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We are about to sanction extortion as a legitimate Congressional negotiating strategy. Anyone think this is the last time we will see this happen?
One side put a gun to the economy and said do it our way or else. The other side had many ways to disarm the strategy, the 14th amendment for example, that it didn't even bother to keep alive as an alternative. Why? Even if you don't plan to use the option, why not leave the other side wondering so that their leverage is reduced?
The best hope at this point is that Democrats in the Senate will not stand for this, and that they will somehow manage to get a better deal. But I'm not expecting much.
We are not going to default on our debt payments on Tuesday, or even run out of money. According to reports, Treasury can make it another week, and bond payments could be continued even longer (though there would have to be cuts in other areas). We don't have to take a terrible deal today, and if it were up to me I'd threaten to veto the current arrangement, and make good on that threat if needed. I'd also do my best to make it abundantly clear to the public what is really holding the deal up, the unwillingness of the GOP to give up anything in the negotiations.
I thought Obama promised to do just that -- to veto the deal unless it was fair -- where fair meant three dollars in expenditure cuts for each dollar in tax increases. To me, that was already an unacceptably right-tilted outcome, and now we aren't even guaranteed that will happen.
There is the scheduled expiration of the Bush tax cuts at the end of 2012, and we are supposed to be content with a promise that Democrats will even the score at that point. But there's nothing at all in recent negotiations to give confidence that Democrats will manage to get tax increases when the time comes. A vague promise from Democrats about the future is all but worthless right now, we've had too many promises broken already. Obama's promises in particular mean nothing.
I'm mad right now. I just got an email from a high school friend who lost his job after 17 years working at the same place, and he's only four and a half months from being eligible for retirement. Now he's left out in the cold with nothing. That's what we ought to be focused on right now, helping people get and keep jobs, making sure that workers are treated fairly. Promising employees future benefits so that they are dedicated, hard-working, and then pulling the rug out just as they are about to realize that promise is unacceptable. But why should business worry when nobody is there to stand up for the rights of the workers?
Instead of spending valuable Congressional time trying to help working class households deal with the effects of the recession, and deal with longer-run problems that are causing wages for those lucky enough to be employed to stagnate, etc., we are making things worse for them in a budget deal with no sense of shared sacrifice. What are the wealthy giving up in this deal? What did the GOP give up?
This is a terrible deal for Democrats, and a terrible precedent for future budget negotiations.
Posted by Mark Thoma on Sunday, July 31, 2011 at 09:54 AM in Budget Deficit, Economics, Politics |
The great divergence, the other way around, by Dani Dodrik: As rich economies' prospects dim under their crushing debt burdens and political paralyses, the world's hope for economic dynamism rests with developing nations. These countries had an exceptionally good decade before the global financial crisis struck. And most among them have recovered quickly.
Check out this picture, which I find quite interesting:
For the first time ever, developing countries as a group grew have been growing faster than industrial countries. Not only that, as the figure makes clear, the growth differential between the two groups has been widening in favor of the poor countries.
And it isn't just China, India, and a few countries that have been doing well. For a change, Africa and Latin America actually experienced some convergence with rich countries over the last decade.
Many analysts have projected these trends forward and predict rapid global growth, largely off the back of emerging and developing nations. In the words of a Citigroup report, "this time will be different."
I am not sure that it will. Growth in Latin America and Africa is fragile; much of it is making up for lost time rather than real convergence. Asia, I am more optimistic about. But growth in Asia has required unconventional policies (undervalued currencies, industrial policies) that will be difficult to rely on in a world where rich countries are facing economic crises.
More on these points later...
Here's the follow-up: Will the divergence in growth result in eventual convergence in incomes?
Posted by Mark Thoma on Sunday, July 31, 2011 at 12:06 AM in Development, Economics |
Posted by Mark Thoma on Saturday, July 30, 2011 at 11:01 PM in Economics, Links |
The negotiations over the debt ceiling and the deficit appear to be stuck on the issue of triggers. Specifically:
Look closely at the Reid and Boehner bills. The first round of cuts are pretty much the same. The joint congressional committee charged with recommending further deficit reduction is pretty much the same. The difference is that Boehner’s bill forces them to act. He ties a future increase in the debt-ceiling to the successful passage of their proposal. Reid’s bill has no such trigger. ...
Most think the likely compromise is a trigger that would impose automatic, across-the-board cuts in spending if the committee fails in its mission. But Senate Democratic leadership isn’t so sure. They worry that a spending-cuts only trigger is heads, Republicans win; tails, Democrats lose. ...
The White House proposed a balanced trigger in April: It would have automatically raised taxes and cut spending if America wasn’t on a path to balanced budgets by 2014. ...
But at this point there's no way to be sure that the White House will hold firm on their insistence that any trigger be balanced:
But privately, they’re less concerned about a spending-only trigger, which was seriously considered during their negotiations with Boehner.
If the Democrats want any claim whatsoever that this deal was not completely one-sided, there has to be at least has some weight on the other side of the scale. That is, tax increases must to be part of the agreement. (Using the word balance when the weight on the scale is so uneven, perhaps even piled entirely on one side, doesn't seem correct. The final deal won't be balanced in any case).
It's pretty discouraging to see Democrats trying to sell such a large defeat as a victory (we only lost half the farm!).
[I'm about to head to the land of no internet connections for awhile today, and it will be good to get away from the frustrating news for a few hours.]
Posted by Mark Thoma on Saturday, July 30, 2011 at 09:45 AM in Budget Deficit, Economics, Politics, Taxes |
America’s Locust Years, by J. Bradford DeLong, Commentary, NY Times: It is hard right now to write about American political economy. Nobody knows whether the debt-ceiling tripwire will be evaded; if so, how; or what will happen if it is not. ...
So, rather than talking about the US debt ceiling, let us think instead about all of the things that the debt-ceiling impasse has prevented the US government from doing during the past six months...
The risks imposed by global warming, for example, have not gone away. ... The employment-to-population ratio in the US remains flat... America faces ... decaying infrastructure, weakening educational systems, and a dysfunctional health-care system that produces sub-standard outcomes at twice the cost of any other industrial country. ... Six months ... have been lost.
During the run-up to World War II, Winston Churchill ... lamented “the years that the locusts hath eaten” – the period during which preparatory action to face the great crisis of his day (the rise of Continental fascism) could have been taken, but was not. ...
My view is that the problem would fix itself easily if only the Republican Party of Dwight D. Eisenhower could stage a comeback (though without Richard Nixon and Joseph McCarthy).
It is becoming increasingly clear, however, that the problem is one not only for the US, but for the rest of the world as well. Since December 7, 1941, the world has in large part been able to rely on global governance by a somewhat-competent hyperpower. That America may be gone for good. If it is, the world needs to develop other institutions for global management – and quickly.
Posted by Mark Thoma on Saturday, July 30, 2011 at 12:42 AM in Economics, Politics |
Posted by Mark Thoma on Saturday, July 30, 2011 at 12:33 AM in Economics, Unemployment, Video |
Posted by Mark Thoma on Friday, July 29, 2011 at 11:01 PM in Economics, Links |
In response to the post What's the Point of Economic Growth, a former colleague, Paul Johnson, reminds me of Benjamin Friedman's "The Moral Consequences of Economic Growth":
The moral consequences of economic growth, Benjamin M. Friedman Interviewed by Romesh Vaitilingam, April 2009 [Transcription of an VoxEU audio interview]: Romesh Vaitilingam: Welcome to Vox Talks, a series of interviews with leading economists from around the world. Today's interview is with Benjamin Friedman, Professor of Political Economy at Harvard University. Ben and I ... spoke about his recently published book, "The Moral Consequences of Economic Growth." I began by asking him why he had chosen this striking title.
Ben Friedman: I wanted to convey that what I think economic growth is all about, ultimately, is not just the material aspect of how people live and how that improves, but rather how economic growth, or importantly today, the absence of economic growth affects societies more broadly.
The more I think about the subject, the more I thought about the subject when I was designing the book, the more I realized that I was exactly along the lines that many of the key thinkers of the Enlightenment Period, the late 18th Century, had in mind - especially Smith, Turgeau, but others as well – and that what they thought of themselves doing was not economics. They didn't even have the word economics at the time. They thought of themselves as doing moral philosophy.
And so, what I wanted to do was write about and think through the broad societal implications of whether we have economic growth, or not. And I wanted to do it in a way that connected very self-consciously with this moral philosophical approach to thinking about individuals and societies that was at the centre of the Enlightenment enterprise.
Romesh: So, what are the moral consequences to economic growth? What are the kinds of issues that you look at?
Continue reading "The Moral Consequences of Economic Growth" »
Posted by Mark Thoma on Friday, July 29, 2011 at 01:08 PM in Economics |
The advance estimate of GDP growth for the second quarter of this year is 1.3 percent:
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.3 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.4 percent.
And, if that news isn't discouraging enough, previous estimates were revised downward. For example, growth in the first quarter is now estimated to be just .4 percent, and GDP growth in the fourth quarter of 2008, i.e. at the worst part of the recession, was revised downward from -6.8 to -8.9 percent.
Why are we talking about cutting the deficit immediately and running the risk of making this even worse? It's time for Congress to wake up and realize that this problem, particularly troubled labor markets, should be their first priority?
[Note: I may not have internet access until much later today. There's one post scheduled for later, will do more if I can.]
Posted by Mark Thoma on Friday, July 29, 2011 at 08:37 AM in Economics |
Why won't members of the media "acknowledge the one-sided role of Republican extremists in making our system dysfunctional"?:
The Centrist Cop-Out, by Paul Krugman, Commentary, NY Times: The facts of the crisis over the debt ceiling aren’t complicated. Republicans have, in effect, taken America hostage, threatening to undermine the economy and disrupt the essential business of government unless they get policy concessions they would never have been able to enact through legislation. And Democrats — who would have been justified in rejecting this extortion altogether — have, in fact, gone a long way toward meeting those Republican demands.
As I said, it’s not complicated. Yet many people in the news media ... portray the parties as equally intransigent; pundits fantasize about some kind of “centrist” uprising, as if the problem was too much partisanship on both sides.
Some of us have long complained about the cult of “balance,” the insistence on portraying both parties as equally ... at fault on any issue... The cult of balance has played an important role in bringing us to the edge of disaster. For ... there is no penalty for extremism. Voters won’t punish you for outrageous behavior if all they ever hear is that both sides are at fault.
Let me give you an example... As you may know, President Obama initially tried to strike a “Grand Bargain”... To do so, he ... offered extraordinary concessions on Democratic priorities: an increase in the age of Medicare eligibility, sharp spending cuts and only small revenue increases. ...
But Republicans rejected the deal. So what was the headline on an Associated Press analysis of that breakdown in negotiations? “Obama, Republicans Trapped by Inflexible Rhetoric.” A Democratic president ... who leans so far to the right that he’s in danger of falling over ... is treated as being just the same as his utterly intransigent opponents. Balance!
Which brings me to those “centrist” fantasies..., what’s with the buzz about a centrist uprising? As I see it, it’s coming from people who recognize the dysfunctional nature of modern American politics, but refuse, for whatever reason, to acknowledge the one-sided role of Republican extremists in making our system dysfunctional. And it’s not hard to guess at their motivation. After all, pointing out the obvious truth gets you labeled as a shrill partisan, not just from the right, but from the ranks of self-proclaimed centrists.
But making nebulous calls for centrism, like writing news reports that always place equal blame on both parties, is a big cop-out — a cop-out that only encourages more bad behavior. The problem with American politics right now is Republican extremism, and if you’re not willing to say that, you’re helping make that problem worse.
Posted by Mark Thoma on Friday, July 29, 2011 at 12:42 AM in Economics, Politics |
From Outside the Beltway, by Tim Duy: Tracking the debt ceiling debate has been something of a monumental task - there are simply too many pieces in motion at any given time. Perhaps even more of a challenge given that it is an insider's game, and I am well removed from that game Indeed, from my perch the only thing that looks certain is that whatever happens will be unambiguously bad for the economy. We are simply looking at degrees of bad – fiscal contraction in the range from mild to severe. The latter – a severe contraction – will almost certainly result if federal spending needs to be slashed beginning next month to maintain servicing the debt, thus preventing defaults to one group of creditors while defaulting on promises to another – the general US public.
One view is that the consequences of failure are so severe that failure is not an option. Thus, we are simply watching a political spectacle unfold that will ultimately be resolved. In other words, you can sleep peaceful dreams throughout the weekend.
I wish I could be that confident.
Here is my view from the other side of the continent: My fear is that this optimistic assessment fails to sufficiently acknowledge there are two battles. One between Democrats and Republicans, and the other within the Republican party itself. And any outcome that is acceptable to Democrats is internally corrosive to Republicans. So internally corrosive that compromise with Democrats is a monumental if not impossible challenge.
Consider Paul Krugman’s analysis:
There’s actually a simple way to resolve the debt ceiling crisis: non-crazy Republican leaders could support something like the Reid plan — which is, let’s be clear, a huge victory for the right and defeat for progressives — and pass it with limited GOP support and overwhelming Democratic support. Situation resolved.
This would, however, probably be the end of these Republicans’ political careers. And the answer is, so?
If you believe that default will quite possibly be a catastrophe — and leading Republicans probably do believe that — their unwillingness to take the action I’ve just described means that they are risking America’s future rather than pay a price in their personal political careers. That’s cowardice on an epic scale, even if it’s the kind of behavior we take for granted nowadays.
On the surface, the Reid plan looks like an overwhelming defeat for progressives, but a look deeper suggests that it arguably puts the Democrats in a much stronger position in 2012. Ezra Klein:
Democrats are going to lose this one. Whatever deal emerges to raise the debt ceiling, we can be pretty sure it won’t include revenue, it won’t include stimulus, and it will let Republicans pocket a trillion dollars or more in cuts without offering anything to Democrats in return.
It’s difficult to see how it could end otherwise. Virtually no Democrats are willing to go past Aug. 2 without raising the debt ceiling. Plenty of Republicans are prepared to blow through the deadline. That’s not a dynamic that lends itself to a deal. That’s a dynamic that lends itself to a ransom.
Yet Democrats will have their turn. On Dec. 31, 2012, three weeks before the end of President Barack Obama’s current term in office, the Bush tax cuts expire. Income tax rates will return to their Clinton-era levels. That amounts to a $3.6 trillion tax increase over 10 years, three or four times the $800 billion to $1.2 trillion in revenue increases that Obama and Speaker John Boehner were kicking around. And all Democrats need to do to secure that deal is -- nothing.
The Reid plan raises the debt ceiling by enough to clear the next election, sufficient to take it off the plate next year. Which leaves the Administration holding the leverage – that’s a nice little tax break you have there, you wouldn’t want something to happen to it, would you?
Continue reading "From Outside the Beltway" »
Posted by Mark Thoma on Friday, July 29, 2011 at 12:24 AM in Economics, Politics |
Posted by Mark Thoma on Friday, July 29, 2011 at 12:05 AM in Economics, Links |
David Altig says there's a lot of ground to cover before things get back to normal:
Lots of ground to cover, by David Altig: In my last post I noted that the pace of the recovery, now two years old, is in broad terms similar to that of the first two years of the previous two recoveries. The set-up included this observation:
"Though we have grown used to thinking of the rebound from the most recent recession as being spectacularly substandard, that impression (which I share) is driven more by the depth of the downturn than the actual speed of the recovery."
The context of the depth of the downturn is not, of course, irrelevant. One way of quantifying that context is to look at measures of the "output gap," that is, the difference between the level of real gross domestic product (GDP) and the economy's "potential." An informal way to think about whether or not a recovery is complete is to mark the time when the output gap returns to zero, or when the level of GDP returns to its potential.
There are several ways to estimate potential GDP, but for my money the one constructed by the Congressional Budget Office (CBO) is as good as any. And it does not tell a pretty story:
It is worth noting that the CBO's measure is not a just a simple extrapolation of a constant trend, but a calculation based on historical relationships among labor hours, productivity growth, unemployment, and inflation. Their trend in potential GDP growth rates implied by this methodology, described here, is anything but linear:
Note that the output gaps in the first chart are at historical lows (by a lot) despite the fact that potential GDP growth is at historical lows as well.
These estimates provide one way to assess the pace of the recovery. For example, the midpoints of the Federal Open Market Committee's (FOMC) most recent consensus forecasts for GDP growth are 2.8 percent (2011), 3.5 percent (2012), and 3.85 percent (2013). If those forecasts come to pass, approximately 60 percent of the CBO-implied gap will be closed. This would still leave, in real terms, more resource slack than existed at the lowest point in the past two recessions.
Put another way, if the economy grows at 4 percent from 2012 forward, the output gap won't be closed until sometime in 2015. At a growth rate of 3.5 percent—the lower end of FOMC participants' projections for the next two years—the "full recovery" date gets pushed back to 2016. If, however, the FOMC projections are too optimistic and the economy can only manage to grow at an annual pace of 3 percent (which is currently the consensus view of private forecasters for 2012) output gaps persist until 2020.
The conventional view of the macroeconomy that motivates the CBO estimates of potential GDP (and hence output gaps) at least implicitly embeds the assumption that time heals all wound. But the healing won't necessarily be fast.
Posted by Mark Thoma on Thursday, July 28, 2011 at 01:22 PM in Economics |
I used to write editorials for the Wall Street Journal... So I’m well aware of the challenge faced by those assigned to compose these documents. The strict demands of the paper’s ideology do not always lie smoothly over the rocky outcroppings of reality. It can take considerable skill to match the two together.
Unfortunately, many of the writers aren't that skilled.
He goes on:
In that regard, this morning’s lead editorial about the debt-ceiling crisis is a true masterpiece.
If you were to write a story about government debt, you’d probably be inclined to write about the two sets of government decisions that produce deficits or surpluses: decisions about expenditure and decisions about revenue. You’d want to do that not only as a matter of fairness, but also as a matter of math.
And that’s why, my friend, you would wash out as a WSJ editorialist. They wrote this editorial without any reference to revenues whatsoever. Boom! Gone! Don’t deny reality. Defy reality. ...
One of the many traps and impediments facing a Journal editorialist writing about debt is that up until 2009, the US debt burden rose most under the two presidents the Journal most ardently supported: Ronald Reagan and George W. Bush. The debt burden declined most under the presidents the Journal most despises – Dwight Eisenhower, Bill Clinton and Jimmy Carter.
It must have taken some hunting, but the Journal managed to find a chart that did just the opposite: federal payments to individuals as a percentage of federal outlays. What’s so great about this chart is that it excludes two of three biggest federal spending programs: Medicare and Medicaid, both of whose costs rose faster in the Bush 2000s than in the Clinton 1990s. ...
Posted by Mark Thoma on Thursday, July 28, 2011 at 09:09 AM in Economics, Press |
I have some comments at MoneyWatch on today's news that new claims for unemployment insurance fell below 400,000:
Better News on Labor Markets, But Will It Continue?
Update: The post includes a graph from Macroadvisors giving their forecast of how the Boehner and Reid plans will slow economic growth. Brad DeLong describes their forecast:
Congress Debates Making the Economy Weaker: Macro Advisers:
Macroadvisers: Dueling Debt Proposals: How Much Fiscal Drag?: The House and the Senate have advanced separate but dueling plans to cut federal spending as a way to break the current impasse over raising the debt ceiling. Both plans would initially limit spending through 2021 with caps on discretionary budget authority while promising to convene commissions to identify more savings later…. CBO has now scored both of these plans relative to its March adjusted baseline…. The cuts in primary spending (that is, excluding interest payments) in the House (or Boehner) plan cumulate to just $715 billion ($851 billion including interest). The cuts in primary spending in the Senate (or Reid) plan cumulate to $1.8 trillion ($2.2 trillion including interest). The cuts in the Senate plan are so much larger because that plan quickly cuts budget authority for the wars….
We estimate that the Reid plan would slow GDP growth (again, statically) by about ¼ percentage point on average from fiscal year (FY) 2012 through FY 2015, with the peak effect being almost ½ percentage point in FY 2013.
We estimate that the Boehner plan would slow GDP growth by only about 0.1 percentage point on average over the same period, with the peak effect being a little over 0.2 percentage point in FY 2014.
Can't anybody play this game?
Posted by Mark Thoma on Thursday, July 28, 2011 at 09:01 AM in Economics, Unemployment |
There's a new paper from the San Francisco Fed discussing how long it will take for residential construction to rebound to normal levels. Here's the abstract:
When Will Residential Construction Rebound?, by William Hedberg and John Krainer, FRBSF Economic Letter: Over the past several years, U.S. housing starts have dropped to around 400,000 units at an annualized rate, the lowest level in decades. A simple model of housing supply that takes into account residential mortgage foreclosures suggests that housing starts will return to their long-run average by about 2014 if house prices first stabilize and then begin appreciating, and the bloated inventory of foreclosed properties declines.
The paper notes that price adjustment alone is not enough, "a significant easing of the drag on housing stemming from the inventory of foreclosed homes is also needed." For example, in this graph showing the predicted path for housing starts, the red line assumes a 50,000 per quarter decline in the inventory of foreclosed homes starting in 2012, which as the paper notes is an optimistic assumption. The black line assumes no decline at all. When foreclosures decline as assumed for the red line, the recovery time improves substantially (but note that the prediction of a recovery by 2014 depends upon the optimistic assumption about how fast foreclosures will drop):
An implication of this research is that polices that help homeowners escape foreclosure would speed the recovery of the housing market.
Posted by Mark Thoma on Thursday, July 28, 2011 at 12:42 AM in Economics, Housing |
Posted by Mark Thoma on Thursday, July 28, 2011 at 12:33 AM in Economics, Methodology |
A Golden Opportunity to Please Conservatives and Liberals Alike, by Robert Stavins: ...It’s too soon to forget that a year ago the Senate abandoned its attempt to pass climate legislation that would limit CO2 emissions. In the process, conservative Republicans dubbed cap-and-trade “cap-and-tax.’’ But, as I’ve said before, regardless of what they think about climate change, conservatives should resist demonizing market-based approaches to environmental protection and reverting to pre-1980s thinking that saddled business and consumers with needless costs.
Market-based approaches to environmental protection should be lauded, not condemned, by political leaders, no matter what their party affiliation. Otherwise, there will be severe and perverse long-term consequences for the economy, for business, and for consumers.
Posted by Mark Thoma on Thursday, July 28, 2011 at 12:24 AM in Economics, Environment, Regulation |
Posted by Mark Thoma on Wednesday, July 27, 2011 at 10:01 PM in Economics, Links |
Quick one before getting back on the road:
Where the Job Growth Is: At the Low End, by Steven Greenhouse, NY Times: There’s more unhappy news for the millions of Americans hoping for a surge in the number of good, high-paying jobs — a new report concludes that the great bulk of new jobs created since the economic recovery began are in lower-wage occupations, paying $13.52 or less an hour.
The report by the National Employment Law Project, a liberal research and advocacy group, found that while 60 percent of the jobs lost during the downturn were in midwage occupations, 73 percent of the jobs added since the recession ended had been in lower-wage occupations, like cashier, stocking clerk or food preparation worker.
According to the report, “The Good Jobs Deficit,” the number of jobs in midwage and high-wage occupations remains significantly below the prerecession peak, while the number of jobs in lower-wage occupations has climbed back close to its former peak. ...
The report gives additional ammunition to those who argue, like David Autor, an economics professor at M.I.T., that there is a distinct hollowing out of the middle. ...“We should emphasize that it is too early in the recovery to predict whether these trends will continue,” the report said. ...
Net Change in Occupational Employment During and after the Great Recession
Source: National Employment Law Project analysis of Current Population Survey
Posted by Mark Thoma on Wednesday, July 27, 2011 at 02:07 PM in Economics, Unemployment |
Ratings agencies shouldn't have so much influence:
The Biggest Driver in the Deficit Battle: Standard & Poor’s, by Robert Reich: ...All of America’s big credit-rating agencies — Moody’s, Fitch, and Standard & Poor’s — have warned they might cut America’s credit rating if a deal isn’t reached soon to raise the debt ceiling. ... But Standard & Poor’s has gone a step further: It... insists any deal must also ... reduce the nation’s long-term budget deficit by $4 trillion — something neither Harry Reid’s nor John Boehner’s plans do.
If Standard & Poor’s downgrades America’s debt, the other two big credit-raters are likely to follow. The result: You’ll be paying higher interest on ... every ... penny you borrow. ... In other words, Standard & Poor’s is threatening that if the ten-year budget deficit isn’t cut by $4 trillion..., you’ll pay more – even if the debt ceiling is lifted next week.
With Republicans in the majority in the House, there’s no way to lop $4 trillion of the budget without harming Social Security, Medicare, and Medicaid, as well as education, Pell grants, healthcare, highways and bridges, and everything else the middle class and poor rely on.
And you thought Republicans were the only extortionists around.
Who is Standard & Poor’s to tell America how much debt it has to shed in order to keep its credit rating?
Standard & Poor’s didn’t exactly distinguish itself prior to Wall Street’s financial meltdown... Had they done their job and warned investors how much risk Wall Street was taking on,... taxpayers wouldn’t have had to bail out Wall Street; millions ... would ... be working now instead of collecting unemployment insurance; the government wouldn’t have had to inject the economy with a massive stimulus...; and far more tax revenue would now be pouring into the Treasury... In other words, had Standard & Poor’s done its job, today’s budget deficit would be far smaller.
And where was Standard & Poor’s (and the two others) during the George W. Bush administration – when W. turned a ... budget surplus ... into a gaping deficit? Standard & Poor didn’t object to Bush’s giant tax cuts for the wealthy. Nor did it raise a warning about his huge Medicare drug benefit (i.e., corporate welfare for Big Pharma), or his decision to fight two expensive wars without paying for them. ...
So why has Standard & Poor’s decided now’s the time to crack down on the federal budget — when it gave free passes to Wall Street’s risky securities and George W. Bush’s giant tax cuts ... thereby contributing to the very crisis it's now demanding be addressed?
Could it have anything to do with the fact that the Street pays Standard & Poor’s bills?
Is there any evidence that ratings agencies are influenced by the fact that Wall Street pays their bills?:
Did Rating Agencies Give Preference to Big Banks?, by Matthew Philips: At the heart of the financial crisis was the market for mortgage-backed securities (MBS). These are the “toxic assets” that larded up bank balance sheets and all but froze the credit markets in the fall of 2008 ... thanks to the AAA ratings they received from the rating agencies Moody’s, S&P, and Fitch. These firms that allowed so much junk to be passed off as gold were essentially the enablers of the financial crisis.
The relationship between the rating agencies and banks is a perfect case study of flawed incentives. With banks paying them to rate their investment products, and so much money pouring in at the height of the mortgage-boom..., Moody’s, S&P, and Fitch had a strong incentive to play along.
A new study adds more fodder to the argument that these agencies were unduly influenced by the institutions whose products they were grading. It basically posits that the more MBS an institution issued, the better rating their stuff received. Here’s the abstract:
We examine whether rating agencies (Moody’s, S&P, and Fitch) reward large issuers of mortgage-backed securities, who bring substantial business, by granting them unduly favorable ratings. The initial yield on both AAA-rated and non-AAA rated tranches sold by large issuers is higher than that on similar tranches sold by small issuers during the market boom years of 2004-2006. ... We conclude that large issuers receive more favorable ratings...
Posted by Mark Thoma on Wednesday, July 27, 2011 at 06:48 AM in Economics, Market Failure |
As I get ready to hit the road for a couple of weeks away from Eugene, here are a few responses to my post yesterday at Reuters:
Paul Krugman: Listening to Others.
Dean Baker responds to Paul Krugman.
More from Dean Baker: There's Zero Accountability in Economics.
Paul Smalera: Krugman says Thoma’s right, except when he’s wrong.
Larry Summers: Economic specialization is a feature, not a bug.
Richard Green responds to Larry Summers.
I focused on the relationship between academic and other economists, but I should have at least mentioned the sociology within the profession as well. There were a few academic economists who called the housing bubble, but they were dismissed in much the same way as those outside of academia.
I am for specialization, of course, but being overly insular can cause specialists to deviate from the socially optimal set of research questions.
In at least one case it's easy to detect the attitude I was talking about.
When I say we should listen, I also mean that people should think about what they hear and consider the motivations of the person doing the talking, not blindly accept what, say, housing economists are saying.
Update: More from Macroeconomic Resilience.
Update: Jim Hamilton comments.
Update: Peter Martin too.
Posted by Mark Thoma on Wednesday, July 27, 2011 at 05:04 AM in Economics, Methodology |
Is Structural Change the Primary Challenge?, by Tim Duy: Given that thoughts of high structural unemployment continue to emerge in Fed thinking, the topic bears ongoing scrutiny. Especially so for me personally, as I have long seen the need for structural shifts that address the US current account deficit - but should such adjustments require persistently high unemployment rates? Some affirmation of my general story comes via David Altig, who recently posted this chart:
Note the shift in relative growth patterns – less consumption, more investment, and net exports at least a less negative drag. This seems consistent with a shift away from the externally supported pattern of household consumption so evident in the past decade. And in discussing the general disappointment with the strength of the recovery, Altig says:
The undeniable (and relevant) human toll aside, the current recovery seems so disappointing because we expect the pace of the recovery to bear some relationship to the depth of the downturn. That expectation, in turn, comes from a view of the world in which potential output proceeds in a more or less linear fashion, up and to the right. But what if that view is wrong and our potential is a sequence of more or less permanent "jumps" up and down, some of which are small and some of which are big?
The implication is that perhaps we are closer to potential output than is widely believed. Now, before you roll your eyes, as I am inclined to do, note the CBO estimate of potential output is not the only estimate. Menzie Chinn reminds us of the variety of estimates of potential output, some of which suggest that, at the moment, the output gap is actually positive.
Why might we believe that potential output has suffered some sizable, negative downward shock? Altig did not provide an explanation, but one can find the same idea in the most recent FOMC minutes:
Continue reading "Fed Watch: Is Structural Change the Primary Challenge?" »
Posted by Mark Thoma on Wednesday, July 27, 2011 at 12:24 AM in Economics, Fed Watch, Fiscal Policy, Monetary Policy |
Posted by Mark Thoma on Tuesday, July 26, 2011 at 10:01 PM
Larry Summers on whether the stimulus should have and could have been larger (from a longer interview):
Ezra Klein: Overall, could we have done more?
Larry Summers: There are multiple aspects of this question. First, the administration proposed considerably more than Congress was willing to enact. Taking account of the addition of the AMT, the Administration’s Recovery Act proposals were cut back by about 20% in the process of passing Congress by very narrow margins.
Second, the President’s economic team advised that there was essentially no danger of excessive fiscal stimulus in 2009. I joked ... that worrying about overdoing fiscal policy was like my losing too much weight and becoming anorexic — a conceivable possibility, but very far from the dominant risk. The President’s political advisers — rightly in my view — constrained the initial stimulus proposals to avoid sticker shock and rejection or great delay on Congress’s part.
Third, politics aside there were difficulties in moving spending rapidly in 2009. So-called shovel-ready projects often were not in fact ready to go. ... Of course it would have been possible to increase the tax cuts or assistance to state and local governments, but there were severe political limits in both those areas.
Fourth, we believed in the winter of 2009 that if, as seemed likely, more stimulus would ultimately be required, it could be passed through the Congress using the unemployment insurance extension for 2010 as a vehicle. This view proved incorrect. The administration proposed and the House passed in the fall of 2009 a substantial further program... Unfortunately it did not pass the Senate and the focus has shifted very much towards deficit reduction rather than job creation. It is fortunate that the President was able last fall to lead an effort to pair extended tax cuts with payroll tax reductions — without that stimulus we might be looking at a double dip today
This doesn't explain the rosy baseline forecast for the economy that the White House put out, a forecast that has been a thorn in the side of the stimulus package ever since. Given the forecast, it didn't look like the fiscal package did anything. Had the baseline forecast been more realistic (i.e. lower), the stimulus package would have looked better, and the case for more stimulus would have been much stronger.
Note also that it only seemed "likely" they would need more stimulus, they thought it might be enough. They'd wait and see and ask for more if it was needed. But it was nowhere near enough. Thus, politics or not, they appear to have underestimated the degree of the problem, and hence the size of the response that would be required. Summers seems to say they knew how much was needed, but couldn't get it. I'm not so sure that they fully recognized the size of the problem they faced.
Posted by Mark Thoma on Tuesday, July 26, 2011 at 01:08 PM in Economics, Fiscal Policy, Politics |
When I was trying to figure out if there was a housing bubble or not, the academic economists I had come to trust said no, the fundamentals explain this. Sometimes this was backed by econometric analysis. But many people outside of academics, or at least a few, said there was a bubble. This was often backed by logic, intuition, and simple charts rather than sophisticated econometrics based upon theoretical constructs. For the most part, I dismissed the people I should have listened to, especially if it contradicted what the academics were saying. Most of all, I relied too much on the experts in the academic community instead of listening to all the evidence and then thinking for myself.
One of the reasons I didn't listen is that until I started blogging, I was pretty arrogant about academic economists. As far as I was concerned, pretty much, academic economists knew more about everything related to economics than anyone else. But one thing I've learned from the wide array of voices in the blogosphere is that I was wrong. Academic economists have a lot to learn if they are willing to listen.
This column at Reuters is, in part, a mea culpa:
The Great Divide in Economics
It's also a more explanation of why we need increased interaction between researchers and practitioners.
Update: Paul Krugman comments: Listening to Others.
Update: Dean Baker weighs in.
Update: More from Dean Baker: There's Zero Accountability in Economics.
Update: Paul Smalera: Krugman says Thoma’s right, except when he’s wrong.
Update: Larry Summers responds: Economic specialization is a feature, not a bug.
Update: Richard Green responds to Larry Summers.
Posted by Mark Thoma on Tuesday, July 26, 2011 at 08:10 AM in Economics, Methodology |
CBPP Analysis of John Boehner’s Plan: The Center on Budget and Policy Priorities concludes that if enacted, John Boehner’s debt ceiling plan “could well produce the greatest increase in poverty and hardship produced by any law in modern U.S. history.”
That sounds to me like something that would create strong incentives to not be poor and, indeed, to fully incentive richness. Consequently, we’ll have massive economic growth. Right?
Think of all the old people who will be willing to do odd jobs, whatever, in order to pay for health care. No more free-riding from grandma and grandpa to slow the economy down.
The CBPP adds:
This may sound hyperbolic, but it is not. The mathematics are inexorable. ...
In short, the Boehner plan would force policymakers to choose among cutting the incomes and health benefits of ordinary retirees, repealing the guts of health reform and leaving an estimated 34 million more Americans uninsured, and savaging the safety net for the poor. It would do so even as it shielded all tax breaks, including the many lucrative tax breaks for the wealthiest and most powerful individuals and corporations.
As for the way the debt ceiling talks are going, what a disaster.
Posted by Mark Thoma on Monday, July 25, 2011 at 11:07 PM in Budget Deficit, Economics, Politics |
Posted by Mark Thoma on Monday, July 25, 2011 at 10:05 PM in Economics, Links |
I haven't been able to keep up very well today, so let me turn things over to someone who has:
The obvious compromise between the Reid and Boehner plans, by Ezra Klein: When it comes to cutting the deficit, the plans proposed by Senate Majority Leader Harry Reid (read it here) and House Speaker John Boehner (read it here) are much more similar than they are different. It’s when they come to raising the debt ceiling that the consensus cracks apart.
Both plans call for $1.2 trillion in cuts to discretionary spending. Both plans envision the formation of a bipartisan “Supercommittee” that will try to find consensus on a larger deficit-reduction package that, if it wins a majority on the Supercommittee, will be immune to amendments and filibusters and be fast-tracked for an up-or-down vote in the House and the Senate.
Reid’s plan includes $100 billion in savings from so-called “mandatory spending” like Fannie Mae and agricultural subsidies, $1 trillion in savings from winding down the wars, and $400 billion in reduced interest payments from cutting more than $200 billion in spending. Boehner’s plan doesn’t specifically include any of that, but it’s fair to expect that his bipartisan committee would end up recommending many of the same mandatory savings, that the wars will wind down whether Boehner mentions them or not, and if all that happens, his interest savings will be similar. So the two plans are roughly equivalent in their immediate savings.
But that’s about as far as the agreement goes. Reid would use his $2.7 trillion in named savings to raise the debt ceiling through to 2013. Boehner underplays his savings precisely so he doesn’t have to raise the debt ceiling through to 2013. He doesn’t mention the war spending or interest savings, for instance, which Republicans counted in the Ryan budget, and which were part of Boehner’s negotiations with the White House. That allows Boehner to say he’s saving $1.2 trillion rather than $2.4 trillion, and thus gives him reason to only raise the debt ceiling by $1 trillion and demand that Congress go through another debt-ceiling debate next year. But that’s a choice he’s making, for reasons that will come clear in a moment. ...
The similarity of the two plans does, however, suggest an obvious compromise. The final plan could adopt Reid’s initial spending cuts, which are both slightly larger and more impressively stated than Boehner’s, and Reid’s longer debt-ceiling increase. But it could adopt Boehner’s idea for across-the-board spending cuts — perhaps in an augmented form that includes penalties designed to bring Republicans to the table — if a second round of deficit reduction doesn’t pass. It could also include a vote on a balanced-budget amendment, though I personally dislike this policy and consider it a mistake. ...
In theory, that should achieve almost all of Boehner’s goals. The only way it doesn’t is if he actually wants to endanger the American economy in an election year. But he doesn’t want that, right?
There are apparently dueling press conferences as well. Obama first, Boehner second, and who knows who else after that.
Update: Transcript of Obama's remarks, Transcript of Boehner's remarks.
Posted by Mark Thoma on Monday, July 25, 2011 at 03:24 PM in Budget Deficit, Economics, Politics |
As I look around for something to talk about or post, just a reminder:
...the Bush tax cuts have had a huge damaging effect. If all of them expired as scheduled at the end of 2012, future deficits would be cut by about half, to sustainable levels...
Add in the spending on wars and the total is even larger.
[Let me add that, in effect, we are trading tax cuts for a weakened social safety net and for most people that's a terrible deal.]
Posted by Mark Thoma on Monday, July 25, 2011 at 09:54 AM in Budget Deficit, Economics, Taxes |
Why is the president proposing such a bad trade in the negotiations over deficit reduction?:
Messing With Medicare, by Paul Krugman, Commentary, NY Times: At the time of writing, President Obama’s hoped-for “Grand Bargain” with Republicans is apparently dead. And I say good riddance. I’m no more eager than other rational people (a category that fails to include many Congressional Republicans) to see what happens if the debt limit isn’t raised. But what the president was offering to the G.O.P., especially on Medicare, was a very bad deal for America.
Specifically, according to many reports, the president offered both means-testing of Medicare benefits and a rise in the age of Medicare eligibility. The first would be bad policy; the second would be terrible policy. And it would almost surely be terrible politics, too. ...
For Medicare, with all its flaws, works better than private insurance. It has less bureaucracy and,... has been more successful in controlling costs. ... And ... Medicare-type systems in other advanced countries have much lower costs than the uniquely privatized U.S. system...
Republicans are doing all they can to undermine health care reform ... and may eventually succeed... If they do, many of those losing Medicare coverage would find themselves unable to replace it.
So raising the Medicare age is a terrible idea. Means-testing — reducing benefits for wealthier Americans — isn’t equally bad, but it’s still poor policy.
It’s true that Medicare expenses could be reduced by requiring high-income Americans to pay higher premiums, higher co-payments, etc. But why not simply raise taxes on high incomes instead? This would have the great virtue of not adding another layer of bureaucracy...
But, you may say, raising taxes would reduce incentives to work and create wealth. Well, so would means-testing..., the truly rich would prefer means-testing, since they would end up sacrificing no more than the merely well-off. But everyone else should prefer a tax-based solution. ...
The G.O.P.’s most potent political weapon last year — the weapon that caused a large swing in the votes of older Americans — was the claim that Mr. Obama was cutting Medicare. Why give Republicans a chance to do it all over again?
Of course, it’s possible that the reason the president is offering to undermine Medicare is that he genuinely believes that this would be a good idea. And that possibility, I have to say, is what really scares me.
Posted by Mark Thoma on Monday, July 25, 2011 at 12:24 AM in Budget Deficit, Economics, Politics, Social Insurance |
Posted by Mark Thoma on Sunday, July 24, 2011 at 10:01 PM in Economics, Links |
Taxing and Spending, in Balance, by Robert Shiller, Commentary, NY Times: The fight over the debt ceiling has deflected attention from the serious problems of fixing the economy and finding jobs for the 14 million unemployed. Worse, it has created strong negative feelings about fiscal policy, just when other policy measures seem incapable of restoring economic health.
The very term “fiscal stimulus” has become tainted. ... Fiscal stimulus is actually very useful and appropriate in the current circumstances. But rather than despair, we should ... never give up proposing sensible economic policies. ...
In December, I wrote about the concept of the balanced-budget multiplier and of raising taxes and government expenditure by the same amount, dollar for dollar..., such a policy would be one-for-one expansionary...
This is an expansionary change in fiscal policy that won’t require additional increases in the national debt. We should start a dialogue right now about taking such action, before the damage of protracted unemployment worsens. ...
Such a policy needn’t make government substantially bigger. Instead, the government would act as a kind of investment banker specializing in public goods. It wouldn’t need a lot of employees itself. It would seek private-sector proposals for building infrastructure and other useful projects, and bring in private-sector panels to review them. This would be akin to the role government already plays for science with the National Science Foundation. ...
Current trends suggest that we may be dealing with high unemployment for years. We should be prepared to provide balanced support to the economy.
I appreciate the sentiment that "we should ... never give up proposing sensible economic policies." We should certainly do our best to educate people and to fight for better policy. But there's no way a policy that involves a substantial increase in taxes will pass right now.
But do I have something better to offer that might pass? Nope -- "might pass" and "better" are non-intersecting sets, and that won't change before the debt ceiling deadline. My effort right now is directed toward avoiding the stupidity that might lead to a failure to raise the debt ceiling, or almost as bad, a deal that raises it stupidly (I avoid using the word stupid here for the most part so that when I do use it, it will have more force).
In that respect, I am annoyed at the (demonstrably incompetent) ratings agencies, S&P in particular. They are now saying that simply raising the debt ceiling is no longer enough, there must be trillions in deficit reduction -- enough to derail the recovery and potentially send the economy back into recession -- to avoid a ratings downgrade. So S&P is making it more likely that a recovery killing deal will be made, and less likely that there is a last minute deal that "cleanly" raises the debt limit, avoids the recession risk associated with immediate debt reduction, and also avoids the risk of the severe economic problems associated with default. [Update: see here too, and here.]
Posted by Mark Thoma on Sunday, July 24, 2011 at 12:15 PM in Budget Deficit, Economics, Fiscal Policy, Politics |
The third political party idea mentioned yesterday is further along than I thought:
Make Way for the Radical Center, by Thomas Friedman, Commentary, NY Times: ...If ... idiocy by elected officials sends you into a hair-pulling rage and leaves you wishing that we had more options today than our two-party system..., help may be on the way.
Thanks to a quiet political start-up..., a viable, centrist, third presidential ticket, elected by an Internet convention, is going to emerge in 2012. I know it sounds gimmicky — an Internet convention — but an impressive group of frustrated Democrats, Republicans and independents, called Americans Elect, is really serious, and they have thought out this process well. In a few days, Americans Elect will formally submit the 1.6 million signatures it has gathered to get on the presidential ballot in California as part of its unfolding national effort to get on the ballots of all 50 states for 2012.
The goal of Americans Elect is to take a presidential nominating process now monopolized by the Republican and Democratic parties, which are beholden to their special interests, and blow it wide open — guaranteeing that a credible third choice, nominated independently, will not only be on the ballot in every state but be able to take part in every presidential debate and challenge both parties from the middle...
“Our goal is to open up what has been an anticompetitive process to people in the middle who are unsatisfied with the choices of the two parties,” said Kahlil Byrd, the C.E.O. of Americans Elect, speaking from its swank offices, financed with some serious hedge-fund money...
The only rule is that a Democrat must run with a Republican or independent, and a Republican with a Democrat or independent. ...
Write it down: Americans Elect. What Amazon.com did to books, what the blogosphere did to newspapers, what the iPod did to music, what drugstore.com did to pharmacies, Americans Elect plans to do to the two-party duopoly that has dominated American political life — remove the barriers to real competition, flatten the incumbents and let the people in. Watch out.
That's sems like an oversell to me.
I think we are starting to see an answer to the question of who will be blamed for the mess we are in, and more generally for the dysfunction in Washington. Not one party or the other, but politicians generally. That disappoints me -- I think it's possible to point a finger at one of the two parties and assign a preponderance of responsibility. But the public sees little but partisan bickering and big unsolved problems, not much in the way of leadership on either side, and there's been little if any headway on the problems that matter to them the most (or at least the problems they've been convinced ought to matter to them most, in some cases political dysfunction and the inability of the media to step in and clarify the issues has misled them here too).
One more thought. Friedman says at one point that "President Obama should dump the Democrats and run as an independent, which he is, at heart, anyway." But Obama shows that having a centrist in the White House doesn't make anyone happy (except perhaps a gang of only six). So why do we think milquetoast centrism as practiced by Obama, or even radical centrism whatever that is, rather than strong leadership is the key to finding a way to move forward on the problems that people care about the most? I want better performance from Democrats, particularly from the leaders in the Party, not a third party that potentially splinters the coalition and robs it of its power.
[Update: I wish I'd said more about the irony of Friedman's note that Americans Elect is "financed with some serious hedge-fund money."]
Posted by Mark Thoma on Sunday, July 24, 2011 at 09:09 AM in Economics, Politics |
Posted by Mark Thoma on Saturday, July 23, 2011 at 10:01 PM in Economics, Links |
Jeff Sachs wonders why military spending isn't a large part of the budget talks:
Obama could have cut hundreds of billions of dollars in spending that has been wasted on America's disastrous wars in Afghanistan, Iraq, Libya, and Yemen, but here too it's been all bait and switch. Obama is either afraid to stand up to the Pentagon or is part of the same neoconservative outlook as his predecessor. The real cause hardly matters since the outcome is the same: America is more militarily engaged under Obama than even under Bush. Amazing but true. ... The American people ... have said repeatedly that they want a budget that sharply cuts the military, ends the wars, raises taxes on the rich, protects the poor and the middle class, and invests in America's future
I've been wondering the same thing. Military spending has hardly been mentioned in the budget debate.
He's pretty hard on both Republicans and Democrats, e.g.:
The Republicans also misrepresent the costs and benefits of closing the deficit through higher taxes on the rich. Americans wants the rich to pay more, and for good reason. Super-rich Americans have walked away with the prize in America. Our country is run by millionaires and billionaires, and for millionaires and billionaires, the rest of the country be damned. Yet the Republicans and their propaganda mouthpieces like Rupert Murdoch's media empire, claim with sheer audacity that taxing the rich would kill economic growth. This trickle-down, voodoo, supply-side economics is the fig leaf of uncontrolled greed among the right-wing rich.
at every crucial opportunity, Obama has failed to stand up for the poor and middle class. He refused to tax the banks and hedge funds properly on their outlandish profits; he refused to limit in a serious way the bankers' mega-bonuses even when the bonuses were financed by taxpayer bailouts; and he even refused to stand up against extending the Bush tax cuts for the rich last December, though 60 percent of the electorate repeatedly and consistently demanded that the Bush tax cuts at the top should be ended. It's not hard to understand why. Obama and Democratic Party politicians rely on Wall Street and the super-rich for campaign contributions the same way that the Republicans rely on oil and coal. In America today, only the rich have political power.
I've been hoping to help to change the course that Democrats have been on recently, and frustrated at every turn. Jeff Sachs seems to have given up. In his view, a third party is the only answer:
America needs a third-party movement to break the hammerlock of the financial elites. Until that happens, the political class and the media conglomerates will continue to spew lies, American militarism will continue to destabilize a growing swath of the world, and the country will continue its economic decline.
I'm not quite there yet (and I should note that I don't agree with everything he says in the article). I worry a fractured party would open the door to GOP control (though it could fracture both parties?), but what do you think? Is he correct?
Posted by Mark Thoma on Saturday, July 23, 2011 at 10:44 AM in Economics, Iraq and Afghanistan, Politics |
Posted by Mark Thoma on Friday, July 22, 2011 at 10:04 PM in Economics, Links |
There's a reason the breakdown in budget talks happened after markets were closed -- it shows there is considerable fear about how markets might have reacted (though perhaps that's wishful thinking?). It also indicates that a "fear of what might happen" motivated agreement of some sort is still likely. (But what hold do financial markets have on the new Tea Party Republicans in the House? That's the wild card.)
Is it good news or bad news that fear might motivate an agreement?:
Shorter Obama Press Conference, by Michael Froomkin: I tried repeatedly to surrender to the House GOP, but they wouldn’t take even my most abject surrender. I have summoned them back to the White House tomorrow morning in another attempt to force them to accept it. If worst comes to worst, and they will not accept my surrender, I am prepared to accept theirs, but I really don’t like it, and will use the opportunity to campaign against Democratic values in the next election.
I'm hoping that they throw up their arms at some point, point fingers at each other as they lift the debt ceiling out of fear of what might happen if they don't, and take this fight up another day. That would at least give us a chance to try to bring some sense to Obama on entitlements and taxes, though it's looking more and more like that's a lost cause. He seems determined to show he's a Very Serious Person -- to show how tough he is -- by placing key Democratic programs on the sacrificial altar.
Update: I meant to add that the scenario may play out similarly to what happened with the financial market bailout. Congress will fail to do anything until markets actually react, and once they see what they have caused and the fear begins to mount, they will move very quickly to come to an agreement of some sort. The key will be to have something available as a back door when that happens (e.g. an improved McConnell plan).
How do you see this ending?
Posted by Mark Thoma on Friday, July 22, 2011 at 04:50 PM in Budget Deficit, Economics, Politics |
Via David Wessel's Twitter feed:
RT @mitchellreports: Obama in briefing room shortly doesn't bode well
CNN says Boehner tells Obama & GOP rank-and-file he's pulling out of the deficit talks.
WSJ: Boehner Tells Obama Will No Longer Pursue Major Deficit Reduction Deal http://on.wsj.com/IYK20 33 minutes ago
Obama: Boehner is walking away from talks...
Obama: I offered $650 bb in entitlement cuts
Obama: We sought revenues less than Gang of Six proposed
Obama: We wanted $1.2 trillion in rev over 10 years, which didn't call for tax-rate rise. "This was an extraordinarily fair deal."
Obama: "I was willing to take a lot of heat from my party...It is hard to understand why Boehner would walk away form this kind of deal."
Obama, Boehner waited till after markets closed to share the news that their deficit talks are over.
Obama: "We have run out of time." Calls congressional leadership to WH at 11 a.m. Saturday to explain how to avoid default
Obama says he'll insist on extending debt ceiling into 2013, that is after next election.
Obama: Up until early today when I couldn't get a phone call returned, my expectation was Boehner would go to caucus to do the right thing
Obama: One of the things the Republican Party is going to have to ask itself: Can they say yes to anything?
Obama to GOP: How serious are you about deficit reduction, or is this just a campaign ploy
Obama: I'm not going to continue to play games and string this along for another nine months and then have to go thru this all over again
Text of Boehner letter to caucus on why debt talks broke down. http://bit.ly/p2r3Sb
Boehner: "A deal was never reached, and was never really close"
Obama: I went further than Dems thght wise to get a deal. "If it was unbalanced, it was unbalanced in the direction of not enough revenue"
Obama says he was willing to persuade Dems that a deal they didn't like was better than no deal.
Obama: "When it comes to actually doing something difficult, folks walk away...A Democratic president was willing to make some compromises."
Obama is either furious or feigning anger: "We've shown ourselves willing to do the tough stuff on an issue the Republicans ran on"
Obama sounds like a newspaper editor: We'll provide the 'tick tock"
Obama: We wanted "at least enough revenue" to protect current Soc Sec, Medicare beneficiaries, and prevent Medicaid evisceration.
Obama: $4 in cuts for $1 revenue was "pretty hard to stomach." Wanted revenue increases=entitlement cuts
Obama: If all Congress can do is raise the debt ceiling w/o deficit-reduction, I'll sign that -- as long as it goes thru end of 2012
Obama: "We better have some answers" before markets open Monday. "Remain confident" we'll extend of debt limit.
Obama: "Less confident" political system has capacity to cope with long-run fiscal problem.
Barack "Harry Truman" Obama emerges. Says he is looking out for "the working stiffs."
Obama: Why was I willing to go along with deal that wasn't optimal? At least it would show that this place is serious...willing to step up.
Obama's parting words: "If you want to be a leader, you've got to lead."
Also via Twitter:
Insane conservatives keep bailing pogressives out from center-right Obama offers.
It's hard to disagree with that.
Posted by Mark Thoma on Friday, July 22, 2011 at 04:05 PM in Budget Deficit, Economics, Politics |
I have a few comments on the Dodd-Frank financial reform legislation in a post at Public Radio's Marketplace:
Dodd-Frank Improves Regulation, But Shadow Bank Runs are Still a Potential Problem
One thing I didn't have space to talk about -- I pushed beyond the suggested word limit as it was -- is the doubts I have about whether the resolution authority granted in the legislation will work. The hope is that by having plans ready in advance to dismantle large systemically important financial institutions and the ability to force firms to execute those plans, large disruptions to financial markets can be avoided when these firms are in danger of failing. However, if doubts exist about whether this will stop bank runs, then it will be best not to take a chance on leaving shadow system deposits in place that might be vulnerable, and the problem of bank runs in the shadow banking system will still be present.
I also didn't say as much as I could have about why I think the regulation is too weak in many places, see here for more.
Posted by Mark Thoma on Friday, July 22, 2011 at 03:06 PM in Economics, Financial System, Regulation |
I see these claims frequently as well, i.e. that Keynesian economics doesn't work because any surplus is always used for new spending:
Debt and Forgetfulness, by Paul Krugman: I keep seeing comments along the lines of “Keynesianism doesn’t work, because liberals keep running deficits even when times are good, and never pay debt down.”
Guys, how about looking at recent history (pdf)?
Between 1993 and 2001, federal debt held by the public fell from 49.2 percent of GDP to 32.5 percent of GDP. What stopped the paydown of debt wasn’t liberal big spending; it was demands from conservatives that the surplus be used to cut taxes. George Bush said that a surplus means that the government is collecting too much money; Alan Greenspan warned that we were paying off our debt too fast.
Oh, and I was very much against those tax cuts, arguing that we should pay down the debt to prepare for future needs. As a reward, I now get accused of inconsistency, for saying that deficits were bad under Bush but good now.
Anyway, get your history straight before making claims about who’s fiscally responsible.
Democrats aren't the ones who can't keep their hands off of surpluses. The problem isn't that surpluses will be spent, the problem is that they will be given away as tax cuts instead of being used to pay down the debt. That's the lesson Bush taught us. Republicans have no interest in using tax cuts to pay down the debt, their goal is to lower taxes on the well-to-do based upon a false promise the tax cuts will somehow trickle down. But rising inequality, the lack of strong job creation througout the Bush years, and economic growth driven by bubbles rather than fundamentals show how hollow the excuses for high-end tax cuts turned out to be.
Posted by Mark Thoma on Friday, July 22, 2011 at 11:34 AM in Budget Deficit, Economics, Politics |
Posted by Mark Thoma on Friday, July 22, 2011 at 09:36 AM in Economics, Video |
Will we manage to avoid a "global disaster"? It's not looking good:
The Lesser Depression, by Paul Krugman, Commentary, NY Times: These are interesting times — and I mean that in the worst way. Right now we’re looking at not one but two looming crises, either of which could produce a global disaster. In the United States, right-wing fanatics in Congress may block a necessary rise in the debt ceiling, potentially wreaking havoc in world financial markets. Meanwhile, if the plan just agreed to by European heads of state fails to calm markets, we could see falling dominoes all across southern Europe — which would also wreak havoc in world financial markets.
We can only hope that the politicians huddled in Washington and Brussels succeed in averting these threats. But here’s the thing: Even if we manage to avoid immediate catastrophe, the deals being struck on both sides of the Atlantic are almost guaranteed to make the broader economic slump worse. ...
The disappearance of unemployment from elite policy discourse and its replacement by deficit panic has been truly remarkable..., the conversations in Washington and Brussels are all about spending cuts (and maybe tax increases, I mean revisions). That’s obviously true about the various proposals being floated to resolve the debt-ceiling crisis here. But it’s equally true in Europe. ...
For those who know their 1930s history, this is all too familiar. If either of the current debt negotiations fails, we could be about to replay 1931, the global banking collapse that made the Great Depression great. But, if the negotiations succeed, we will be set to replay the great mistake of 1937: the premature turn to fiscal contraction that derailed economic recovery and ensured that the Depression would last until World War II finally provided the boost the economy needed.
Did I mention that the European Central Bank — although not, thankfully, the Federal Reserve — seems determined to make things even worse by raising interest rates?
There’s an old quotation, attributed to various people, that always comes to mind when I look at public policy: “You do not know, my son, with how little wisdom the world is governed.” Now that lack of wisdom is on full display, as policy elites on both sides of the Atlantic bungle the response to economic trauma, ignoring all the lessons of history. And the Lesser Depression goes on.
Posted by Mark Thoma on Friday, July 22, 2011 at 12:24 AM in Economics |
Posted by Mark Thoma on Thursday, July 21, 2011 at 10:01 PM in Economics, Links |
Though there are denials from both sides, there are reports that the White House and Speaker Boehner are close to a deal:
Boehner and Obama Close to Deal, Leaders Are Told, NYT: The Obama administration has informed Democratic Congressional leaders that President Obama and Speaker John A. Boehner were starting to close in on a major budget deal that would enact substantial spending cuts and seek future revenues through a tax overhaul...
Officials knowledgeable about the conversations between the administration and Congressional leaders said the details of the potential package remained unknown but they presumed it would include cuts and adjustments in most federal programs, including Medicare.
However, officials on all sides of the tense negotiations warned that no firm deal was in hand yet...
The agreement was likely to rile Democrats, who could view it as more tilted toward Republican priorities than a bipartisan plan issued by the so-called Gang of Six senators this week; its prospects with conservative House Republicans were uncertain as well. Though it would initially appear to meet Republican demands for less reliance on new revenues as part of what Democrats have called a “balanced” approach, Republicans could be uneasy about accepting a plan tied to a higher future revenues through tax changes.
“The trick on this has always been the tax issue,” one Republican said.
The reports indicate the deal is for $3 trillion in deficit reduction, though the baseline for those calculations, i.e with or without the Bush tax cuts expiring, whether the AMT is assumed to increase, etc., isn't given so it's hard to evaluate precisely.
The plan involves immediate spending cuts, and "future revenues through a tax overhaul", and the immediate spending cuts pose a risk to the economy. The cuts will further reduce demand at a time when lack of demand is already a big problem, and that will make it harder for the economy to recover. So the question is, if the tax increases could be delayed, why couldn't the spending cuts be delayed as well? Delaying the cuts would reduce the risk to the economy without having much impact on long-run debt projections, and it would also preserve the bargaining chip Democrats need to actually get tax increases in the future. If one can be delayed, why not the other, particularly with the shape the economy is in right now? Why does only one side -- the Democrats -- have to make a down payment on the deal by enacting cuts now while the other -- the Republicans -- are only asked for promises about the future?
Republicans will take the spending cuts they can get for now, and perhaps agree to future tax increases -- that isn't certain since there's no deal yet. But if there is a deal, when it comes time to actually implement the tax increases Republicans will make up an excuse as to why it is a really bad time to increase taxes at that time -- employment, growth, the effect on small businesses, they'll find something -- and fight it tooth and nail. So it's not clear Democrats will actually get the tax increases they are promised. Even setting aside worries about undercutting key social programs such as Medicare and Social Security, if the reports are correct this is a bad deal for Democrats.
Posted by Mark Thoma on Thursday, July 21, 2011 at 12:06 PM in Economics |
Robert Shiller is less than impressed with Reinhart and Rogoff's warning that "when government debt exceeds 90% of GDP, countries suffer slower growth":
Debt and Delusion, by Robert J. Shiller, Commentary, Project Syndicate: Economists like to talk about thresholds that, if crossed, spell trouble. ... Consider, for example, the debt-to-GDP ratio..., debt (which is measured in currency units) and GDP (which is measured in currency units per unit of time) yields a ratio in units of pure time. There is nothing special about using a year as that unit. ...
If economists did not habitually annualize quarterly GDP data..., if they habitually decadalized GDP [i.e. used total GDP over 10 years as the standard measure] ..., Greece’s debt burden would be 15%. From the standpoint of Greece’s ability to pay, such units would be more relevant, since it doesn’t have to pay off its debts fully in one year (unless the crisis makes it impossible to refinance current debt). ... Most people never think about this when they react to the headline debt-to-GDP figure.
A paper written last year by Carmen Reinhart and Kenneth Rogoff ... found that when government debt exceeds 90% of GDP, countries suffer slower growth... But if one reads their paper carefully, it is clear that Reinhart and Rogoff picked the 90% figure almost arbitrarily. They chose, without explanation, to divide debt-to-GDP ratios into the following categories: under 30%, 30-60%, 60-90%, and over 90%. And it turns out that growth rates decline in all of these categories as the debt-to-GDP ratio increases, only somewhat more in the last category.
There is also the issue of reverse causality. Debt-to-GDP ratios tend to increase for countries that are in economic trouble. If this is part of the reason that higher debt-to-GDP ratios correspond to lower economic growth, there is less reason to think that countries should avoid a higher ratio, as Keynesian theory implies that fiscal austerity would undermine, rather than boost, economic performance. ...
The lesson is simple: We should worry less about debt ratios and thresholds, and more about our inability to see these indicators for the artificial – and often irrelevant – constructs that they are.
High unemployment also lowers long-run economic growth, but we aren't we putting nearly as much effort into that problem as we are into austerity. Where are the White House meetings with key Republican leaders over what to do about the unemployment problem? True, Republicans might not show up show up for such a meeting, but so what? Pictures of empty chairs at a meeting focused on helping the unemployed would send a strong message about what really counts for the GOP. Unfortunatley, Democrats seem to have forgotten about the unemployed as well -- right now all the chairs are empty -- and that sends a strong message as well.
Posted by Mark Thoma on Thursday, July 21, 2011 at 11:34 AM in Budget Deficit, Economics |
I keep expecting -- hoping more than expecting I suppose -- that my pessimistic view of the labor market will be overturned by incoming data. So far, that hasn't happened:
Weekly Initial Unemployment Claims increase to 418,000
With the two political parties competing to see which party can cut the most from the deficit immediately and make things even worse, as Paul Krugman says, "The Serious People are determined to destroy all the advanced economies in the name of prudence."
Posted by Mark Thoma on Thursday, July 21, 2011 at 09:00 AM in Unemployment |
A strong labor movement seems to be the key to progressive policies. But if, as in the US, labor unions are losing power, is there a viable alernative?
Is there a viable progressive politics that doesn’t hinge on a strong labor movement?, by Lane Kenworthy: ...Here’s what we know from the experiences of the world’s rich democracies: Relative to other nations, those in which labor is highly organized are more likely to have an influential social democratic and/or Catholic center-right (emphasis on center) political party, a proportional representation electoral system, well-organized employers, formal or informal-but-institutionalized participation by labor and business associations in the policy-making process, generous social insurance programs and complementary programs to help households that fall between the social insurance cracks, expansive public services, similar long-run economic growth, a fairly egalitarian distribution of individual wages and household incomes, reliable economic security, extensive economic mobility, and generous holiday and vacation time.
Sorting out the causality is a bit tricky, but it seems probable that labor organization has contributed to most, if not all, of these outcomes. If you want progressive policies, the comparative historical evidence suggests it’s very helpful to have a strong labor movement. Indeed, after democracy, it might well be the single most valuable thing to have.
But what if you live in a country with labor unions that are weak, and getting weaker? What if your country is the United States?
You might choose to focus on strengthening the union movement. Or you might seek an alternative view (“theory of politics”) about conditions for feasible and sustainable progressive policy change. Is there any such view? I think so.
Forge whatever electoral coalition you can, including but not necessarily centered on unions. Organize sympathetic interest groups into single- or multi-issue movements and coalitions. Build up a network of think tanks, journalists, bloggers, and other organizations and individuals to identify and expose the strategies and plans of opposing forces. Offer worthy, workable policy ideas and try to get them (or some acceptable version of them) passed when possible. Aim for big policy advances in rare favorable moments and small ones the rest of the time. (Examples of big ones in American social policy: universal public K-12 schooling, Social Security, unemployment insurance, AFDC, minimum wage, Medicare, Medicaid, Food Stamps, Affordable Care Act. Examples of smaller ones: Head Start, indexing of Social Security benefits to inflation, EITC (it later got big), expansion of EITC and indexing it to inflation, child tax credit, S-CHIP, periodic minimum wage increases.) If your favored programs work well, people will like them. They’ll therefore be difficult — not impossible, but difficult — for the other side to weaken or remove when it’s in power. This last element of the strategy, avoiding policy reversals, is critical, and it’s aided by the array of veto points in the American policy-making process (though there’s also this).
This is a second-best strategy, to be sure. But in the American context it may be the only practicable one. ...
For the moment, the only institution powerful enough to counterbalance the power of firms is government, and even its powers are doubtful given the degree to which wealthy interests can influence policy. Ensuring that working class households have the health and dental care they need, security in old age, a safe place to work, insurance against job loss, affordable higher education, and an equitable share of economic gains would do a lot to help restore what workers have lost since the 1970s.
Posted by Mark Thoma on Thursday, July 21, 2011 at 12:42 AM in Economics, Market Failure, Unemployment |
Casey Mulligan's claim that the unemployment problem is largely due to lack of motivation among younger workers ("the degree to which people would like to have a job"), and that this disproves Keynesian economics, prompts a shrill response from Arin Dube:
Searching for jobs: good thing Casey Mulligan doesn’t need to, by Arin Dube: Tearing down Casey Mulligan’s “discoveries” of evidence against Keynesianism is probably ill-advised: these are not serious arguments, and rebutting them may dull one’s acumen. Nevertheless, once again I will sacrifice some brain cells and bite the bullet—consider it the provision of a minor public good.
OK, so in his most recent post, Mulligan claims that the differential trends in employment among older and younger workers over the Great Recession shows that Keynesian arguments are wrong. He says:
Many elderly people, for example, saw the market values of their homes and retirement assets plummet in 2008 and feel they can no longer afford to be retired. Naturally, many of them react by looking for work. The blue and green lines in the chart show that the elderly have been much more successful than the general population at obtaining and retaining jobs. These findings contradict the Keynesian narrative of the labor market, in which the marketplace fails to recognize the degree to which people would like to have a job.
Except that they do no such thing. Being in a Keynesian demand-constrained equilibrium, where there are less jobs (say N) than people looking for them (say L), says nothing about who gets those jobs. If older people are finding it harder to retire due to the bursting of the housing bubble and hence stay in the labor force, that adds to L. If everyone searching for a job has an equal chance of getting one, this will mechanically increase the employment-to-population rates among the elderly, even while the total number of jobs stays constant at N. It just means that someone else didn’t get that job, which tends to push down the employment rates of non-elderly.
If further the elderly search more intensely due to retirement asset losses, then they will be even more likely to find jobs and will be even more likely to displace others looking for jobs, even as the total number of jobs remains constant at N. Comparing trends in employment across different groups cannot help us understand if the total number of jobs is rationed. There is literally nothing in any of the “findings” that Mulligan reports in that post that has any bearing on whether we are in a demand constrained equilibrium.
Along with Mulligan’s fallacious use of seasonality to detect the power of labor supply in deep recessions, this constitutes the set of variation that is orthogonal to what’s required for credible identification of job rationing. Less technically, Mulligan is hating on Keynes in all the wrong places.
By the way, there are serious researchers who have looked at rationing versus other types of unemployment (like search frictions) in the labor market, and characterized equilbria that differ by the phase of the business cycle. An important paper is by Emmanuel Saez and coauthors, who show why unemployment insurance should be countercyclical because jobs tend to be rationed during recessions—one person’s getting a job means another person not getting one—while during booms that is not the case.
Is the problem, as Mulligan claims, that there are plenty of jobs for motivated, workers, but workers aren't willing to work? Or is it that workers are willing to work, but no jobs are available?
Workers were plenty willing to work before the economy crashed, and despite claims that unemployment insurance and other social insurance programs have somehow eroded the will to work, the evidence points overwhelmingly to lack of demand as the fundamental problem. Telling workers it's their own fault, they aren't trying hard enough, puts blame where it doesn't belong and misdirects attention from the true problem. When the jobs return -- sooner with the help of job creation programs or later without -- people will take them.
Posted by Mark Thoma on Thursday, July 21, 2011 at 12:33 AM in Economics, Unemployment |
Posted by Mark Thoma on Wednesday, July 20, 2011 at 10:21 PM in Economics, Links |