposed plan to raise taxes would not increase government revenues. Mr. Laffer posited that deep cuts in existing tax rates would stimulate the economy and ultimately lead to far higher government revenues. ...
This is from Tiago Mata at History of Economics Playground. I don't think he likes Robert Shiller's paper on "Economists as Worldly Philosophers," nor the intrusion on historian's turf:
Bad job, by Tiago: Imagine I write a paper on Behavioral Macroeconomics making off the cuff observations about the latest financial products and how my bank manager frames that information, and noting my friends and neighbors’ flight to safety or to risk on the flimsiest of whims. Imagine I make no reference to secondary literature, or to methodology as I approach the questions.
Were I then to submit this piece to general appreciation, say get Robert Shiller to referee it. How do you think he would assess my effort?
I am sure we would be fast and dirty in telling me to do something else with my time.
I have not written a paper on Behavioral Macroeconomics and have no intention of doing so. But Shiller has written a working paper, kind of on the history of economics (Cowles Foundation Discussion Paper No. 1788 – Economists as Worldly Philosophers). There is no thread to the argument, no understanding of context, and zero references to the vast body of work by historians on his subject. The working paper, I am sure, will get plenty of readers, downloads and comments. But were I ever to referee it, I would be fast and dirty in telling him to do something else with his time.
Fed Views, by Reuben Glick, SF Fed: ...Global commodity prices have followed global economic activity as measured by world industrial production. Commodity prices fell during the recent recession and rose with the recovery, which increased demand for raw materials, particularly from developing countries such as China. In fact, increased demand from developing countries accounts for most of the increased world demand for commodities such as oil, wheat, and corn over the past decade. In the case of corn, a substantial amount of increased demand also reflects its use in ethanol production. ...
Cyclical and structural unemployment can be hard to tell apart. For example, suppose that a business owner would like to hire someone to operate a complicated piece of machinery, and needs someone with experience. The owner offers $10 per hour, but, unfortunately, no one applies. Interviewed by the local paper, the owner complains that qualified workers simply aren't available.
However, that is not true. There is an unemployed worker who has been running that kind of machine for 10 years. He's good at it, and only lost his job due to the fact that the place he had worked for the last 10 years shut its doors in the recession. At $15 per hour, or more, he would have taken the job. But $10 is just not enough to pay the bills and save the house, and he decides to hold out and hope that something better comes along.
So whose fault is it? Should be blame the worker for being unwilling to take a decent job due to the fact that it doesn't pay enough (perhaps unemployment compensation is helping the worker to wait for a job that will pay enough to support the household)? Should we blame the store owner for not paying enough to attract workers with families to support? Neither, the problem is lack of demand.
If times were better, i.e. demand were stronger, the business owner could afford to pay $15, and would -- problem solved. So, all that is needed is an increase in demand for the products the business sells (demand that would exist if the worker and others like him had jobs). But at current demand levels, which are depressed, it is not worth it to pay that much. The business owner would be losing money.
So is the problem cyclical or structural? It will look like structural unemployment in the data, the owner can't find anyone who is qualified who will take the job at the wage being offered, but the heart the problem is a lack in demand.
As noted above, cyclical and structural unemployment can be hard to sort out. One way around this is to find a group of workers who should do well if the problem is structural, and see how they are faring. This Economic Letter by Bart Hobijn, Colin Gardiner, and Theodore Wiles of the SF Fed attempts to do just that. It answers the cyclical versus structural unemployment question by looking at a segment of the population that ought to be doing relatively well if the problem is structural, recent college graduates, and finds that "structural factors are of minor importance for current unemployment":
Recent College Graduates and the Labor Market, by by Bart Hobijn, Colin Gardiner, and Theodore Wiles, FRBSF Economic Letter: Although the U.S. economy is recovering from the 2007–09 recession, the labor market remains weak. The unemployment rate was 8.9% in February 2011, down more than a percentage point from its peak in 2009, but about four percentage points higher than before the recession. Some economists have concluded that this persistently high unemployment rate is due largely to structural frictions in the U.S. labor market rather than to weak demand for workers associated with the severe recession (Kocherlakota 2010). Generally, such structural frictions arise from mismatches between workers and employers. A common example of a mismatch occurs when employers are looking for skills that are different from those that available workers offer. Another type of mismatch occurs when jobs are available in geographic regions with few qualified job seekers (see Daly, Hobijn, and Valletta 2011 and Weidner and Williams 2011).
One way of testing whether such structural factors are important in the overall labor market is to examine a segment of the market that is not subject to these constraints. Recent college graduates for the most part don’t experience skill and geographic constraints because they tend to be highly educated and mobile (Pianalto 2010). Thus, if structural unemployment were the principal factor accounting for labor market weakness in this downturn, then the job market for recent college graduates would be relatively stronger than in a mainly cyclical downturn. In this Economic Letter, we analyze the extent of structural constraints on employment by comparing current trends for recent college graduates with the trends that prevailed during the recovery after the 2001 recession, a labor market downturn that was mainly cyclical in nature. We find that the labor market for recent college graduates is equally weak or even weaker than the overall market, just as in the 2001 recession and its aftermath. The weakness of the current labor market for college graduates is reflected not only in the unemployment rate for this group, but also in their part-time employment rate and earnings. This indicates that structural factors are of minor importance for current unemployment. ...[continue reading]...
Data limitations likely prevented this, but I wish they could have looked at disaggregated data to see if graduates in any subset of disciplines are faring relatively better than in 2001. Given the aggregate numbers it's unlikely that there are individual sectors that are doing substantially better than in 2001, so I don't expect this would change the picture at all, but the disaggregated data would provide useful information and rebut (or not) the charge that aggregates are hiding important information. In any case, there are many, many indications that the problem is largely cyclical, and despite the fact the legislators seem to have forgotten about the unemployed, there's still a long recovery period ahead of us. It's not too late for policy to help. [Also posted at MoneyWatch.]
The War on Warren, by Paul Krugman, Commentary, NY Times: Last week, at a House hearing on financial institutions and consumer credit, Republicans lined up to grill and attack Elizabeth Warren, the law professor ... in charge of setting up the new Consumer Financial Protection Bureau. Ostensibly, they believed that Ms. Warren had overstepped her legal authority by helping state attorneys general put together a proposed settlement with mortgage servicers, who are charged with a number of abuses.
But the accusations made no sense. Since when is it illegal for a federal official to talk with state officials, giving them the benefit of her expertise? ...
Republicans were clearly ... hoping that if they threw enough mud, some of it would stick. For people like Ms. Warren — people who warned that we were heading for a debt crisis before it happened — threaten ... attempts by conservatives to sustain their antiregulation dogma. Such people must therefore be demonized, using whatever tools are at hand.
Let me expand on that for a moment. ... Ms. Warren’s prescience and her role in shaping financial reform legislation — not to mention her effective performance running the Congressional panel exercising oversight over federal financial bailouts —... is ... the reason she’s being attacked so fiercely. Nothing could be worse, from the point of view of bankers and the politicians who serve them, than to have consumers protected by someone who knows what she’s doing and has the personal credibility to stand up to pressure.
The interesting question now is whether the Obama administration will see the war on Elizabeth Warren for what it is: a second chance to change public perceptions.
In retrospect, the financial crisis of 2008 was a missed opportunity. Yes, the White House succeeded in passing significant new financial regulation. But for whatever reason, it failed to change the terms of debate: bankers and the disaster they wrought have faded from view, and Republicans are back to denouncing the evils of regulation as if the crisis never happened.
By the sheer craziness of their attacks on Ms. Warren, however, Republicans are offering the administration a perfect opportunity to revive the debate over financial reform, not to mention highlighting exactly who’s really in Wall Street’s pocket these days. And that’s an opportunity the White House should welcome.
The Group of Seven’s coordinated efforts Friday to weaken the value of the Japanese yen are likely designed more to temper panicked markets than targeting a specific currency level, economists say….
“This is a short-term measure that has more the goal of stabilization and averting a short-run panic than taking a view about how global imbalances might evolve and what the right value of the yen is against other currencies,” said Ralph Bryant, a former director of the U.S. Federal Reserve‘s international finance division, now a fellow at the Brookings Institution.
I have a hard time reading anything more than the obvious into the G7 intervention. In response to the earthquake and subsequent tsunami the Yen was appreciating rapidly in what appeared to be a disruptive fashion. The Japanese authorities would have acted on their own sooner or later, but secured the backing of their G7 partners to provide evidence that efforts to stabilize the Yen should not be confused with attempts to direct the value of the Yen to achieve a trade advantage. It will work as a break on speculative activity, but will have limited impact, if any, on any long-run, fundamental forces driving the value of the currency. To fight the latter requires a committed, repeated effort on the part of the Ministry of Finance, something that at the moment does not appear to be on the table.
The Wall Street Journal also has a more curious piece relating the currency intervention to the Federal Reserve’s balance sheet that reads like it was rushed on a Friday afternoon. (which I can identify with, as most pieces I rush fall short of where they should be). The piece begins:
It's all counterintuitive, but it will work. Ending quantitative easing and raising short-term rates will surely cause the stock market to crater. 1,000 points? 2,000? Who knows? But a selloff will ensue. Does that mean a negative wealth effect? I doubt it. Who really thought they were wealthier at Dow 12,000 versus Dow 10,000?
Some banks will sputter, and maybe even fail, even the big boys. ... Hopefully the FDIC is ready to dive in and remove the remaining toxic mortgage assets of any failing banks, along with their managements, and then refloat the institutions. ...
But along with a likely lower stock market and failing banks will be several positive effects that will finally kick-start the economy. Oil and wheat and commodities will see a 20%-30% drop in price as speculators run for the hills. This will be a de facto tax cut for consumers. Hiring should restart when businesses see normal short-term rates, most likely 2%. ...
The key to recovery begins with a Fed induced stock market crash, followed by failing banks -- perhaps even systemically important ones? This may win more than "the most foolish op-ed of the week".
Black males earn 25% less than White males. The corresponding figure for females is 17% (see Table 1, “raw” columns). This pattern of disparity is replicated in many other measures of social and economic achievement: schooling, health, incarceration, occupational success (Fryer 2010).
Nonetheless, there is great wisdom in the insight of William Julius Wilson (2009) that the first order problems facing African Americans in contemporary society are shared by many other groups. The shortfalls in achievement in the 21st century stem from shortfalls in skills.
When adult wages are adjusted by scores on scholastic ability tests measured in the teenage years, the gaps substantially diminish for Black males and are essentially zero for Hispanic males. The gaps actually reverse for females – that is, adjusting for their ability, minority females earn more than their White counterparts (see the columns labeled “adjusted” in Table 1). Inequality in skills is the first order problem.
Table 1. Shortfalls in hourly wages by age for Blacks and Hispanics in the last 20 years: Actual disparity and adjusted for ability
Note: 1 Denotes not statistically significant from zero, i.e. adjusted gap is likely to arise from chance. Soure: Authors' calculations from the National Longitudinal Survey of Youth. For details, see web appendix.
What’s more, there is evidence that disadvantaged children of all race groups have lower levels of soft skills, i.e. motivation, sociability, attention, self regulation, self-esteem, the ability to defer gratification etc. (Carneiro and Heckman 2003). These skills are as predictive, if not more predictive, of schooling, wages, and crime.
America is not yet a color blind society. Still, any serious accounting of economic and social disparities must reckon with the importance of skills in US society.
Rethinking our strategies for promoting skills
Many of the programs and policies designed to boost skills that were launched in the 1960s War on Poverty failed. However, people continue to advocate many of these unsuccessful approaches, especially those most concerned about closing racial gaps. Just as we need to rethink the sources of racial inequality in contemporary American society, we need to rethink our strategies for promoting skills.
Public policy to promote skills has to reckon with three essential truths distilled from a large body of research conducted in the wake of the War on Poverty.
First, the skills needed for success in life are many. Success requires more than just being smart. Soft skills are important. Conscientiousness, perseverance, sociability, and other character traits matter a lot, even though they are largely neglected in devising policies to reduce inequality.
Second, skill formation is a dynamic, synergistic process. Skills beget skills. They foster and promote each other. A perseverant child open to experience learns more. Early success fosters later success. Advantages cumulate. Young children are flexible and adaptable in ways that adolescents and adults are not. It is much easier to prevent deficits from arising in the early years than to remediate them later.
Third, families play an essential role in shaping the skills of their children. Skill formation starts in the womb. The early years of a child’s life before the child enters school lay the foundation for all that follows. Large gaps in abilities between the advantaged and the disadvantaged open up early – before children enter school.
The American family under strain
Across all race and ethnic groups, the American family is under strain. Currently, over 40% of all American children are born out of wedlock and more than 12% of all children live in families where the mother has never married (Figure 1). Such families provide fewer financial and parenting resources for child development. It is well documented that the children of lone parent families perform worse in life on many outcomes (McLanahan 2004). Many American children across all races and ethnicities are in the same sinking boat. Any effective policy to foster skills has to recognize the importance of the family, the mechanisms through which families create child skills, and the stress under which many families operate.
Figure 1. Share of children under 18 living with one parent, by marital status of the parent
How to best aid struggling families
While we do not yet know all of the mechanisms through which families influence their children, we know enough to suggest the broad contours of an effective child development strategy. Supplementing the early years of disadvantaged children addresses a major source of inequality.
An example is the Perry preschool program that targeted disadvantaged, subnormal IQ African American preschoolers just outside Detroit. For two years, the program taught children to plan, execute, and evaluate daily projects in a structured setting. It fostered social skills. There were weekly home visits to encourage parenting. The Perry program was evaluated using random assignment with long-term follow-up for 40 years. Rates of return are 7%-10% per annum – higher than the return on equity over the post-war period 1945-2008 and before the recent market meltdown (Heckman et al. 2010).
Dynamic synergies and the timing of effective interventions
These and other successful child development programs work because they start early. Benefits include enhanced school readiness, and reduced burdens on the schools for special education. They produce benefits in the teen years with better health behaviors, reduced teenage pregnancy, and lower dropout rates. They promote higher adult productivity and self-sufficiency. High quality early childhood programs are investments with rates of returns far higher than those found for most governmentally provided skills programs. The return to investment at the earliest ages is high because it creates the foundation of skills that make later investment productive. This pattern is a manifestation of dynamic synergism – what economists call “dynamic complementarity.”
Current policy over-invests in attempting to remediate the problems of disadvantaged adolescents and under-invests in the early years of disadvantaged children. In contrast to the 7%-10% per annum earned by the Perry program and other early childhood programs, returns on many other skill enhancement programs are much lower. They are certainly lower for public job training, criminal rehabilitation programs, adult literacy programs, and a variety of other later life remediation programs targeting disadvantaged adolescents and young adults with low cognitive and character skills.
We need to listen to the logic of developmental biology to devise strategies to reduce disparities in parenting across all racial and ethnic groups.
Engage the private sector
How can we fund such programs? Times are hard and government budgets are strained. Nonetheless, it is still possible to fund effective new programs if we replace the numerous ineffective programs currently in place. Also, engaging the private sector – philanthropic, community and religious organizations – could bolster the resource base supporting early childhood. Bringing in diverse partners encourages experimentation with new approaches that build on the success of templates like Perry program. Educare is one promising program that fosters public and private partnerships.
A new strategy based on new knowledge
Modern society is based on skills, and inequality in achievement across all race and ethnic groups is primarily due to inequality in skills. Our current policies to reduce achievement gaps ignore these simple truths. A comprehensive, cost-effective policy to enhance the skills of disadvantaged children of all racial and ethnic backgrounds through voluntary, culturally sensitive support for parenting is a politically and economically palatable strategy.
Carneiro, Pedro and James J Heckman (2003), "Human Capital Policy", in James J Heckman, Alan B Krueger, and Benjamin M Friedman (eds.),Inequality in America: What Role for Human Capital Policies?, MIT Press. Fryer, Roland (2010), "Racial Inequality in the 21st Century: The Declining Significance of Discrimination", (Forthcoming in the Handbook of Labor Economics, Volume 4). Heckman, James J, Seong Hyeok Moon, Rodrigo Pinto, Peter A Savelyev and Adam Q Yavitz (2010), "The Rate of Return to the Highscope Perry Preschool Program", Journal of Public Economics, 94(1-2). McLanahan, Sara (2004), "Diverging Destinies: How Children Are Faring under the Second Demographic Transition", Demography, 41 (4). Wilson, William J (2009), “More Than Just Race: Being Black and Poor in the Inner City”, W W Norton & Company.
U.S. Missiles Strike Libyan Air Defense Targets - NYTimes: American and European forces began a broad campaign of strikes against the government of Col. Muammar el-Qaddafi on Saturday, unleashing warplanes and missiles in the first round of the largest international military intervention in the Arab world since the invasion of Iraq, the Pentagon said. ...
Since I just happened to watch Inside Job last night, this post from Richard Green is timely:
Is Inside Job correct about the corrupting influence of money on the economics profession?, by Richard Green: I think it may be, but not in the way implied by the movie. Charles Ferguson makes a big deal out of the fact that Glenn Hubbard, Frederic Mishkin, Larry Summers and Martin Feldstein were paid well by financial institutions and governments who wound up becoming major contributors to the crisis. HIs implication is that all of these well-known economists ignored the danger signals arising from financial deregulation because they were well paid to do so.
I really doubt this is true. I say this because I remember thinking at the time it was passed that Gramm-Leach-Bliley was on net good policy, because is was (1) necessary in order to allow New York to compete with London and (2) I thought people at places like Goldman Sachs (especially Goldman Sachs) were smart and competent and would protect their franchise. I was, at the time, very impressed with Alan Greenspan and Robert Rubin. I had no financial stake at all in any of these beliefs, other than the fact that I wanted my kids' college fund and my wife and my retirement fund to do well.
And by all indications, the economy was doing well. Unemployment fell to historically low levels, the employment to adult population ratio hit its zenith, and low wage workers were seeing increases in income. I even remember walking to work in Madison in 1999 or so, and thinking to myself, "could the economy get any better than it is?" I am thus in no position at call to complain about others having the same view. All this said, Ferguson was spot on when he called for economists to disclose financial interests that might in any way be related to their research.
But the problem, I think, is far more insidious. For people who are both successful and reflective, there must often be an undercurrent of doubt as to whether the success is "deserved:" is it a product of virtue or of luck. The neoclassical paradigm allows successful people to feel good about themselves. It is not much of a leap to infer from it the proposition that people in a neoclassical world can make their own choices, and that when they make "good" choices, they are rewarded, and when they make "bad" choices, they are not. The number of important choices available to us are, however, limited. I try to remember that I did not get to choose the country where I was born, I did not get to choose that I had loving, well-educated parents, I did not get to choose that I grew up in a safe community, and I did not get to choose that I have never been seriously ill. The problem with economics, I think, is not the money people take from various countries and companies, but a broader lack of reflection on the circumstances that produce outcomes.
To me the most disturbing aspect of Inside Job is not the revelation of consulting relationships, but the fact that the economists interviewed by Ferguson seem not to have changed their view of the world even a little. Feldstein's statement that he had "no regrets" about AIG was the ultimate expression of this.
What I found amusing is to see so many of the proponents of supply-side economics -- the people who argue that changes in income cause important changes in incentives -- arguing that when they take this money it does not affect their choices at all.
The vast majority of economists don't have outside financial interests to disclose, let alone ones that would conflict with their research, so this is not a pervasive problem. But that doesn't mean it can't be a problem for some, and the people who do take this money often occupy critical, gatekeeper roles in the profession (e.g. as editors of journals). So I do think these ties should be disclosed when it relates to the type of research that an individual is publishing. If, for example, the people publishing the top papers in finance are taking large sums from financial institutions, that should be revealed.
[Oops: I also meant to talk about whether success is deserved -- and the implicit assumption that opportunity is relatively equal by those who believe their success was all their own doing (but opportunity isn't equal), and the unrecognized extent to which success depends upon the help of society more generally rather than individual choices and initiative. Then, there's luck. Guess I'll leave that to comments.]
Buffett Tells Country, TARP Gave Over $1 Billion to Goldman Sachs, by Dean Baker: At a time when all the tough guys in Washington are making plans to cut Social Security and Medicare benefits for high-living seniors and to cut Head Start for low-income kids, it was generous of Warren Buffett to point out that we taxpayers gave over $1 billion to Goldman Sachs through TARP. Buffett probably didn't intend to point out this fact to the country, but it is an unavoidable implication of his $2 billion profit on his loans to Goldman.
Buffett made his $5 billion loan to Goldman about a week before the Treasury lent $10 billion to Goldman through the TARP program. Buffet got 10 percent interest on his loans, while the Treasury got 5 percent on its loans. In addition, Buffett got a much more generous commitment of stock warrants, which is the basis of the $2 billion in profits that he is now set to pocket.
The Treasury boasted of getting a $1.1 billion profit on its loans to Goldman, but as Mr. Buffet showed, this was far below the market rate of interest on loans to Goldman at the time. The difference between the return received by Buffett and the return received by the Treasury was in effect a gift from taxpayers to the top executives at Goldman and their shareholders. ...
This says that there cannot be a general excess demand or excess supply of goods, i.e. that the sum of the excess demands (excess supply if negative) across all goods must equal zero. There can be no "general gluts."
Walras says, not so fast. We also have to consider money demand and money supply. If there is an excess demand for money, there can be an economy-wide excess supply of goods. Walras Law:
Thus, if there is an excess supply of goods, the imbalance can be cured by increasing the supply of money.
Brad DeLong says, not so fast, we also need to consider the supply and demand of "high-quality interest bearing assets." Delong's Law:
This says that there can be a general gluts of goods offset by either an excess demand for money or an excess demand for assets (or some combination of the two that nets out correctly, and sometimes -- like now -- the assets in A and M are perfect substitutes). What is the cure for an excess supply of goods in this case? In Brad's own words:
I would say that the right way to think about the current situation is to move from a two-commodity model--money and goods--to a three-commodity model: goods, money, and "high-quality interest bearing assets." When there is an excess demand for high-quality interest bearing assets the interest rate goes to zero, in which case money becomes a perfectly good high-quality interest bearing asset. Then money gets swapped out of the "transactions" balance account into the "speculative" (or "insurance") balance account, and all of a sudden you have an excess demand for transactions-balance account money and so by Walras's Law a deficient demand for currently-produced goods and services.
I'm happy to call that a "monetary phenomenon" if it will make Nick Rowe happy.
But might it not be more illuminating to call it a financial phenomenon? A Minkyite or Kindlebergian or Bagehotian phenomenon?
Elsewhere, Brad adds:
Hicks and Wicksell would say that you also have to include the supply and demand for bonds--for interest-yielding savings vehicles. And, of course, at the ZLB money becomes a perfectly good savings vehicle and a perfectly good safe asset: it is no longer dominated by the other assets for those wanting a savings vehicle or safety because interest rates are zero.
What Use is Economic Theory?, by Hal R. Varian, August, 1989: ...1. Economics as a policy science Part of the attraction and the promise of economics is that it claims to describe policies that will improve peoples’ lives. This is unlike most other physical and social sciences. Sociology and political science have a policy component, but for the most part they are concerned with understanding the functioning of their respective subject matters.
Physical science, of course, has the potential to improve peoples’ standards of living, but this is really a by-product of science as an intellectual activity.
In my view, many methodologists have missed this essential feature of economic science. It is a mistake to compare economics to physics; a better comparison would be to engineering. Similarly, it is a mistake to compare economics to biology; a better comparison is to medicine. ... None of the ‘‘policy subjects’’--- engineering, medicine... ---is much concerned about methodology, and economists, by and large, aren’t either.
When you think about it, it is quite surprising that there isn’t more work on the methodology of engineering or medicine. These subjects have exerted an enormous influence on twentieth century life, yet are almost totally ignored by philosophers of science. This neglect should be contrasted with with other social sciences where much time and energy is spent on methodological debate. Philosophy of science, as practiced in philosophy departments, seems to be basically concerned with physics, with a smattering of philosophers concerned with psychology, biology, and a few social sciences.
I think that many economists and philosopher who have written on economic methodology have not given sufficient emphasis to the policy orientation of most economic research. One reason for this is the lack of an adequate model to follow. There is no philosophy of engineering [or] philosophy of medicine...---there is no model of methodology for a policy science on which we can build an analysis. The task of constructing such a theory falls to economists. This is, in my view, one of the most interesting problems for those concerned with methodological issues and the philosophy of the social sciences. ...[continue reading]...
So one-sixth of America’s workers — all those who can’t find any job or are stuck with part-time work when they want a full-time job — have, in effect, been abandoned..., we’re well on the way to creating a permanent underclass of the jobless.
Why doesn’t Washington care? ... At this point,... polls indicate that voters still care much more about jobs than they do about the budget deficit. So it’s quite remarkable that inside the Beltway, it’s just the opposite.
What makes this even more remarkable is the fact that the economic arguments used to justify the D.C. deficit obsession have been repeatedly refuted by experience.
On one side, we’ve been warned, over and over again, that “bond vigilantes” will turn on the U.S. government unless we slash spending immediately. Yet interest rates remain low by historical standards...
On the other side, we’ve been assured that spending cuts would do wonders for business confidence. But that hasn’t happened in any of the countries currently pursuing harsh austerity programs. ... Yet the obsession with spending cuts flourishes all the same — unchallenged, it must be said, by the White House.
I still don’t know why the Obama administration was so quick to accept defeat in the war of ideas, but the fact is that it surrendered very early in the game. In early 2009, John Boehner ... was widely and rightly mocked for declaring that since families were suffering, the government should tighten its own belt. That’s Herbert Hoover economics, and it’s as wrong now as it was in the 1930s. But, in the 2010 State of the Union address, President Obama adopted exactly the same metaphor and began using it incessantly.
And earlier this week, the White House budget director declared: “There is an agreement that we should be reducing spending”... No wonder, then, that according to a new Pew Research Center poll, a majority of Americans see “not much difference” between Mr. Obama’s approach to the deficit and that of Republicans.
So who pays the price for this unfortunate bipartisanship? The increasingly hopeless unemployed, of course. And the worst hit will be young workers —... young Americans who graduated during the severe recession of the early 1980s suffered permanent damage to their earnings. ...
So the next time you hear some Republican declaring that he’s concerned about deficits because he cares about his children — or, for that matter, the next time you hear Mr. Obama talk about winning the future — you should remember that the clear and present danger to the prospects of young Americans isn’t the deficit. It’s the absence of jobs.
But, as I said, these days Washington doesn’t seem to care about any of that. And you have to wonder what it will take to get politicians caring again about America’s forgotten millions.
As I've noted in the past, there is little evidence that we need mega-size banks, but they do come with costs, so why allow them?:
There is no convincing evidence that banks need to be as large as allowed under the Dodd legislation for the financial system to function efficiently. However, limits on bank size may not protect the financial system from a meltdown. If small banks are exposed to common risks or sufficiently interconnected, then many small banks could fail simultaneously and mimic the failure of a large bank, something that has happened in the past.
Reducing size is no guarantee of safety. But limiting bank size does limit the political power of financial institutions. Imposing regulations such as strict limits on leverage is much more difficult when banks are politically powerful, and that alone is sufficient reason to enact strict limits on bank size.
12 banks worldwide had liabilities exceeding $1 trillion, and
30 banks had a ratio of liabilities to national GDP higher than 0.5.
Large banks tend to be too big to fail, as their failure would have hugely negative repercussions for the overall economy.
Saving oversized banks, however, may ruin a country’s public finances (Gros and Micossi 2008). Take the example of Ireland; this country provided extensive financial support to its large banks and subsequently had to seek financial assistance from the EU and the IMF in 2010. The public finance risks posed by systemically large banks suggest that such banks should be reduced in size.
Further evidence against big banks can be found from studies on banking technologies. Berger and Mester (1997) estimate the returns to scale in US banking using data from the 1990s, to find that a bank’s optimal size, consistent with lowest average costs, would be for a bank with around $25 billion in assets. Amel et al. (2004) similarly report that commercial banks in North America with assets in excess of $50 billion have higher operating costs than smaller banks. These findings together suggest that today’s large banks, with assets in some instances exceeding $ 1 trillion, are well beyond the technologically optimal scale.
The public finance risks of large banks and findings on banking cost structures together present a strong case against large banks. All the same, further evidence on how large banks perform relative to small banks is warranted to inform the debate on bank size. Additional insight is useful before one passes judgment on whether systemically large banks should be regulated or taxed out of existence.
The measure allows not only a no-fly zone but effectively any measures short of a ground invasion to halt attacks that might result in civilian fatalities. It comes as Colonel Qaddafi warned residents of Benghazi, Libya, the rebel capital, that an attack was imminent and promised lenient treatment for those who offered no resistance. ...
I haven't had a chance to ready beyond the introduction and conclusion of this paper by Greg Mankiw and Matthew Weinzierl, "An Exploration of Optimal Stabilization Policy," but a couple of quick reactions. First, in the paper, in order for there to be a case for fiscal policy at all, the economy must be at the zero bound and the monetary authority must be "unable to commit itself to expansionary future policy." This point about commitment has been made in other papers (I believe Eggertsson, for example, notes this), and I think the credibility of future promises to create inflation is a problem. If so, if the Fed cannot credibly commit to future inflationary policy, then this paper provides a basis for, not against, fiscal policy when the economy is stuck at the zero bound.
Second, they note in the paper that tax policy can do a better job of replicating the flexible price equilibrium in terms of the allocation of resources, and hence tax policy should be used instead of government spending. However, since I think that there is a strong case that we are short on infrastructure, and that public goods problems prevent the private sector from providing optimal quantities of these goods on its own, I don't see the distributional issues as an important objection to government spending at present.
Here's the introduction to the paper:
An Exploration of Optimal Stabilization Policy, by N. Gregory Mankiw and Matthew Weinzierl March 8, 2011: 1 Introduction What is the optimal response of monetary and fiscal policy to an economy-wide decline in wealth and aggregate demand? This question has been at the forefront of many economists' minds over the past several years. In the aftermath of the 2008-2009 housing bust, financial crisis, and stock market decline, people were feeling poorer than they did a few years earlier and, as a result, were less eager to spend. The decline in the aggregate demand for goods and services led to the most severe recession in a generation or more.
The textbook answer to such a situation is for policymakers to use the tools of monetary and fiscal policy to prop up aggregate demand. And, indeed, during this recent episode, the Federal Reserve reduced the federal funds rate -- its primary policy instrument -- almost all the way to zero. With monetary policy having used up its ammunition of interest rate cuts, economists and policymakers increasingly looked elsewhere for a solution. In particular, they focused on fiscal policy and unconventional instruments of monetary policy.
To traditional Keynesians, the solution is startlingly simple: The government should increase its spending to make up for the shortfall in private spending. Indeed, this was a main motivation for the $800 billion stimulus package proposed by President Obama and passed by Congress in early 2009. The logic behind this policy should be familiar to anyone who has taken a macroeconomics principles course anytime over the past half century.
Yet many Americans (including quite a few congressional Republicans) are skeptical that increased government spending is the right policy response. They are motivated by some basic economic and political questions: If we as individual citizens are feeling poorer and cutting back on our spending, why should our elected representatives in effect reverse these private decisions by increasing spending and going into debt on our behalf? If the goal of government is to express the collective will of the citizenry, shouldn't it follow the lead of those it represents by tightening its own belt?
Traditional Keynesians have a standard answer to this line of thinking. According to the paradox of thrift, increased saving may be individually rational but collectively irrational. As individuals try to save more, they depress aggregate demand and thus national income. In the end, saving might not increase at all. Increased thrift might lead only to depressed economic activity, a malady that can be remedied by an increase in government purchases of goods and services.
The goal of this paper is to address this set of issues in light of modern macroeconomic theory. Unlike traditional Keynesian analysis of fiscal policy, modern macro theory begins with the preferences and constraints facing households and firms and builds from there. This feature of modern theory is not a mere fetish for microeconomic foundations. Instead, it allows policy prescriptions to be founded on the basic principles of welfare economics. This feature seems particularly important for the case at hand, because the Keynesian recommendation is to have the government undo the actions that private citizens are taking on their own behalf. Figuring out whether such a policy can improve the well-being of those citizens is the key issue, a task that seems impossible to address without some reliable measure of welfare.
Republicans clearly want to strike at the heart of banking reform with legislation attacking new regulations on derivatives, credit rating agencies and private equity firms. But their piecemeal approach suggests they are trying to do so without appearing to favor Wall Street over Main Street. ...
In a two-pronged approach that began with starving funds from relevant federal agencies like the Treasury, Securities and Exchange Commission, and Commodity Future Trading Commission, the GOP now has launched into the symbolic phase of floating repeal legislation favored by the banking lobby. ...
...Opponents of the bill are operating in an environment where almost nobody other than the financial industry is paying attention. That's an environment where it's easy to, at the least, starve financial reform to death. But if President Obama raises the profile of the issue, the politics will quickly flip. It's a political and a policy no-brainer. I don't understand why he hasn't done so already.
If Obama says unkind things about financial executives on Waaaaah Street, they get their feelings hurt -- it's easy to imagine tears rolling down their cheeks. Can't have that.
I'd guess Obama believes he is making progress on the charge that he demonizes business. He's certainly been trying. If he targets the financial sector with tough talk about regulation, he will reopen the charges that his administration is unfriendly to business and, in his and his advisors mind, hurt his chances of reelection.
But whatever progress he thinks he has made with the business community is illusory. The first time that he proposes something against business interests none of this will matter, they will come out once again with full guns against him. They are not an ally, and their interests will always come first. I was disappointed that Obama gave into this in the first place and began courting opponents such as the Chamber of Commerce, and if it's true that fear of upsetting the financial/business community is causing hesitation to fight back against attempts to undercut regulation, the disappointment is magnified.
....Mr. Bowles had harsh words for fellow Democrats. He dismissed the idea that raising taxes alone might help erase the deficit, saying "raising taxes doesn't do a dern thing" to address health care costs that are projected to be a big driver of future fiscal problems.
If there's anything that could be called a wonkish consensus on the left, it's this: we should eliminate the Bush tax cuts in a couple of years when the economy has recovered, and we need to rein in the long-term growth of healthcare costs. It's true that taxes don't address healthcare costs, but it's just sophistry on Bowles' part to put it like that. Taxes do address the medium-term deficit, and that's important. Quite separately, PPACA makes a start on holding down healthcare costs and thus addressing the long-term deficit, and I hardly know anyone on the left who doesn't agree that more needs to be done.
...Jon Chait has more on this, including a more detailed takedown of Bowles' own proposals for healthcare, which are almost laughably inadequate.
I think we make a mistake by talking about this as though the goal of Republicans is actually deficit reduction. It's not, the goal is a reduction in the size of government and once you understand that, it's clear why Republicans will not support tax increases of any kind. They'd rather cut taxes now (and argue it's about jobs or long-run growth rather than ideology), and increase the deficit even more because they still believe the beast can be starved. Anything that increases the pressure to reduce spending will be embraced, anything such as a tax increase that might allow the government to grow larger will be opposed. Logic about the best way to close the deficit won't win this argument because it has little to do with the deficit itself.
Consider, for example, what has occurred over the past 20 years in the United States. Some parts of the tradable sector (finance, insurance, and computer systems design) grew in value added and employment, while others (electronics and cars) grew in value added but declined in employment, as lower value-added jobs moved offshore. The net effect was negligible employment growth in the tradable sector. ...
But ... while many goods and services are less expensive than they would be if the country were walled off from the global economy, we cannot assume that these cost savings necessarily compensate for diminished employment opportunities. People might trade away cheaper goods for assurances that a wide range of productive and rewarding employment options would be available, now and in the future. ...
If a relatively open global system is to survive..., it will have to be managed ... to ensure that its benefits are distributed equitably between and within countries. ...
It is not a good idea to assume that markets will solve these distributional problems by themselves... All countries, advanced and emerging, have to address issues of inclusiveness, distribution, and equity as part of the core of their growth and development strategies. ...
I had one major source of unhappiness with last week’s conference: the participants were largely silent about the dismal outlook in the advanced economies for the next several years. The current outlook for unemployment in the United States, Europe, and Japan is probably worse than it was in late 2008. Then, mainstream forecasts for 2009–2011 showed unemployment rising sharply—but generally to levels below what we are experiencing today—and then returning toward normal at a moderate pace. Today, not only is unemployment higher than most 2008 forecasts of its peak levels, but the expected pace of recovery is weaker.
Despite this deterioration, the dire sense of urgency in late 2008 has not increased. Indeed, it has largely disappeared. I find this complacency in the face of vast, preventable suffering and waste hard to understand.
Part of the answer, I suspect, is lack of nerve in the face of the ferocity of the austerians: anyone who suggests that we actually need to focus on unemployment instead of slashing spending now now now can expect to face harsh attacks, which leads all too many to shy away from the current policy debate in favor of longer-run concerns.
But there’s also this, from the JOLTS (job offerings and labor turnover) data:
Although unemployment remains very high, at this point that’s mainly due to lack of hiring; layoffs are quite low. This means that people who still have decent jobs aren’t feeling much at risk of losing them. So any urgency would have to come from concern about those who don’t have jobs — those who lost them in the slump, and of course young people trying to get started on their working lives.
And those people — at least one in six workers, judging by U6 — don’t seem to have much political or psychological visibility. In effect, they’re being written off.
I believe quits are quite low as well.
On the workers who are currently being written off, it's important to realize that some of the effects of the failure to adequately address this problem will be permanent. For example, some workers will leave the labor force forever -- especially those near retirement age who can find a way to get by until they are eligible. It also permanently lowers the wage profile of young workers, particularly those just entering the workforce who must settle for less due to the recession (if they can find employment at all). Brad DeLong and Tyler Cowen have been arguing over whether the government should take advantage of the recent fall in the interest rate to try to do more for the economy. But I don't think that matters much, the price of infrastructure and other projects was already very low, and the benefits of putting people to work very high (which comes on top of the benefits the infrastructure or other useful spending provides on its own). It was already worthwhile to do more for the economy before the fall in Treasury rates, the recent fall in rates doesn't change this conclusion. To echo David Romer, it's been puzzling why there is so much "complacency in the face of vast, preventable suffering and waste."
Below are some facts and figures about the radiation hazard of the Fukushima Daiichi plant and how it compares to other nuclear accidents in history. Many of the figures are measured in millisieverts, an international unit of radiation dosage. One sievert is equal to 100 rems, so one millisievert is 0.1 rem.
Radiation dose at the boundary of the Fukushima Daiichi plant at 2:30 P.M. Japan time on March 16: 1.9 millisieverts (mSv) per hour
Peak radiation dose measured inside Fukushima Daiichi nuclear power station on March 15: 400 mSv per hour
Maximum allowable exposure for U.S. radiation workers: 50 mSv per year
Average exposure of U.S. residents from natural and man-made radiation sources: 6.2 mSv per year
Estimated total exposure at the boundary of the Three Mile Island site during the 1979 accident there: 1 mSv or less
Average total radiation dose to the 114,500 individuals evacuated during the 1986 Chernobyl disaster: 31 mSv
Half-life of iodine 131, a dangerous radioactive isotope released in nuclear accidents: 8 days
Half-life of cesium 137, another major radionuclide released in nuclear accidents: 30 years ...
Amount of nuclear fuel in the Chernobyl 4 reactor that exploded in 1986: 190 metric tons
Estimated nuclear fuel and fission by-products released into the atmosphere during Chernobyl disaster: 25 to 57 metric tons
Approximate amount of nuclear fuel in each crippled Fukushima Daiichi reactor: 70 to 100 metric tons
David Romer was one of the cohosts of the recent IMF conference on Macro and Growth Policies in the Wake of the Crisis:
An Important Starting Point—with One Gap, by David Romer: I had one major source of unhappiness with last week’s conference: the participants were largely silent about the dismal outlook in the advanced economies for the next several years. The current outlook for unemployment in the United States, Europe, and Japan is probably worse than it was in late 2008. Then, mainstream forecasts for 2009–2011 showed unemployment rising sharply—but generally to levels below what we are experiencing today—and then returning toward normal at a moderate pace. Today, not only is unemployment higher than most 2008 forecasts of its peak levels, but the expected pace of recovery is weaker.
Despite this deterioration, the dire sense of urgency in late 2008 has not increased. Indeed, it has largely disappeared. I find this complacency in the fact of vast, preventable suffering and waste hard to understand.
With the exception of that one critical omission, I was impressed by the discussion. One striking feature was the consensus that there is no consensus. That is, no one argued that there was widespread agreement about a simple set of rules for achieving macroeconomic stability, robust growth, and shared prosperity. Indeed, no one proposed such a set of rules. The crisis has, appropriately, made macroeconomists and policymakers humble about what we know. ...
On some specific issues, there was, if not unanimity, considerable agreement:
Because of asymmetric information, agency problems, and behavioral forces, financial markets do not reliably produce efficient outcomes. Moreover, even well conceived and well implemented microeconomic regulation cannot ensure that financial market imperfections will not lead to adverse macroeconomic outcomes. Thus there is a need for “macro-prudential regulation”—that is, regulation and supervision that address financial risks to the macroeconomy.
The idea of “the” fiscal multiplier is not sensible. The impact of a change in fiscal policy is extremely dependent on whether monetary policy is able to respond, and on how it responds if it can. The impact also depends on the state of the economy, the health of the financial system, the time horizon of the change, its specific form, and more.
Capital controls should be part of the macroeconomic toolkit. Even speakers who were skeptical of capital controls thought there were circumstances under which they were a reasonable short-term expedient. And others felt they were a fully appropriate response to the prospect of large inflows of short-term capital that could lead to substantial overvaluation of the exchange rate.
The simple “one instrument/one target” view of monetary policy (where the instrument is a short-term interest rate and the target is inflation, or a weighted average of inflation and the output gap) is too simple. There are other instruments (exchange market intervention, capital controls, margin requirements, down payment requirements, capital requirements, and more), and other potential targets (notably the exchange rate and indicators of financial risks).
Having a domestic central bank—specifically, the U.S. Federal Reserve—be the main provider of emergency liquidity to central banks around the world, as occurred in 2008 through swap lines, does not seem optimal. Finding an arrangement where an international body plays that role would be desirable.
The discussion that was started at this conference needs to continue. We, the conference co-hosts, hope to hear your comments.
Policy Still on Autopilot, For Now, by Tim Duy: The Federal Reserve did as expected, leaving policy unchanged. But policymakers tweaked the statement ever to slightly to suggest that indicators are at a minimum not moving away from the objectives of the dual mandate – a critical first step on the road toward normalizing monetary policy.
First, apparently there was some surprise that the Federal Reserve failed to mention the unfolding crisis in Japan. From the Wall Street Journal:
Federal Reserve policy statements are supposed to outline the forces that will drive monetary policy over coming months, so while it wasn’t unexpected, it’s nevertheless puzzling central bankers omitted the biggest risk of all: Japan.
I suspect they did not mention Japan because little information is known about the economic risk or they don’t perceive it to be the primary risk in the US outlook. Indeed, we have been down this road before with Hurricane Katrina - even very large disasters in advanced economies appear to have limited overall economic impact, although the regional impacts could be quite severe. I often wonder if economists have a tendency to initially overestimate the potential impact of such events as they believe the economic impacts must somehow reflect the human impact, or that if they don’t play up the economic impacts they will be seen as downplaying the human impact. I tend to be less concerned about the economic impact (particularly over the longer term; market economies have proven to be remarkably resilient) and instead am much, much more concerned about the very devastating and long-lasting human impact of this tragedy. I recommend the guest post at Econbrowser on this topic. To be sure, policymakers will be watching this and other situations closely, but I suspect they would turn to this kind of research as a guide and conclude for now that the global economic impact will be largely transitory.
Indeed, instead of focusing on the downside risk, policymakers turned their attention largely to on the moderately positive news. First, as has been widely noted, the Fed upgraded the economic assessment – the recovery is not only on “firmer footing,” but labor markets “appear to be gradually improving.” The last bit is important. The lack of any meaningful improvement in labor markets has been a central feature of this recovery, and a major impediment to any change in policy. Signs of improving labor conditions are a welcome relief for policymakers.
Note also that the language regarding commodity prices is focused on the inflationary, not deflationary, implications. I tend to believe the Fed would ultimately be forced to ease policy further in the event of a significant oil price surge, but there is no indication here that this is the concern.
Inflation "subdued" instead of "trending downward"
If you are looking for QE3, you need some combination of ongoing labor market stagnation and threat of deflation (the two go hand in hand). Instead, what the Fed sees is improving labor markets and inflation that appears to have hit a floor:
Of course, despite indications data is actually heading in the direction of the dual mandate, the size of the output gap, high unemployment, and weak wage growth all argue against tightening policy in any way, shape, or form. Hence the current large scale asset program continues unabated. I still believe the calendar argues against any deviation from this plan. Even if incoming data strongly surprised on the upside, by the time the Fed was able to assess such data and act, the policy would be nearly at an end. Changes would be essentially pointless.
Bottom Line: Monetary policy continues on autopilot – they still plan that QE2 will end as expected at which time policymakers will turn their attention to policy normalization, setting the stage for a rate hike in 2012. Watch for signs that the downside risks (oil, Japan, Europe, etc.) are evolving in such a way that they are impacting actual data, with the weak reading on consumer confidence being a cautionary tale. But if the data holds up, with steadily improving labor markets and improving inflation measures, the next test for monetary policy will be the end of QE2. Will markets falter in the absence of a steady drip of monetary policy?
This is from Larry Mishel and Heidi Shierholz of the EPI:
The sad but true story of wages in America, by Lawrence Mishel and Heidi Shierholz, EPI: Recent debates about whether public- or private-sector workers earn more have obscured a larger truth: all workers have suffered from decades of stagnating wages despite large gains in productivity. The current public discussion illogically pits state and local government employees against private workers, when both groups have failed to sufficiently benefit from the economic fruits of their labors. This paper examines trends in the compensation of public (state and local government) and private-sector employees relative to the growth of productivity over the past two decades.
This paper finds:
• U.S. productivity grew by 62.5% from 1989 to 2010, far more than real hourly wages for both private-sector and state/local government workers, which grew 12% in the same period. Real hourly compensation grew a bit more (20.5% for state/local workers and 17.9% for private-sector workers) but still lagged far behind productivity growth.
• Wage stagnation has hit high school–educated workers harder than college graduates, although both groups have suffered—and a bit more so in the public sector. For example, from 1989 to 2010, real wages for high school-educated workers in the private sector grew by just 4.8%, compared with 2.6% in state government. During the same period, real wages for college graduates in the private sector grew 19.4%, compared with 9.5% in state government.
• The typical worker has had stagnating wages for a long time, despite enjoying some wage growth during the economic recovery of the late 1990s. While productivity grew 80% between 1979 and 2009, the hourly wage of the median worker grew by only 10.1%, with all of this wage growth occurring from 1996 to 2002, reflecting the strong economic recovery of the late 1990s.
• The fading momentum of the 1990s recovery failed to propel real wage gains for college graduates employed by private-sector firms or states from 2002 to 2010, despite productivity growth of 20.2% over the same period.
These data underscore that there is a bigger story than public versus private compensation and a more penetrating set of questions to ask than who has more than whom. The ability of the economy to produce more goods and services has not translated into greater compensation for either group of workers. Why has pay fared so poorly overall? Why did the richest 1% of Americans receive 56% of all the income growth between 1989 and 2007, before the recession began (compared with 16% going to the bottom 90% of households)? Why are corporate profits 22% above their pre-recession level while total corporate sector employees’ compensation (reflecting lower employment and meager pay increases) is 3% below pre-recession levels? ...
Essentially, economic policy has not supported good jobs over the last 30 years or so. Rather, the focus has been on policies that were thought to make consumers better off through lower prices: deregulation of industries, privatization of public services, the weakening of labor standards including the minimum wage, erosion of the social safety net, expanding globalization, and the move toward fewer and weaker unions. These policies have served to erode the bargaining power of most workers, widen wage inequality, and deplete access to good jobs. In the last 10 years even workers with a college degree have failed to see any real wage growth. [Read Issue Brief]
We are, as they say, live. Senator Shelby blocking Peter Diamond's appointment to the Federal Reserve Board of Governors, and this talks about whether there is any justification for doing so, and how the appointment process might be improved:
Update: One thing that doesn't come through very well in the column is that a president's first few appointments to the Board of Governors should be given due deference (and a lot is due). After that scrutiny, even blocking, is justified since a president's ability to stack the Board should be limited -- that's the Senate's role. Scrutiny over Krosner was appropriate since Bush had ample opportunity (and then some) to shape the ideological makeup of the Board. Blocking Diamond as payback for blocking Kroszner is not appropriate since Diamond is clearly qualified and among the first few nominations.
Do modern market democracies increase or decrease social, economic, and political inequalities?:
Basic institutions and democratic equality, by Dan Little: Modern societies seem to produce persistent social inequalities that are contradictory to many of the values we espouse when it comes to the idea of democratic equality. We continue to find wealth and income inequalities, inequalities of educational and health outcomes, inequalities of political power and influence, and these disparities seem to increase over time. Is this a residual defect in these specific societies, or is it rather a natural result of the logic of the institutions that define a market economy and an electoral democracy in the circumstances of extensive existing inequalities of wealth and power?
Consider these polar views:
Modern market democracies work to narrow social and economic inequalities over time.
The institutions of modern market democracies work to increase economic and political inequalities; the rich and powerful become more so through their privileged positions within existing institutions.
Which of these views is correct?
We would like to think that it is possible for a society to embody basic institutions that work to preserve and enhance the wellbeing of all members of society in a fair way. We want social institutions to be beneficent (producing good outcomes for everyone), and we want them to be fair (treating all individuals and groups with equal consideration; creating comparable opportunities for everyone).
There is a fundamental component of liberal optimism that holds that the institutions of a market-based democracy accomplish both goals. The economic institutions of the market create efficient allocations of resources across activities, permitting the highest level of average wellbeing. Free public education permits all persons to develop their talents. And the political institutions of electoral democracy permit all groups to express and defend their interests in the arena of government and law.
But social critics cast doubt on all parts of this story, based on the role played by social inequalities within each of these sets of institutions. The market embodies and reproduces a set of economic inequalities that result in grave inequalities of wellbeing for different groups. Economic and social inequalities influence the quality of education available to young people. And electoral democracy permits the grossly disproportionate influence of wealth holders relative to other groups in society. So instead of reducing inequalities among citizens, these basic institutions seem to amplify them.
On this line of thought, market and electoral institutions both create and reproduce social inequalities even when they are working correctly; inequality is built into them at a very basic level. The institutions are tilted in favor of privileged groups, and it is no surprise when corporations wield substantial influence in Washington and Paris and tax policies are enacted that favor the richest percent of American income earners. These aren't abnormal anomalies; they are instead precisely what we should expect when we analyze the basic institutions carefully.
What remedies are available to help move a modern society towards greater democratic equality for all of society? Several large institutional variations have been tried in the past century -- social democracy, small self-sufficient communities, local economies based on cooperatives, etc. Jon Elster surveyed some of these alternatives in Alternatives to Capitalism over twenty years ago -- at a time when there was more openness to the idea of fundamental institutional reform. Tamas Bauer opens his essay, "The unclearing market," with these words:
The well-functioning market of textbooks brings about general satisfaction. Under market-clearing prices, goods and factors offered for sale are sold; the demand of each agent is satisfied by supply by others. Wage earners are paid wages that more or less correspond to their marginal contribution. Etc., etc. ... Life is, of course, much different. (71)
The social-democratic solution to these tendencies was developed in the early twentieth century. It was recognized that market institutions create unacceptable inequalities and leave some citizens in circumstances of insecurity, deprivation, and indignity; and it was argued that the institutions of the state needed to correct these tendencies through the establishment of a strong social safety net. The majority of a society would have the electoral strength to create and maintain strong protections of the interests of ordinary working people through a combination of positive economic rights. (Gosta Esping-Andersen reviews this history in The Three Worlds of Welfare Capitalism.)
The triumph of social and economic conservatism -- Thatcher, Reagan, and other conservative European leaders and their political parties -- took this theory of the role of the state off the public agenda, and the past thirty years have witnessed the systematic disassembly of the institutions of social democracy in most countries. And the consequences are predictable: more inequality, more deprivation, more severe disparities of life outcomes for different social groups.
What is truly surprising is that there has been so little continuing exploration of alternatives in the intervening two decades. Democratic theorists have explored alternative institutions in the category of deliberative democracy (link), but there hasn't been much visioning of alternative economic institutions for a modern society. We don't talk much anymore about "economic justice," and the case for social democracy has more or less disappeared from public debate. But surely it's time to reopen that public debate.
What has the Internet Done for the Economy?, Kellogg Insight: ...There is widespread optimism among media commentators and policy makers that the Internet erases geographic and socioeconomic boundaries. The Death of Distance and The World Is Flat, two books that espouse that rosy view, were bestsellers. But in the early days of the Internet, the income gap between the upper and middle classes actually began to grow. “We thought it was just a very natural question to ask: is the Internet responsible?” Greenstein says.
Misplaced Optimism The researchers studied trends from 1995 to 2000 in several large sets of data, including the Quarterly Census of Employment and Wages—which gives county-level information on average weekly wages and employment—and the Harte Hanks Market Intelligence Computer Intelligence Technology Database, which holds survey information about how firms use the Internet. In total, the researchers included relevant data for nearly 87,000 private companies with more than 100 employees each. Based on their older work, they focused only on advanced Internet technologies.
Out of about 3,000 counties in the U.S., in only 163 did business adoption of Internet technologies correlate with wage and employment growth, the study found. All of these counties had populations above 150,000 and were in the top quarter of income and education levels before 1995. Between 1995 and 2000, they showed a 28 percent average increase in wages, compared with a 20 percent increase in other counties (Figure 1).
Figure 1. Advanced Internet investment and wage growth by county type.
Why did the Internet make such big waves in these few areas? Greenstein believes the reason was that these areas already had sophisticated companies and the communications infrastructure needed to seize on the Internet’s opportunities. But there are other possibilities. The impact could have been due to a well-known phenomenon called “biased technical change,” which means that new technologies can thrive only in places with skilled workers who know how to use them. Or it could have been because cities brought certain advantages—denser labor markets, better communication, tougher competition—than more remote areas.
“Each one of those explanations is plausible in our data, and probably explains a piece of it. But none of them by themselves can explain the whole story,” Greenstein says. “It’s really a puzzle.” ...
Life-cycle shocks such as job loss, disability, and divorce can have large effects on individual and household economic well-being. Understanding these impacts is important for designing and maintaining an adequate social safety net. In this Economic Letter, we examine how these shocks affect family income. We trace the path of total family income before and after job displacement, the onset of a disability, or divorce. We then examine the components of total family income, including labor earnings, transfer payments, and other income, and look at how each responds to these shocks. We find several important patterns. The U.S. social safety net helps mitigate the impact of these shocks, but on average offsets only a portion of the losses. Private actions, including drawing on savings or increased employment of other family members, also play an important role in offsetting income losses following shocks. The combination of public and private measures significantly offsets losses in total family income, even when an individual’s earnings fall severely as a result of a shock. ...
Conclusion ...Work-limiting disabilities, job losses, and divorces generally have damaging economic effects. For the most part, individuals and families respond to these shocks privately. In the case of families whose principal income earner becomes disabled, other family members increase their income from labor to offset lost earnings. On average, job displacement permanently reduces an individual’s earnings. However, other family members respond by increasing their work activity. Similarly, prime-aged workers on average make up for the large earnings loss that typically follows divorce by adding income from new family partners. Social safety net insurance is important in mitigating the circumstances of those who experience the most severe unexpected life-cycle shocks, such as an incapacitating disability. However, on average, most post-shock family income comes from the earnings of family members. If a life-cycle shock causes the principal earner to lose income, other family members take up all or most of the slack by increasing their own earnings. The data suggest that Americans depend mostly on their own families for the resources necessary to weather unexpected economic events. ...
The Letter doesn't say much about whether this is the optimal level of social insurance -- I think we need more -- but it does knock down the idea that Americans rely mainly upon the government to insure themselves against unexpected declines in family income and hence lack the motivation to take action on their own to offset the income loss.
"Getting banks to clear up mortgage debts would help, not hurt, the economy":
Another Inside Job, by Paul Krugman, Commentary, NY Times: Count me among those who were glad to see the documentary “Inside Job” win an Oscar. The film reminded us that the financial crisis of 2008 ... didn’t just happen — it was made possible by bad behavior on the part of bankers, regulators and, yes, economists.
What the film didn’t point out, however, is that the crisis has spawned a whole new set of abuses, many of them illegal as well as immoral. And leading political figures are, at long last, showing some outrage. Unfortunately, this outrage is directed, not at banking abuses, but at those trying to hold banks accountable for these abuses.
The immediate flashpoint is a proposed settlement between state attorneys general and the mortgage servicing industry. That settlement is a “shakedown,” says Senator Richard Shelby of Alabama. The money banks would be required to allot to mortgage modification would be “extorted,” declares The Wall Street Journal. And the bankers themselves warn that any action against them would place economic recovery at risk.
All of which goes to confirm that the rich are different from you and me: when they break the law, it’s the prosecutors who find themselves on trial.
To get an idea of what we’re talking about here, look at the complaint filed by Nevada’s attorney general against Bank of America. The complaint charges the bank with luring families into its loan-modification program ... under false pretenses; with giving false information about the program’s requirements...; with stringing families along with promises of action, then “sending foreclosure notices, scheduling auction dates, and even selling consumers’ homes while they waited for decisions”; and, in general, with exploiting the program to enrich itself at those families’ expense. ...
Notice, by the way, that we’re not talking about the business practices of fly-by-night operators; we’re talking about two of our three largest financial companies... Yet politicians would have you believe that any attempt to get these abusive banking giants to make modest restitution is a “shakedown.” ...
What about the argument that placing any demand on the banks would endanger the recovery? ... First, the proposed settlement only calls for loan modifications that would produce a greater “net present value” than foreclosure — that is, for offering deals that are in the interest of both homeowners and investors. The outrageous truth is that in many cases banks are blocking such mutually beneficial deals, so that they can continue to extract fees. How could ending this highway robbery be bad for the economy?
Second, the biggest obstacle to recovery isn’t the financial condition of major banks, which were bailed out ... and are now profiting... It is, instead, the overhang of household debt combined with paralysis in the housing market. Getting banks to clear up mortgage debts — instead of stringing families along to extract a few more dollars — would help, not hurt, the economy.
In the days and weeks ahead, we’ll see pro-banker politicians denounce the proposed settlement, asserting that it’s all about defending the rule of law. But what they’re actually defending is the exact opposite — a system in which only the little people have to obey the law, while the rich, and bankers especially, can cheat and defraud without consequences.
Olivier Blanchard, Director of Research at the IMF, struck the significant note in the opening minutes of the first session (2:50 in Session 1). According to him (and I paraphrase), before the crisis mainstream economic thinking had converged on a beautiful construction in terms of monetary policy, namely “inflation targeting”. We had convinced ourselves that it was enough to focus our attention on one target (inflation), and one instrument (the policy interest rate) to achieve that target.
One lesson of the crisis is that the pre-crisis consensus is not right--“Beauty is not synonymous with truth”--and we have to reconsider. The policy problem is one of multiple targets and multiple instruments, and the mapping from instruments into targets is complex. Economic policy is consequently much more complicated and messy than we had thought pre-crisis.
Where do we go from here? On the research front, so Blanchard continues in his closing remarks (8:00), this “brave new world” of policy-making is very exciting. We have the chance to revisit a large range of macroeconomic issues but now with the right microeconomic foundations, for example agency theory, imperfect information, and behavioral economics.
On the policy front, however, we must simply face the limits of our knowledge, and hence go slow. We cannot give up on inflation-targeting, but must proceed step by step, pragmatically, to add additional targets and instruments one by one, in an experimental fashion, in order to find out what works and what does not. We must “keep hopes, our hopes, in check”. Crises will probably happen again and we won’t be ready for them.
In summary, we need new economic thinking, but we can start from where we were before the crisis, with a conception that the underlying problem is microeconomic distortion of one kind or another from the perfect market ideal. And we need new economic policy also, but again we can start from where we were before the crisis, with the inflation targeting model that Otmar Issing says “doesn’t help you at all” as a practical central banker. That is one message anyway.
I take away a different message.
To me, the importance of this conference comes simply from the very public assertion that the pre-crisis consensus was wrong (okay, “not right”), and that we need now to be working toward something else. The significant point is that there is no consensus on what that something else should be. Some people, perhaps even most economists currently practicing, will work from the pre-crisis consensus, tweaking this or that.
But there is room also for more fundamental departures, for new approaches that have not yet been tried. Unless I mistake him, I think Blanchard would agree.
Otmar Issing, for example, offers a Nobel for anyone who provides a proper theoretical treatment that combines credit and money, financial quantities and financial prices. That is what economists like himself have always been looking for, and not found yet, certainly not in the pre-crisis academic consensus.
A decade ago, Olivier Blanchard wrote an influential paper, "What do we know about macroeconomics that Fisher and Wicksell did not?," in which he put forth a kind of Whig history of the progress of macroeconomic thinking up to 2000. Compared to today, suggested Blanchard, macroeconomics pre-1940 looks like “a period where confusion reigned, for lack of an integrated framework”.
According to his account, the inter-temporal general equilibrium model provided that missing framework. Now, ten years later, we can see that framework in a different light, as the origin of the “beauty” that economists mistook for truth, and apparently still do, if only by force of intellectual habit. The important takeaway is that the crisis has opened the ground for alternative frameworks as well as tweaks of the existing one.
To be provocative, let me put it this way. We are living today in a period not unlike the inter-war period, a period where confusion reigns for lack of an integrated framework. We are living in a period of exploration and experimentation, not only in the policy world but also in the world of ideas. Let the new economic thinking begin.
To be continued….
Here's a few thoughts on this from previous posts. First:
... If you believe, as I do, that macroeconomics needs to change, there are three possible ways to proceed.
First, we could try to reform the DSGE model used widely today. How much would it help to do one or more of the folowing: (i) Within the DSGE model, develop better connections between the real and financial sectors. In particular, the model should allow for the endogenous collapse of financial intermediation. Recent models of financial frictions and endogenous leverage cycles give an indication of how to proceed. (ii) Replace rational expectations (and the efficient markets hypothesis) with a better approximation of how expectations are actually formed. One possibility along these lines is to added learning to the models. Another is behavioral economics. (iii) Replace the representative agent assumption with heterogeneous agents. It's hard to have realistic financial markets with one agent. However, adding heterogeneity is not as simple as it might seem. Generically, having heterogeneous agents in a model makes it difficult to aggregate across individuals – once the representative agent assumption is dropped you cannot, for example, guarantee that uniqueness or stability will appear at the aggregate level even if individual agents are well-behaved neoclassical agents. There are clever ways to allow for heterogeneity without sacrificing the ability to aggregate, but they aren’t fully satisfactory. If we are going to go this route, then more cleverness is needed. (iv) You may be surprised to learn that regulations such as capital requirements have very little theoretical backing -- they are largely ad hoc (see the talk by Franklin Allen). If the problem was a failure of regulation and not a failure of the model more generally, then perhaps better models of regulation are all that is needed (or, if you believe the crisis was caused by the Fed's pursuit of low interest rates, perhaps all we need is a better model of monetary policy). However, this brings up the question of whether the DSGE structure is an adequate foundation for models of regulation, and I am not convinced that it is. (v) This wasn't part of my remarks, but a physicist spoke at the conference and one of his main points was that financial markets are dictated by power laws, not the Gaussian distributions that are commonly assumed in theoretical work (often for analytical convenience). Is addressing this problem all that is needed?
The second way we might proceed is to adopt new models. Possibilities along these lines are: (i) To develop network (complexity) models and their associated measures of network characteristics such as centrality and degree distribution that can be used to estimate the risk of network failure. (ii) There is George Soros' Reflexivity theory, and (iii) there is the theory developed by Frydman and Goldberg, Imperfect Knowledge Economics. (Both of these had been discussed in earlier sessions.) (iv) We could begin the modeling process at the aggregate level and give up the insistence that the models be microfounded. This would, among other things, avoid the problems associated with aggregating from realistic microfoundations discussed above.
Third, take a whole new approach to theory. (i) The call for pluralism that Sheila Dow will talk about falls into this category (see here for more on this). (ii) Economics could give up trying to model itself after physics as it existed a century or more ago, drop the "natural" language, and embrace the methods of the "softer" sciences. These disciplines have already successfully addressed many of the problems that economists face. ...
...I am torn between the first two options -- fixing the existing model and building a new one -- but fortunately work on the two options is not mutually exclusive. There's no reason why one group of researchers can't try to fix the model we are using now while another group works on a much different theoretical structure. Presumably, in the end, the better model will win out.
Many people are working on fixing the existing structure -- macroeconomists are already tooled up for this, so it's a natural progression -- what is needed is more acceptance within the profession (at journals in particular) for alternative theoretical models and different approaches to economic modeling (one thing that come up at the conference is if there any role for articles without math in top journals).
Outside of the work on fixing the existing DSGE model (where I think developing better connections between real sector and financial intermediation, and endogenous leverage cycles are the first things to do), my first choice of where to go next would be to investigate network models. There is already progress in this direction, and I think these models have a lot of potential for characterizing the risk within financial networks in a way that would be helpful for regulators. But while these models look promising in some areas, it's hard for me to see how network models could constitute a brand new macroeconomics more generally (they seem more of a complement than a substitute for existing models). So there's a lot more work than that to be done.
Most of the current work is focused, as expected, on whether the existing sturcture can be fixed. Thus, while "the crisis has opened the ground for alternative frameworks as well as tweaks of the existing one," work on fixing the existing framework is dominant for now.
"there is little reason to expect Ricardian equivalence to provide a good first approximation in practice"
The relevant section from the text is provided in the link. Romer provides mostly theoretical objections, but I want to note one thing that Williamson left out, the empirical evidence for this proposition is mixed at best. Again, from Romer:
11.3 Ricardian Equivalence in Practice ...The issue of whether Ricardian equivalence is a good approximation is closely connected with the issue of whether the permanent-income hypothesis provides a good description of consumption behavior. ...
We saw in Chapter 7 that the permanent-income hypothesis fails in important ways... This ... suggests that there is little reason to expect Ricardian equivalence to provide a good first approximation in practice. The Ricardian equivalence result rests on the permanent-income hypothesis, and the permanent-income hypothesis fails in quantitatively important ways. ...
To be fair, the empirical evidence does provide support in some cases -- as noted here, "When Ricardian equivalence is tested in a life–cycle framework the hypothesis is usually rejected, while when the empirical analysis is based on optimizing models, it is usually accepted. But my reading of the evidence is that it would be hard to justify anything more than a 50% offset even when the conditions for Ricardian equivalence appear to be well approximated. As I said when this topic initially came up, worries about Ricardian equivalence may justify a larger policy intervention, taking the extreme case if there is a 50% offset than the policy needs to be twice as large (or, better, structured in such a way as to minimize the offset), but it shouldn't lead to a worry that these policies won't work at all. (And to the extent that the tax cuts are partly saved, when liquidity/borrowing constraints are present for some households the money held against future tax liabilities can provide important insurance against unexpected contingencies. This allows households to resume consumption sooner than they would have without this insurance.)
Way back, when I spent a year in the government, an old hand told me that fighting bad ideas is like flushing cockroaches down the toilet; they just come right back. I’m having that feeling a lot lately
What are his frustrations?:
One is ... “the Social Security trust fund doesn’t exist” thing. I’ll just repeat what I said back when Bush was trying to push through privatization:
Social Security is a government program supported by a dedicated tax, like highway maintenance. Now you can say that assigning a particular tax to a particular program is merely a fiction, but in fact such assignments have both legal and political force. ...
The date at which the trust fund will run out, according to Social Security Administration projections, has receded steadily into the future: 10 years ago it was 2029, now it’s 2042. As Kevin Drum, Brad DeLong, and others have pointed out, the SSA estimates are very conservative, and quite moderate projections of economic growth push the exhaustion date into the indefinite future.
But the privatizers won’t take yes for an answer when it comes to the sustainability of Social Security. Their answer to the pretty good numbers is to say that the trust fund is meaningless because ... the whole notion of a separate budget for Social Security is a fiction. And if that’s true, the idea that one part of the government can have a positive trust fund while the government as a whole is in debt does become strange.
But there are two problems with their position.
The lesser problem is that if you say that there is no link between the payroll tax and future Social Security benefits – which is what denying the reality of the trust fund amounts to – then Greenspan and company pulled a fast one back in the 1980s: they sold a regressive tax switch, raising taxes on workers while cutting them on the wealthy, on false pretenses. More broadly, we’re breaking a major promise if we now, after 20 years of high payroll taxes to pay for Social Security’s future, declare that it was all a little joke on the public.
The bigger problem for those who want to see a crisis in Social Security’s future is this: if Social Security is just part of the federal budget, with no budget or trust fund of its own, then, well, it’s just part of the federal budget: there can’t be a Social Security crisis. All you can have is a general budget crisis. Rising Social Security benefit payments might be one reason for that crisis, but it’s hard to make the case that it will be central.
But those who insist that we face a Social Security crisis want to have it both ways. Having invoked the concept of a unified budget to reject the existence of a trust fund, they refuse to accept the implications of that unified budget going forward. Instead, having changed the rules to make the trust fund meaningless, they want to change the rules back around 15 years from now: today, when the payroll tax takes in more revenue than SS benefits, they say that’s meaningless, but when – in 2018 or later – benefits start to exceed the payroll tax, why, that’s a crisis. Huh?
I don’t know why this contradiction is so hard to understand, except to echo Upton Sinclair: it’s hard to get a man to understand something when his salary (or, in the current situation, his membership in the political club) depends on his not understanding it. But let me try this one more time, by asking the following: What happens in 2018 or whenever, when benefits payments exceed payroll tax revenues?
The answer, very clearly, is nothing.
The Social Security system won’t be in trouble: it will, in fact, still have a growing trust fund, because of the interest that the trust earns on its accumulated surplus. The only way Social Security gets in trouble is if Congress votes not to honor U.S. government bonds held by Social Security. That’s not going to happen. So legally, mechanically, 2018 has no meaning.
Now it’s true that rising benefit costs will be a drag on the federal budget. So will rising Medicare costs. So will the ongoing drain from tax cuts. So will whatever wars we get into. I can’t find a story under which Social Security payments, as opposed to other things, become a crucial budgetary problem in 2018.
What we really have is a looming crisis in the General Fund. Social Security, with its own dedicated tax, has been run responsibly; the rest of the government has not. So why are we talking about a Social Security crisis?
Oh well. I guess we just have to keep fighting these fights, over and over.
One cockroach I thought had been wiped out by "facticide" is that tax cuts pay for themselves. But that turned out to be wrong. Prior to the recent Congressional elections this claim was still made by many politicians on the right, and it was largely unchallenged by the press (making me think I should have called the insecticide used to battle bad ideas "facts aside" instead of "facticide"). It wasn't claimed as widely as in the past, so that is progress I guess, but even those who know better began making artful statements that made it sound like tax cuts would still bring more revenue to the Treasury (e.g. statements like tax cuts increase growth, and more growth means more revenue for the government -- essentially, the cockroach mutated in a way that neutralized the attempt to kill it off).