...From my perspective, it is fine--not optimal, but fine--that Barack Obama is not a liberal. Somebody pursuing effective technocratic centrist policies that work would be an enormous asset to the world right now.
The fear of all of us is that Obama is not just not a liberal, but that he is not a technocrat--and not a particularly good manager either. If you judge policies not by whether they work but by whether centrist worshippers of bipartisanship approve of them, don't be surprised to find yourself up to your neck...
Saturday, November 19, 2011
No matter how much the Democrats give up in negotiations, the media still accuses them of refusing to compromise:
Supercommittee Democrats Insist on Not Giving Republicans Everything, by Dean Baker: In much of the media it is the rule that both parties are equally to blame regardless of what the facts of the situation are. Hence the lead sentence in the Post's article on the supercommittee's deadlock tells readers:"Congressional negotiators made a yet another push Friday to carve $1.2 trillion in savings from the federal debt, but remained stuck in their entrenched positions on tax policy even as the clock was running down on their efforts to reach a deal."
It would be interesting to know how the Post decided that the Democrats have an entrenched position. They have offered dozens of plans, many of which would not involve having the rates return to their pre-Bush level, as is specified in current law. By contrast, the Republicans have consistently put forward proposals that would keep the taxes on the wealthy at their current level or lower them further.
Even though the Democrats have shown every willingness to cave, the Post refuses to give them credit for it.
I wish this was accurate, i.e. that Democrats did have an entrenched positions on tax increases and other things. We call these principles, and there's nothing wrong with having them or defending them.
- Laura D'Andrea Tyson: Tackling Income Inequality - NYTimes.com
- Fed’s Williams: Fiscal Policy Actions ‘Badly Needed’ - WSJ
- Delusions Of Mobility - Paul Krugman
- Job creation by small firms: Age matters - macroblog
- Nudging: When incentives do (and don't) work - New Economist
- Stop the Austerity Train Wreck! - Robert Reich
- God bless income disparity - FT Alphaville
- The Anatomy of Global Economic Uncertainty - Mohamed El-Erian
- What Makes a Bank Look Like a Bank? - Liberty Street
Friday, November 18, 2011
The failure to do a bad thing is a good thing:
Failure Is Good, by Paul Krugman, Commentary, NY Times: It’s a bird! It’s a plane! It’s a complete turkey! It’s the supercommittee!
By next Wednesday, the so-called supercommittee, a bipartisan group of legislators, is supposed to reach an agreement on how to reduce future deficits. Barring an evil miracle — I’ll explain the evil part later — the committee will fail to meet that deadline. ...
Why was the supercommittee doomed to fail? Mainly because ... Republicans and Democrats don’t just have different priorities; they live in different intellectual and moral universes.
In Democrat-world, up is up and down is down. Raising taxes increases revenue, and cutting spending while the economy is still depressed reduces employment. But in Republican-world, down is up. The way to increase revenue is to cut taxes on corporations and the wealthy, and slashing government spending is a job-creation strategy. ...
Moreover, the parties have sharply different views of what constitutes economic justice. Democrats see social insurance programs, from Social Security to food stamps, as serving the moral imperative of providing basic security to our fellow citizens and helping those in need.
Republicans have a totally different view..., they view the welfare state as immoral, a matter of forcing citizens at gunpoint to hand their money over to other people. ...
Why did anyone think this would work?
Well, maybe the idea was that the parties would compromise out of fear that there would be a political price for seeming intransigent. But this could only happen if the news media were willing to point out who is really refusing to compromise. And they aren’t..., the G.O.P. pays no price for refusing to give an inch.
So the supercommittee will fail — and that’s good.
For one thing, history tells us that the Republican Party would renege on its side of any deal as soon as it got the chance. ... So any deal reached now would, in practice, be nothing more than a deal to slash Social Security and Medicare, with no lasting improvement in the deficit.
Also, any deal reached now would almost surely end up worsening the economic slump. Slashing spending while the economy is depressed destroys jobs... Better to have no deal than a deal that imposes spending cuts in the next few years. ...
Eventually, one side or the other of that divide will get the kind of popular mandate it needs to resolve our long-run budget issues. Until then, attempts to strike a Grand Bargain are fundamentally destructive. If the supercommittee fails, as expected, it will be time to celebrate.
Richard Green highlights a new report on mortgage lending:
Read CRL on Disparities in Mortgage Lending, by Richard Green: The Center for Responsible Lending's research team of Carolina Reid (who has been working tirelessly at developing data on subprime mortgages for some time now), Roberto Quercia, We Li, and Debbie Grunstein Bocian has produced Lost Ground, 2011: Disparities in Mortgage Lending and Foreclosures. They argue(1) The nation is not even halfway through the foreclosure crisis. Among mortgages made between 2004 and 2008, 6.4 percent have ended in foreclosure, and an additional 8.3 percent are at immediate, serious risk.(2) Foreclosure patterns are strongly linked with patterns of risky lending. The foreclosure rates are consistently worse for borrowers who received high-risk loan products that were aggressively marketed before the housing crash, such as loans with prepayment penalties, hybrid adjustable-rate mortgages (ARMs), and option ARMs. Foreclosure rates are highest in neighborhoods where these loans were concentrated.(3)The majority of people affected by foreclosures have been white families. However, borrowers of color are more than twice as likely to lose their home as white households. These higher rates reflect the fact that African Americans and Latinos were consistently more likely to receive high-risk loan products, even after accounting for income and credit status.
It is really striking how African-Americans and Hispanics were steered into crappy loans, even controlling for income and credit history. Beyond all this, the web site accompanying the report has really nicely organized data on severely delinquent loans and loans in foreclosure by state, race, ethnicity and MSA.
Do minimum wages drive industrialization?, by Chris Blattman: Minimum wages kill employment, right?
Maybe not..., evidence from Indonesia’s industrialization:
Big Push models suggest that local product demand can create multiple labor market equilibria: one featuring high wages, formalization, and high demand and one with low wages, informality, and low demand. I demonstrate that minimum wages may coordinate development at the high wage equilibrium.
formal employment increases and informal employment decreases in response to the minimum wage. Local product demand also increases, and this formalization occurs only in the non-tradable, industrializable industries
A new paper from Jeremy Magruder.
- United States of Hunger - NYTimes.com
- Changes in Unionization Rates in Rich Countries - CEPR
- Demand, Demand, Demand - Paul Krugman
- Fed Hawks, Doves Want Policy Restrictions - WSJ
- ECB crisis actions: The printing press perspective - Hans-Werner Sinn
- Fed’s Dudley: We Aren’t Out of Ammunition - WSJ
- The Bush tax cuts are tripping up the supercommittee - Ezra Klein
- Why Not Break Up Citigroup? - Simon Johnson
- Charts of the day, corporate income-tax edition - Felix Salmon
- The ECB's internal contradictions - Nick Rowe
- Poor Consumer Spending is Indeed a Problem - Modeled Behavior
- Economic Mobility Project - Pew
- Subsiding Inflation - Paul Krugman
Thursday, November 17, 2011
If you are anywhere near Eugene today:
Noted expert on Europe's economy to speak on campus, UO Communications: Economist and political scientist Barry Eichengreen of the University of California, Berkeley, whose opinions have been widely sought by international media covering the European financial crisis, will deliver a lecture on the "Europe's Never-Ending Crisis" at 7:30 p.m., Thursday, Nov. 17, at the University of Oregon.
Eichengreen will address the causes of Europe's debt and financial crisis, as well as elaborate on the potential impacts on both the U.S. and world economy. The event will be held in 100 Willamette Hall, 1371 E. 13th Ave.
Admission is free, with the lecture content designed to reach a general public audience.
Robert Kuttner is unhappy with the Washington Post:
Post Hoc Fallacy, by Robert Kuttner, Prospect: Wednesday’s Washington Post deserves some kind of perverse award for advocacy journalism—in this case, for advocating the proposition that dire economic consequences will ensue if the congressional Super Committee fails to cut a deal for drastic deficit reduction. This is, of course, one side of an argument.
Those on the other side, including myself, have argued that austerity in a deep recession makes no economic sense...
Moreover, Social Security does not belong in this conversation, and Democrats are better off, substantively and politically, defending it against Republican proposed cuts rather than lumping it in with budget talks....
The Post has been an editorial champion of the Super Committee and austerity politics, and of the bogus claim that Social Security is partly responsible for the current deficit...
A companion piece, by Ann Kornblut, was headlined, “White House Girds for Failure.” ... OMB Director Jack Lew is quoted, “I think it’s important that they succeed.” Again, the subtext of the piece is that the economy really needs this deal.
But the absolute corker is a companion piece by Neil Irwin and Ylan Q. Mui, with the economically absurd headline and premise, “Supercommittee could add uncertainty to holiday shopping.”
The writers quote leaders of trade associations saying that the committee needs to act to restore confidence. This is Paul Krugman’s famous "confidence fairy." ...
So let’s get this straight. If the committee does agree to cut the budget by some $1.2 trillion, including people’s Medicare, Medicaid, and Social Security, that will make them more likely to go out and shop. But if the committee fails to extract cuts—putting off budget austerity until 2013—that will make people more hesitant to spend? Where do these people study their economics? ...
The Super-Duper Job Creation Committee is, of course, nowhere to be found.
Do you agree with this?:
Summers also tried to defend inequality, at least in part, by saying that “suppose the United States had 30 more people like Steve Jobs” — that, he said, would be a good thing even as it increased inequality. “So we do need to recognize that a component of this inequality is the other side of successful entrepreneurship; that is surely something we want to encourage.”
Now there is nothing new in this view. It is an argument for inequality that reminds me of Ted Baxter (from the Mary Tyler Moore Show) who intended to have six children in the hope that one of them grows up to solve the population problem. The inequality version is that we accept inequality in the hopes of getting the fruits of entrepreneurship.
So no one disagrees with encouraging entrepreneurship. ... But when we link it to inequality in this way we are asking ... whether the poor (or middle class) are happy outsourcing knowledge creation and are each willing to pay a bit to see that happen.
Seen in this light, the problem of inequality is a design problem. This is something that Jean Tirole and Glen Weyl have recently investigated. They ask a related question: when is it a good idea to confer entrepreneurs with market power (as a reward)? The answer turns out to be, when the government does not know much about the nature of demand for innovative products. In this world, by exposing entrepreneurial rewards to what they can get through monopoly pricing, we screen for innovations that maximize the gap between innovative benefits and innovative costs. The implication here is that if we outsourced innovation to creative geniuses, we would do it in a way that allows them to charge high prices.
But does that carry over when there is real inequality? Let’s face it, the actual products Steve Jobs produced were not priced for the poor. The best we can say is that when they were imitated the poor received some benefits (which may also be arguable). So is it really the case that poorer people would be willing to be taxed more (by government or through monopoly pricing) in order to bring out more people like Steve Jobs? Instead, the Steve Jobs argument is surely one for a lateral wealth transfer from those with wealth — innovators or not — to be more concentrated amongst those who innovate. It is inequality in talent and skill and its mismatch to wealth that drives the argument not inequality in wealth.
It takes a village to make an iPad.
I've been wondering why the Fed hasn't lowered the interest it pays on bank reserves from its current value of .25 percent to zero. It probably wouldn't do much, but it would slightly lower the incentive for banks to hold cash rather than loaning it out, and more loans would help to spur the economy, so why not give it a try? In addition, unlike some other policies the Fed might pursue, this would be easily reversible, and it would help to convince critics that the Fed is trying everything it can think of.
Though it's buried deep within the post, the NY Fed explains the FOMC's reluctance to pursue this option. The argument is that it's possible for some interest rates to go slightly negative, and if they do it will cause various problems the Fed would rather avoid (see below). Since banks can borrow from anyone charging less than the rate they earn on reserves and arbitrage the difference away, paying interest on reserves puts a floor on interest rates. Here's the full argument:
Why Is There a “Zero Lower Bound” on Interest Rates?, by Todd Keister, Liberty Street: Economists often talk about nominal interest rates having a “zero lower bound,” meaning they should not be expected to fall below zero. While there have been episodes—both historical and recent—in which some market interest rates became negative, these episodes have been fairly isolated. In this post, I explain why negative interest rates are possible in principle, but rare in practice. Financial markets are generally designed to operate under positive interest rates, and might experience significant disruptions if rates became negative. To avoid such disruptions, policymakers tend to keep short-term interest rates above zero even when trying to loosen monetary policy in other dimensions. These policy choices are the source of the zero lower bound.
The standard description of the zero lower bound begins with the observation that the nominal interest rate offered by currency is always zero: If I hold on to a dollar bill, I’ll still have one dollar tomorrow, next week, or next year. If I invest money at an interest rate of -2 percent, in contrast, one dollar of saving today would become only ninety-eight cents a year from now. Because everyone has the option to hold currency, the argument goes, no one would be willing to hold some other asset or investment that offers a negative interest rate.
This argument is only part of the story, however. Safeguarding and transacting with large quantities of currency is costly. One only needs to imagine the risk and hassle of making all transactions in cash—paying the rent or mortgage, utility bills, etc.—to appreciate the safety and convenience of a checking account. Many individuals would likely be willing to keep funds in deposit accounts even if these accounts pay a negative interest rate or charge maintenance fees that make their effective interest rate negative.
Large institutional investors are in a similar situation. They use a variety of short-term investments, such as lending funds in the “repo” (repurchase agreement) market and holding short-term Treasury bills, in much the same way individuals use checking accounts. These investments will remain attractive to large investors even at negative interest rates because of the security and convenience they offer relative to dealing in currency. Some repo rates did in fact become negative in 2003 (see this New York Fed study) and again more recently (see Bloomberg). Interest rates in the secondary market for Treasury bills have also been slightly negative recently (see Businessweek).
In other words, market interest rates can move somewhat below zero without triggering a massive switch into currency. Nevertheless, central banks typically maintain positive short-term interest rates even while using less conventional tools (such as large-scale asset purchases) to provide additional monetary stimulus.
The Federal Reserve, for example, currently pays an interest rate of 0.25 percent on the reserve balances that banks hold on deposit at the Fed. The ability to earn this interest gives banks an incentive to borrow funds in a range of markets (including the interbank market and the repo market) and thus has the effect of keeping market interest rates positive most of the time. The Federal Open Market Committee (FOMC) discussed the idea of reducing the interest on reserves (IOR) rate at its September meeting, but no action was taken. Reducing this rate would tend to lower short-term market interest rates and might push some rates below zero. The minutes from the meeting report that “many participants voiced concerns that reducing the IOR rate risked costly disruptions to money markets and to the intermediation of credit, and that the magnitude of such effects would be difficult to predict.”
Similarly, the Monetary Policy Committee (MPC) of the Bank of England discussed the possibility of lowering the official Bank Rate below 0.5 percent at its September meeting, but decided against doing so. The MPC had previously expressed concern that “a sustained period of very low interest rates would impair the functioning of money markets.”
Some examples of areas where disruptions could potentially arise in U.S. financial markets are:
- Money market mutual funds: Money market funds operate under rules that make it difficult for them to pay negative interest rates to their investors, either directly or by assessing fees. Many of these funds would likely close down if the interest rates they earn on their assets were to fall to zero or below, possibly disrupting the flow of credit to some borrowers.
- Treasury auctions: The auction process for new U.S. Treasury securities does not currently permit participants to submit bids associated with negative interest rates. If market interest rates become negative, new Treasury securities would be issued with a zero interest rate—effectively a below-market price—and bids would be rationed if demand exceeds supply. Such rationing, which has occurred in recent auctions, would generate an incentive for auction participants to bid for more than their true demand, leading to even more rationing. This situation could generate market volatility, as unexpected changes in the amount of rationing in each auction could leave some investors holding either many more or many fewer securities than they desire.
- Federal funds: A decrease in the IOR rate would also likely affect the federal funds market, where banks and certain other institutions lend funds to each other overnight. A lower IOR rate would give banks less incentive to borrow in this market, which would likely decrease the amount of activity. When less activity takes place, the market interest rate will be influenced more by idiosyncratic factors, making it a less reliable indicator of current conditions. This decoupling of the federal funds rate from financial conditions could complicate communications for the FOMC, which operates monetary policy in part by setting a target for this rate.
These examples demonstrate that many current institutional arrangements were not designed with near-zero or negative interest rates in mind. In principle, these arrangements—such as the rules governing mutual funds and Treasury auctions—could be changed. The implementation of a “fails charge” in 2009 for the settlement of Treasury securities (see this New York Fed study) is one example of an institutional adaptation that allows markets to function better at very low interest rates. (A similar charge is scheduled to take effect in some mortgage-related markets in February 2012.) In practice, however, such changes may take significant time to implement and could simply move disruptions to other markets.
Given the markets’ limited experience with very low interest rates, it is difficult to predict with any degree of certainty how they will react to them. If the types of disruptions described above turn out to be significant, taking steps to lower short-term interest rates could actually make financial conditions tighter rather than looser and thus hinder the economic recovery. To avoid this outcome, policymakers tend to choose policies that keep market interest rates positive. In other words, the potential for negative interest rates to disrupt financial markets limits the extent to which policymakers can stimulate economic activity by lowering interest rates. This limit is known as the zero lower bound.
- America’s New Robber Barons - Jeff Madrick
- The not-so-original sin of finding others to pay for it - Antonio Fatas
- Why conservatives can't get people to work hard - Noahpinion
- As Graduates Move Home, Economy Feels the Pain - NYTimes.com
- Is light-touch regulation passé? - Vox EU
- Are Digital Resale Markets Legal? Should They Be? - Digitopoly
- Is America's financialization China's fault? - Noahpinion
- Mario Savio Memorial Lecture - Robert Reich
- Irving, Maynard, and Me (Wonkish) - Paul Krugman
- That's worse than the approval rating of Jim Caldwell - Tim Haab
- I’m back - New Economist
- How Do Recessions Affect the C-Suite? - Freakonomics
- The attack on election forecasting straw men - Brendan Nyhan
Wednesday, November 16, 2011
So, with inflation fears falling, the Fed is more likely to act, right? Don't set your hopes too high:
But not all members of the FOMC share this sentiment. From the WSJ story:
John Williams, who leads the San Francisco Fed, Tuesday joined a rising chorus of central bank officials calling for continued action to bolster the economy.
But it also says:
Other officials remain staunchly opposed to taking further unconventional steps to spur growth, such as buying more mortgage bonds–and Lacker is among them.
And there's this from Boston:
While the Fed is taking it's time trying to figure out what to do, it should remember how many people are hoping that somebody does something to spur job creation, that most of the forces driving the recent spurt of headline inflation appear to be temporary (as today's data attests), and that the economic outlook is very risky -- we could use some insurance against future problems (especially with evidence that the potential cost of that insurance, i.e. the potential for inflation, is falling).
In a day that euro-era records tumbled, Italian yields moved through 7 per cent – a level viewed as unsustainable – for the second time in a week. The Spanish premium to Germany hit 482bp, above the critical 450bp rate at which Irish and Portuguese yields spiralled out of control and forced both countries into international bail-outs. Belgium also saw its bonds’ spread over German debt reach record levels of 314bp.
The proximate cause of the sell-off appears to have been the weak GDP 3Q GDP report:
Europe’s economic expansion failed to accelerate in the third quarter as Germany and France struggle to shore up a region bracing for a recession sparked by an escalating debt crisis.
Gross domestic product increased 0.2 percent from the previous three months, when it rose at the same pace, the European Union’s statistics office in Luxembourg said in a statement today. That matched the median forecast of 39 economists surveyed by Bloomberg News. From a year-earlier, GDP increased 1.4 percent. A separate report showed that German investor confidence fell to a three-year low in November.
One would normally anticipate that as growth decelerated, bond yields would fall in expectation of monetary easing. Not so in Europe, as slower growth fosters fear of sovereign default as deficits widen. As is well known at this juncture, the response of policymakers will be to enact deeper austerity measures, which will in turn slow growth further. Not what one would call a path to a good equilibrium.
For its part, the ECB continues to dabble in bond markets, although to limited effect, failing to hold Italian yields below 7%. Market participants are convinced that the ECB will step up to the plate eventually and act as a real lender of last resort, completely backstopping sovereign debt in the Eurozone. Monetary policymakers, however, are digging in their heels:
The president of Germany’s powerful Bundesbank has firmly rebuffed international demands for decisive intervention in the bond markets by the European Central Bank to combat the eurozone debt crisis, warning that such steps would add to instability by violating European law...“I cannot see how you can ensure the stability of a monetary union by violating its legal provisions,” Mr Weidmann argued. “I don’t see how you can build trust in a system that violates laws.”
Fiddling while Rome burns. Literally. One has to believe expectations of a ECB backstop are warranted, otherwise there is little if any hope for the Euro. That said, given ECB resistance to the idea, I am beginning to believe that we will need a "Lehman" event to force their hand - at which point, of course, it would already be game over for the European financial situation.
In any event, time is running short. From Bloomberg:
The ECB mops up the liquidity created by its purchases of distressed government bonds -- 183 billion euros ($251 billion) so far -- to prevent them from fueling inflation and ensure it can’t be accused of financing profligate governments.
Rabobank economist Elwin de Groot estimates that there is a “natural limit” of 300 billion euros the ECB can sterilize. “If it maintained a pace of 11 billion additional purchases each week, the average amount of purchases in the period August- September, it would hit that natural limit by mid-January,” De Groot said in a note to investors today.
When the ability to sterilize evaporates, the ECB will have to choose between expanding the balance sheet or ceasing to purchase additional Italian and Spanish bonds. In the meantime, the ECB appears to be waiting for troubled European governments to enact just the right amount of austerity to boost confidence and send private investors scrambling for European debt. They seem to be completely ignorant that the debt-deflation dynamic in place only erodes confidence further.
Meanwhile, the Greece situation remains unresolved. From the Athens Times:
Greece's conservative party leader on Monday vowed to reject any toughening of austerity measures in return for a multi-billion euro bailout, signalling the new coalition government may not enjoy the kind of cross-party support demanded by lenders.
New Democracy leader Antonis Samaras said he would not vote for any new austerity measures and added that the policy mix of spending cuts and tax rises agreed with international lenders should be changed in favour of economic growth......Crucially, Samaras said he would not sign any letter pledging support for conditions on a 130bn euro bailout as EU Economic and Monetary Affairs Commissioner Olli Rehn has demanded.
Another game of chicken. One of the two must back down, it is thought, else the end result is something no one wants, an immediate Greek default. But here again is an opportunity for another Lehman moment.
And while the the European financial system remains in jeopardy, a heavily trumpeted, supposedly key piece of the firewall, remains mired in technical difficulties, as efforts to leverage up the EFSF look doomed to fail. From Reuters:Efforts to amplify the power of the euro zone's rescue fund and convince markets the bloc can handle its debt crisis risk being undermined by delays, surging bond yields and limited investor interest, potentially ruining the plan altogether.
See also FT Alphaville on rising EFSF spreads. Not exactly an auspicious beginning.
Side note - Isn't investor participation in the EFSF inherently risky from Europe's point of view? What is to prevent market participants from launching a speculative attack on both the bonds of the EFSF and the bonds of trouble nations? Indeed, it seems like the existence of a investor dependent ESFS would only enhance the power of speculative attacks. What am I missing hear?
Any way you cut it, the end result is recession in Europe. For Wall Street and Washington, the question remains: Will the US decouple, gaining traction while Europe flounders? Or will the US be caught in the downdraft? I remain cautious on the US outlook, despite recent possitive data. If the US suffers from Europe's malaise, I don't think it would be evident before next year, which means I take little solace in the near term data flow.
Bottom Line: The European situation remains tenuous. Indeed, I am not sure any real progress has been made in the last few months - certainly not if the bond markets are any guide. It will continue to get worse before it gets better, and I worry that a Lehman event will be the only thing that draws in the ECB.
Update: Zero Hedge attributes the bond sell-off not to GDP weakness, but to poor auctions.
- Middle-Class Neighborhoods Shrinking - NYTimes.com
- All the supercommittee proposals in one post - Suzy Khimm
- Austrian Monetary Mental Mysteries - Brad DeLong
- American Migration Reaches Record Low - NYTimes.com
- No (or at least little) net loss of jobs from regulation - Berkeley Blog
- Fed’s Evans Seeks To ‘Take New Chances’ on Monetary Policy - WSJ
- Saving the Euro: Germany's Central Bank against the World - Spiegel
- The Federal Reserve's Dual Mandate - FRB Chicago
- Bullard: "I love Hayek" - WSJ
- Regulators encouraging banks to game risk models - Finance Addict
- ECB Determined to Go Down with the Ship? - Twenty-Cent Paradigms
- Why isn't NGDP targeting a lefty thing? - Nick Rowe
- Italy’s fundamentals aren’t worse than usual - James Mcdonald
- The Balanced Budget Amendment Delusion - Bruce Bartlett
- Entrepreneurship and inequality - Digitopoly
- Meltdown redux - David Cay Johnston
- Some Unpleasant Fisherian Arithmetic - Uneasy Money
- Exports in the Recovery (II) - Econbrowser
Tuesday, November 15, 2011
I wrote a longer version of the post on Congress and insider trading laws for CBS News:
Is there any reason that Congress should be allowed to profit from inside information?
The Myth of the Wealthy Elderly, by Dean Baker: The austerity gang seeking cuts to Social Security and Medicare has been vigorously promoting the myth that the elderly are an especially affluent and privileged group. Their argument is that because of their relative affluence, cuts to the programs upon which they depend is a simple matter of fairness. There were two reports released last week that call this view into question.
The first was a report from the Census Bureau that used a new experimental poverty index. This index differed from the official measure in several ways; most importantly it includes the value of government non-cash benefits, like food stamps. It also adjusts for differences in costs by area and takes account of differences in health spending by age.
While this new measures showed a slightly higher overall poverty rate the most striking difference between the new measure and the official measure was the rise in the poverty rate among the elderly. Using the official measure, the poverty rate for the elderly is somewhat lower than for the adult population as a whole, 9 percent for the elderly compared with 14 percent for the non-elderly adult population. However with the new measure, the poverty rate for the elderly jumps to 14 percent, compared with 13 percent for non-elderly adults.
By this higher measure, we have not been nearly as successful in reducing poverty among the elderly as we had believed. While Social Security has done much to ensure retirees an income above the poverty line, the rising cost of health care expenses not covered by Medicare has been an important force operating in the opposite direction. ...
It is also worth remembering that the Medicare premium is projected to rise considerably more than the cost of living each year. This means that as retirees age, rising Medicare premiums will be reducing the buying power of their Social Security check each year. And this is the median; half of all seniors will have less income than this to support themselves.
This is the group that the Very Serious People in Washington want to target for their deficit reduction. While the Very Serious People debate whether people who earn $250,000 a year are actually rich when it comes to restoring the tax rates of the 1990s, they somehow think that seniors with incomes under $30,000 a year must sacrifice to balance the budget. There is a logic here, but it ain’t pretty.
Raising the payroll tax limit for Social Security would provide needed revenues in a way that is skewed heavily toward the wealthy. However, it would also be a tax increase and we can't have that. But cutting benefits and putting more of the elderly in jeopardy of living in poverty? Apparently that's not a problem.
Antonio Fatás does his best to paint an optimistic picture for Italy:
Italy: not good but we have seen this before, by Antonio Fatás: It is hard to find much optimism by looking at the Italian economy today:... I will do my best to be a contrarian and argue that maybe it is not as bad as it looks. Or maybe it is, but ... there is some hope. ...
Below is the Italian government debt expressed as % of GDP. There are two lines, the gross and net values of government debt. Net debt is a more appropriate measure as it ... is equivalent to what is referred to in the US as "government debt held by the public". ...
...If we focus on net debt the current level of debt is significantly below what it was in 1994. So Italy has seen similar or higher levels of debt before.
We can then argue that those times were different, that Italy had its own currency (although it was heading towards the Euro) and that a combination of high inflation and fast growth allowed them to stabilize that high level of debt.
Certainly it was not growth that saved them. GDP growth in Italy has been low during this period of time..., clearly below the growth in other Euro countries... What about interest rates? Maybe the government of Italy did not face the high interest rates that they face today? Below is a chart of the 10-year interest rate for Italian government bonds.
As it is clear from the chart, financial conditions back in 1994-1995 were extremely difficult for the Italian government with nominal interest rates as high as 12%. Much higher than the current levels of 6-7% that look unsustainable. Of course, what matters is not nominal rates but real rates (what really matters is the difference between interest rates and growth but I do not have that chart ready in my computer). Below is a chart with real rates that confirms that interest rates today remain low compared to the ones faced by Italy in 1994-95.
Here is what I learn... To my surprise, and the surprise of many, Italy has managed to sustain a very high level of debt even when facing high interest rates by generating large enough primary surpluses. And it has done so with a political environment that has been volatile and in some cases driven by very poor choices. Does it mean that they can keep going like this forever? No... But ... it is interesting to see when we look back at history that a similar episode did not automatically lead to default even with poor economic policy choices. And if you want to be even more optimistic, there is some hope that this crisis is not wasted and the future Italian government finds an even better way to manage a very difficult situation.
- Is America following Japan? - The Economist
- Ignorance of Crowds - Cheap Talk
- Mental Monetary Disorders - Paul Krugman
- A Moment Among the Minskians - The Straddler
- Culture in Economics - Raquel Fernandez
- Whitney Gets it Right - Underbelly
- Tyler Cowen channels Mr Potter - Richard Green
- The Euro Zone Crisis and the U.S.: A Primer - NYTimes.com
- Economist Glenn Hubbard: ‘We need a radical change’ - Ezra Klein
- The ECB Needs the Fed Now More Than Ever - David Beckworth
- Should economists be “imagineers” of our future? - Reuters
- Grade Inflation and Choice of Major - Tim Taylor
- The Evolution of Federal Debt Ceilings - Liberty Street
- What Percentage Lives in Poverty? - Nancy Folbre
- Italy: not good but we have seen this before - Antonio Fatas
Monday, November 14, 2011
Richard Green responds to a 60 Minutes report saying that Congress is not subject to insider trading laws:
David Barker writes that Congress is indeed subject to insider trading laws, by Richard Green: He points me to a paper by Donna Nagy. I will be curious to see if a prosecutor does anything with it.
Here's the abstract to the paper:
Insider Trading, Congressional Officials, and Duties of Entrustment, by Donna M. Nagy, Indiana University Maurer School of Law, Boston University Law Review, Vol. 91, p. 1105, 2011 Indiana Legal Studies Research Paper No. 181: Abstract: This article refutes what has become the conventional wisdom that insider trading by members of Congress and legislative staffers is “totally legal” because such congressional officials are immune from federal insider trading law. It argues that this well-worn claim is rooted in twin misconceptions based on: (1) a lack of regard for the broad and sweeping duties of entrustment which attach to public office and (2) an unduly restrictive view of Supreme Court precedents, which have interpreted Rule 10b-5 of the Securities Exchange Act to impose liability whenever a person trades securities on the basis of material nonpublic information in violation of a fiduciary-like duty owed either to the issuer’s shareholders or to the source of the information. It also argues that nonpublic congressional information constitutes property which, like congressional funds and tangible property, rightfully belongs to the federal government and its citizens.
I will also be curious to see if there's any follow-up on this point. In any case, this unfair advantage that Congress has needs to be stopped.
The editors at Reuters asked if I'd like to respond to an essay by Roger Martin on "The limits of the scientific method in economics and the world." I said I would:
[My response will make more sense (I hope) if you read Roger Martin's essay first.]
The situation in Europe has increased the chances of a recession in the US (extract of extract via):
Future Recession Risks, FRBSF Economic Letter: ...odds are greater than 50% that we will experience a recession sometime early in 2012…. Prudence suggests that the fragile state of the U.S. economy would not easily withstand turbulence coming across the Atlantic. A European sovereign debt default may well sink the United States back into recession…
The Fed appears to be taking some precautions, though perhaps not enough, and a wise Congress would be talking about how to do the same, i.e. how to take action now to insure against the rising future risks. Unfortunatley, wisdom is not the strong suit of this (or any?) Congress, and we'll be lucky if it doesn't make things worse.
Not-So-Super Committee Seriously Considers Becoming A Circular Firing Squad, by Stan Collender: A quick note... This story by Robert Pear in today's New York Times about the latest from the not-so-super committee tells you everything you need to know about the status of the negotiations. According to Pear, one of the main plans for reducing the deficit the committee apparently is considering is to set up a process by which tax increases would be considered by the House Ways and Means and Senate Finance Committees at some point next year.
Does anyone else see how ridiculous this is?
The anything-but-super committee was set up because the regular committees and legislative process could not agree on what to do about the deficit. But rather than make those decisions, the super committee may decide that the best way to deal with this situation is to throw it back to the two tax-writing committees that, because they were unable to come up with a plan in the first place, gave the job to the super committee.
And the most inane, stupid, absurd, remarkable thing about this is that the definitely-not-super committee will claim that this make-someone-else-do-the-hard-work-later process complies with the legal requirement to reduce the deficit by $1.2 trillion.
The fact that they are willing to make cuts in social insurance and other programs but cannot agree on revenue increases says a lot about the relative power and influence of various groups in Washington.
Why is the Veteran's Health Administration "in the crosshairs" of Republicans? Is it because it's an example of socialized medicine that works?:
Vouchers for Veterans, by Paul Krugman, Commentary, NY Times: American health care is remarkably diverse. In terms of how care is paid for and delivered, many of us effectively live in Canada, some live in Switzerland, some live in Britain, and some live in the unregulated market of conservative dreams. One result of this diversity is that we have plenty of home-grown evidence about what works and what doesn’t. ...
And that brings me to Mitt Romney’s latest really bad idea, unveiled on Veterans Day: to partially privatize the Veterans Health Administration (V.H.A.). What Mr. Romney and everyone else should know is that the V.H.A. is a huge policy success story, which offers important lessons for future health reform. ... Multiple surveys have found the V.H.A. providing better care than most Americans receive, even as the agency has held cost increases well below those facing Medicare and private insurers. Furthermore, the V.H.A. has led the way in cost-saving innovation...
And yes, this is “socialized medicine” — although some private systems, like Kaiser Permanente, share many of the V.H.A.’s virtues. But it works — and suggests what it will take to solve the troubles of U.S. health care more broadly.
Yet Mr. Romney believes that giving veterans vouchers to spend on private insurance would somehow yield better results. Why? Well, Republicans have a thing about vouchers. ... The claim, always, is ... that “private sector competition” would lower costs.
But we have a lot of evidence about how private-sector competition in health insurance works, and it’s not favorable. The individual insurance market ... has huge administrative costs and has no demonstrated ability to reduce other costs. ... And the international evidence accords with U.S. experience. ...
So what lies behind the Republican obsession with privatization and voucherization? Ideology, of course. It’s literally a fundamental article of faith in the G.O.P. that the private sector is always better than the government, and no amount of evidence can shake that credo.
In fact, it’s hard to avoid the sense that Republicans are especially eager to dismantle government programs that act as living demonstrations that their ideology is wrong. Bloated military budgets don’t bother them much — Mr. Romney has pledged to reverse President Obama’s defense cuts, despite the fact that no such cuts have actually taken place. But successful programs like veterans’ health, Social Security and Medicare are in the crosshairs.
Which brings me to a final thought: maybe all this amounts to a case for Rick Perry. Any Republican would, if elected president, set out to undermine precisely those government programs that work best. But Mr. Perry might not remember which programs he was supposed to destroy.
- College Tuition, Student Loans, and Unemployment - James Surowiecki
- Deficit Panel Seeks to Defer Details on Raising Taxes - NYTimes.com
- Was Napster the day the music died? - Joel Waldfogel
- Greece, Italy, and financial stability - Econbrowser
- The Folly of the Flat Tax - Alan Blinder
- A proposal for Greg Mankiw's Economics 10 course - Noahpinion
- Supply-Side Solutions? Beware (Wonkish) - Paul Krugman
- The Anthropologists’ Hour - Economic Principals
- Interview with Dean Baker - Plutocracy Files
- A Geography Lesson for the Tea Party - The Washington Monthly
- Iceland and the IMF: Why the capital controls are entirely wrong - Vox EU
- Massive Income Inequality and Achievement among the 99% - Richard Serlin
- Debt supercommittee: Frequently Asked Questions - Washington Post
- Health disparities in the US and China - UnderstandingSociety
Sunday, November 13, 2011
Dean Baker says there's no reason for the middle class to take on most of the burden for deficit reduction:
Dealing With the Budget Deficit: Does the Middle Class Have to Take the Hit?, by Dean Baker: Adam Davidson has a piece in the NYT magazine about how the middle class will have to take a hit to deal with the country’s deficit. It’s a bit quick to reach this conclusion.
First, the piece too quickly dismisses the possibility of getting substantial additional tax revenue from the wealthy. It presents the income share for those earning more than $1 million as $700 billion, saying that if we increase the tax rate on this group by 10 percentage points (from roughly 30 percent to 40 percent), then this yields just $70 billion a year.
However, if we lower our bar slightly and look to the top 1 percent of households, with adjusted gross incomes of more than $400,000..., then we get ... $140 billion a year. ...
There are also other ways to address much of the shortfall. In the case of defense, the baseline projects that military spending will average 4 percent of GDP over the next decade. We had been spending 3 percent of GDP on defense in 2000... If military spending averaged 3 percent of GDP over the next decade, that would save us $2 trillion before interest savings..., it should not be absurd to imagine that we could get by with the same sort of military budget (relative to our economy) that we actually had a decade ago.
Another way in which we could have substantial savings that would be relatively painless is to have the Fed simply keep the bonds that it has purchased as part of its various quantitative easing operations. It currently holds around $3 trillion in bonds. The interest on these bonds is paid to the Fed and then refunded to the Treasury. Last year it refunded close to $80 billion in interest. The projections show that ... if it continued to hold the assets, over the course of a decade it could save the government around $800 billion in interest payments. The Fed might have to take other measures to contain inflation...
Finally, the big story in any serious discussion of the long-term budget is health care. We pay twice as much per person as people do in other wealthy countries. ... If we paid the same amount per person for our health care as people in other wealthy countries, we would be looking at long-term budget surpluses rather than deficits. ...
We can’t keep on this course on either the public or private side. The real question is whether we look to save money by having people get fewer services or we look to save money by paying providers less. The former could mean, for example,... seniors ... will just have to do without some amount of care.
The other route involves restructuring the health care system. This is incredibly difficult politically... Nonetheless, in the long-run serious reform is the only option, since the alternative is that large numbers of people (including very middle class people) will not be able to get decent care. ...
In short, there is little reason to be talking about imposing increased burdens on the middle class any time soon. ...
More from Edge of the American West:
It’s Sunday, Let’s Pick On The New York Times, by silbey: It’s Sunday, let’s pick on the New York Times. ... I thought I would extract one particular article and be mean to it. The article of choice is Adam Davidson’s ... “It’s Not Just About the Millionaires,” which is of the school of Very Serious People. The VSP used to be exclusive to foreign policy, but have branched out, and usually consist of someone (Friedman is a charter member) explaining that the current path picked by the policy experts is the best one despite all the naysayers, as those naysayers Don’t Really Understand How The World Works. Davidson Very Seriously explains why the government’s debt problem can’t be solved by taxing just corporations or rich people, but have to come by taxing the middle class. It finishes with the classic trope of a VSPerson that we have to give up our “fantasy” of raising taxes on businesses and rich people.
Davidson does some math to show that taxing the rich heavily won’t bring in that much money to help cure the debt. I’ll outsource that treatment of the rich to ...[Dean Baker]...
His treatment of businesses is equally shaded. ... “Any serious analyst who isn’t paid by one of the tax-benefiting industries would suggest eliminating most industry-specific loopholes.” Ah, good, one thinks, he’s now going to deal with how much revenue could be generated by improving the corporate tax code... Right? ... “But the problem is that cutting them will not even come close to reviving our economy.” But. Huh? I thought we were talking about debt and revenue issues? Where did “reviving the economy” come from?
And he’s off to the races. No discussion of debt, no discussion of what closing the loopholes would actually raise from corporations, no discussion of how it would affect the revenue picture. Instead, he wanders into cutting Social Security and Medicare,... finally reaching the conclusion that taxing businesses “isn’t the answer.”
Combine that with the sleight-of-hand in treating the rich and you have an article that concludes that raising taxes on the middle class is the only way to go. Davidson’s article ... enters service as a reference piece, to be used as evidence. “Look,” Very Serious People will say “Even a liberal like NPR’s Adam Davidson demonstrates that we can’t tax corporations or the rich!” Never mind Occupy Wall Street; never mind the 99%. They don’t understand.
Only Very Serious People understand.
This trick is used again and again to oppose raising taxes on one interest group or another, but the fact that raising taxes on a particular group won't fully solve the debt problem does not imply that the change in taxes for that group should be zero.
- I Killed Some Brain Cells Today - Econbrowser
- Central banks’ voting records and future policy - Vox EU
- The New Progressive Movement - Jeff Sachs
- Spotlight Fixed on Geithner - NYTimes.com
- Naomi Klein on Climate Change: Hit and Miss - Peter Dorman
- European Turmoil Could Slow U.S. Recovery - NYTimes.com
- Vouchers For Veterans - Paul Krugman
Saturday, November 12, 2011
Whatever Happened to Discipline and Hard Work?, by Tyler Cowen, Commentary, NY Times: ...The United States has always had a culture with a high regard for those able to rise from poverty to riches. It has had a strong work ethic and entrepreneurial spirit and has attracted ambitious immigrants, many of whom were drawn here by the possibility of acquiring wealth. ...
In short, the traditional, pro-wealth cultural vision has a great appeal for me. But I must admit that it is showing some wear and tear, which may partly be why the criticisms made by the demonstrators at Zuccotti Park have so much resonance.
The first problem is that higher status for the wealthy can easily lead to crony capitalism. ...
The second problem is that many conservatives have become so attached to their cultural vision that they have ceded sound, technocratic reasoning to the left and center. For instance there is a common willingness among conservatives to defend the Bush tax cuts, even though the evidence does not show much of an economic payoff. ...
The third problem is that the pro-wealth cultural vision may be overly optimistic about human willingness to embrace the idea of responsibility. ...
The counterintuitive tragedy is this: modern conservative thought is relying increasingly on social engineering through economic policy, by hoping that a weaker social welfare state will somehow promote individual responsibility. Maybe it won’t.
For one thing, today’s elites are so wedded to permissive values — in part for their own pleasure and convenience — that a new conservative cultural revolution may have little chance of succeeding. Lax child-rearing and relatively easy divorce may be preferred by some high earners, but would conservatives wish them on society at large, including the poor and new immigrants? Probably not, but that’s often what we are getting.
In the future, complaints about income inequality are likely to grow and ... higher income inequality will increase the appeal of traditional mores — of discipline and hard work — because they bolster one’s chances of advancing economically. That means more people and especially more parents will yearn for a tough, pro-discipline and pro-wealth cultural revolution. And so they should.
It remains to be seen how many of us are up to its demands.
I am not a sure as he is that as inequality continues to increase, people will adopt conservative values rather than wondering why the playing field needed for those conservative values to express themselves has become increasingly unfair. And if they do conclude it's unfairness rather than values that is at the root of the growth in inequality, their reaction may be different.
(Also, my view of what is behind society's problems is also quite different from Tyler's. I suppose this makes me one of the "academics on the left" who "seem more comfortable focusing on the very real offenses of plutocrats and selfish elites," but I'll note that Tyler seems quite comfortable focusing on the problems posed by "today's elites" himself, i.e. the impediment they pose to the cultural values he'd like to see take hold. The comments on wealth and crony capitalism are also not far from complaints about plutocracy. We on the left have values that we believe in every bit as much as conservatives, but those values differ from those held by conservatives in important ways and that will naturally lead us to focus on different aspects of these problems. The fact that we talk about issues such as crony capitalism and powerful elites does not mean we have abandoned those values any more than it means Tyler has abandoned his values when he raises these issues himself. All it says is that the path to reach these values differs from the path preferred by conservatives.)
Daniel Indiviglio says that eliminating illegal immigration won't do much to create jobs:
Would Cracking Down on Illegal Immigration Really Cut Unemployment?, by Daniel Indiviglio: Americans don't want many of these jobs anyway and aren't desperate enough to settle
"And here is something else that we have to do that will help the economy. We have to build the fence on America's southern border and get a grip on dealing with our immigration problem." This was one of the responses from Rep. Michelle Bachmann during Wednesday night's Republican Presidential Debate when asked how she would create jobs as quickly as possible. This is a sentiment shared by many Americans...
Elizabeth Dwoskin at Bloomberg wrote a very thought-provoking article on this topic... She found that Americans don't want many of those jobs that illegal immigrants have. She shows this through a sort of case study of Alabama. The state recently passed a law that allows the police to question people they suspect are in the U.S. illegally. As you might guess, illegal immigrants are fleeing the state.
But the expected boost for unemployed Americans isn't materializing: they aren't rushing to take the jobs those illegal immigrants are leaving behind. Dwoskin writes:
In their wake are thousands of vacant positions and hundreds of angry business owners staring at unpicked tomatoes, uncleaned fish, and unmade beds. "Somebody has to figure this out. The immigrants aren't coming back to Alabama--they're gone," Rhodes says. "I have 158 jobs, and I need to give them to somebody."
There's no shortage of people he could give those jobs to. In Alabama, some 211,000 people are out of work. In rural Perry County, where Harvest Select is located, the unemployment rate is 18.2 percent, twice the national average. One of the big selling points of the immigration law was that it would free up jobs that Republican Governor Robert Bentley said immigrants had stolen from recession-battered Americans. Yet native Alabamians have not come running to fill these newly liberated positions. Many employers think the law is ludicrous and fought to stop it. Immigrants aren't stealing anything from anyone, they say. Businesses turned to foreign labor only because they couldn't find enough Americans to take the work they were offering.
At a moment when the country is relentless focused on unemployment, there are still jobs that often go unfilled. These are difficult, dirty, exhausting jobs that, for previous generations, were the first rickety step on the ladder to prosperity. They still are--just not for Americans.
This point may seem intuitively obvious, but it's nice to see a reporter provide a clear, cohesive example of why illegal immigrants aren't a significant causal force of the high rate of unemployment. The problem isn't merely that there aren't enough jobs -- there aren't enough of the right sort of jobs.
Perhaps if the U.S. didn't have unemployment insurance programs in place, things would be different. If jobless Americans couldn't collect checks for 99 weeks, then they might feel a greater sense of urgency to settle for any job that they could get -- they would then be more willing to pick tomatoes, gut fish, and make beds. But if they can continue to look for something better while just scraping by on the money they get from the government, then that's a better option.
Is the answer, then, to both deport illegal immigrants and end unemployment insurance? ... But would its decline really imply that the nation was much better off? Remember, most of the job openings that would result would be among the least desirable out there. They would pay poorly and result in a pay cut for many of those Americans. ...
So would cracking down on illegal immigration make the U.S. labor market much better off? Reading Dwoskin's article, it's hard to see how. For the U.S. economy to flourish again, the private sector needs to add millions of good-paying jobs that help to build a skill set, which will rebuild the U.S. middle class. You don't get many of those jobs by merely cracking down on illegal immigration.
There is a wage at which US citizens will take these jobs. If the business owner interviewed above were to offer me a million dollars a day to do one of the unfilled jobs, I'd be on the next plane to the job site. So the idea that Americans won't do this type of work is wrong, but you do have to offer a wage that is high to compensate people for the nature of the work they will be asked to do.
Ah, you say, but this is a sign that our social insurance programs are too good. If people were as poor as they are in Mexico, and faced a similar life outlook, surely they'd be willing to take these jobs too. Yes, probably true. It's also true that if we lived in a dictatorship, someone could force me to do this job at whatever pay they wanted to give. The motivation would be to prevent physical pain -- to, say, stop myself from getting beaten for refusing to take the job rather than starvation -- but the effect would be the same.
But I don't want to live in a society so poor that people take jobs out of desperation to survive -- poverty can take away choices -- and I'd rather not have choices made for me by a dictatorial form of government. So what this indicates to me is that there are people in the world, some of whom live close by, so in need of work just to survive that they will take work at exploitive wages. The conditions where they live are so bad, and the available social services so poor, that they have no choice but to do things like leave their families for months or years, head north, and do whatever they can just to get by (even private sector institutions such as soup kitchens are much more scarce than in the US). And much of what they are asked to do is very, very unpleasant work.
The business owners will complain, of course, that if they pay the wages needed to attract Americans to these jobs -- basically to keep them out of soup kitchens -- then they won't be able to make a profit. That may or may not be true, but assume it is. What does it really mean? It means that the product they are selling is not viable unless people are forced by their circumstances to work at wages below what would be acceptable if even the barest of social services were available.
The fact that Americans "continue to look for something better while just scraping by on the money they get from the government" is a sign that we still have some hope left, that people think there is a chance they won't have to resort to working at exploitative wages that unjustly benefit business owners (and those who think that our social service programs are too kind should try living on them for a year or two). I am glad that we don't put people in the position of having to accept these kinds of jobs at very, very low wages just to prevent starvation.
If these jobs remain open, one of two things will happen. Either wages will rise to a level that will attract workers, or if the wage required is too high to make a profit the firm will go out of business. That's just the free market at work, and cries from business owners that the inability to hire illegal workers is forcing them out of business is no more compelling than a cry that the inability to do something illegal such as pollute is forcing them to close their doors. The question is whether they are profitable when forced to internalize all costs, and pay the above-board market price for the resources they use.
But I am also very favorably inclined toward immigration, and believe our doors ought to be much more open than they are. I grew up in an area where illegal immigration was very high, and I have no doubt at all that these workers are exploited by those who hire them. We would never tolerate this type of treatment for our own citizens, but somehow we look away when it is illegal workers from Mexico. In times when work is plentiful, I would have no problem at all with programs that bring workers to the U.S. legally to do this type of work. We could then do a much better job of monitoring how these workers are treated, and so on, and ensure that business owners aren't getting rich through the exploitation of illegal immigrants. Again, this would mean that some business owners wouldn't survive -- those that depend upon paying very low wages to workers who can't complain -- but that's no different than what happens to businesses across the US every day. Not every business is viable, and when costs are too high firms go out of business -- these firms are no different. In times like the present when work is scarce, I would cut back on these programs (though not fully eliminate them) and hope that the improved conditions and higher wages that would result from bringing the formerly illegal workers out into the open would mean some of these jobs would be more likely to be filled by US citizens.
The cry that "Americans don't want many of these jobs" is really an admission that the wages being offered are too low. There are Americans who will do these jobs, and do them very well, but not for wages that barely keep them out of soup kitchens. If business owners want workers, there are plenty available. All they have to do is offer a decent wage.
- We May Be In Store for a Passionless Presidential Race - Robert Reich
- Pursuing Financial Stability at the Federal Reserve - Janet Yellen
- Selfishness and Self Interest For Adam Smith - Gavin Kennedy
- What's the real difference between Brookings and AEI? - Richard Green
- Europe versus the US: Fight! - Antonio Fatas
- Supply-side policies and the zero lower bound - Vox EU
- Down with the Eurozone - Nouriel Roubini
Friday, November 11, 2011
The Roosevelt Treasury liveblogs the Obama Administration, Edge of the American West: There were, in meeting the crisis of the 1930s, two positions.
(a) Let the Government spend the minimum necessary to keep men alive and to prevent social disturbance; or
(b) Let the Government spend on such a large scale as to provide a positive powerful stimulus to recovery.
This second alternative is often formally embraced by those who in practice support the first position. That is, the actual scale of expenditures that they propose, while sufficient to bring about a serious derangement of the budget, is not sufficient to exert an adequate stimulus to recovery. In consequence, depression conditions tend to be frozen over a considerable period.
Harry Dexter White, 2/26/35
Late posting this -- I have some comments about yesterday's report on new claims for unemployment insurance at CBS News:
New claims are headed in the right direction, but the rate of change is very, very slow.
The moral of the story:
Legends of the Fail, by Paul Krugman, Commentary, NY Times: ...Not long ago, European leaders were insisting that Greece could and should stay on the euro while paying its debts in full. Now, with Italy falling off a cliff, it’s hard to see how the euro can survive at all.
But what’s the meaning of the eurodebacle? As always happens when disaster strikes, there’s a rush by ideologues to claim that the disaster vindicates their views. So it’s time to start debunking. ...
I’ve been hearing two claims, both false: that Europe’s woes reflect the failure of welfare states..., and that Europe’s crisis makes the case for immediate fiscal austerity in the United States.
The assertion that Europe’s crisis proves that the welfare state doesn’t work comes from many Republicans. ... The idea, presumably, is that the crisis countries are in trouble because they’re groaning under the burden of high government spending. But .. the nations now in crisis don’t have bigger welfare states than the nations doing well — if anything, the correlation runs the other way. Sweden, with its famously high benefits, is a star performer... Meanwhile, before the crisis ... spending on welfare-state programs ... was lower, as a percentage of national income, in all of the nations now in trouble than in Germany... Oh, and Canada ... has weathered the crisis better than we have.
The euro crisis, then, says nothing about the sustainability of the welfare state. But does it make the case for belt-tightening in a depressed economy?
You hear that claim all the time. America, we’re told, had better slash spending right away or we’ll end up like Greece or Italy. Again, however, the facts tell a different story.
First, if you look around the world you see that the big determining factor for interest rates isn’t the level of government debt but whether a government borrows in its own currency. ...
What has happened, it turns out, is that by going on the euro, Spain and Italy ... have to borrow in someone else’s currency, with all the loss of flexibility that implies. ... America, which borrows in dollars, doesn’t have that problem.
The other thing you need to know is that in the face of the current crisis, austerity has been a failure everywhere it has been tried...
The moral of the story, then, is to beware of ideologues who are trying to hijack the European crisis on behalf of their agendas. If we listen to those ideologues, all we’ll end up doing is making our own problems — which are different from Europe’s, but arguably just as severe — even worse.
- Wall Street v. Elizabeth Warren - The Baseline Scenario
- Is UK academic social science following a discarded model? - Danny Quah
- At Fed, louder calls for action on economy - Washington Post
- European Debt Woes - Oregon Office of Economic Analysis
- Bridge our divide by building bridges – Frank and O'Rourke
- Toy models of inequality - interfluidity
- A Response to Tim Duy - Modeled Behavior
- Bad Astronomy does some bad economics - Noahpinion
- Deficit Cuts Should Be Linked to Unemployment - Robert Reich
- Limits to broadband diffusion? - Digitopoly
- Why the ECB might want to back Spain - The Economist
- Weekly Initial Unemployment Claims decline - Calculated Risk
- Is Europe on the Verge of a Depression, or Inflation? - Simon Johnson
Thursday, November 10, 2011
Nick Rowe says the ECB needs to step in and save the Euro (I've called for fiscal federalism as a stabilization tool, but Nick is making a different point -- how the ECB can accomplish this on its own by using its powers to act as a central fiscal authority):
Could the ECB become the central fiscal authority?, by Nick Rowe: There is only one way to save the Euro now. The ECB acts as lender of last resort to the 17 Eurozone governments. But nobody would want to act as lender of last resort to a deadbeat, and the ECB wouldn't want to act as lender of last resort to a fiscal deadbeat. With the guarantee of unlimited loans from the ECB, the fiscal deadbeat would have every incentive to keep on borrowing and spending unlimited amounts. It's a mix of: the free-rider problem (because they are only one in 17, and even less than that for a small country); and the Samaritan's dilemma (if they know you are going to help them get out of trouble, they are not going to stay out of trouble).
The Eurozone lacks a central fiscal authority to match the central monetary authority. And it seems to lack the ability to create a central fiscal authority in the normal way. Nobody seems to have the power to exert that central fiscal authority, and force the 17 governments to do what they are told.
But the ECB does have that power. It can say to each of the 17 governments: "We will act as your lender of last resort if and only if you do what we say. If you don't do what we say, we will loudly announce that we will no longer act as your lender of last resort, and the bond markets will make mincemeat of your bonds, and there will be runs on all your banks."
In fact, the ECB is the only body that does have that power. I'm not talking about legal power. It's long past that stage of the game. Good central banks ignore all the rules in an emergency (as Brad DeLong tells us the Bank of England did for a century). The ECB has the de facto power to save any or all of the 17 countries. But it won't use that power unconditionally. It has to make the 17 governments do what it tells them to do. It has the power to do that. "Do what we say, or your country is toast".
The normal question in political macroeconomy is whether the monetary authority should have independence from the fiscal authority. It's time, in the Eurozone, to reverse that question. Should the 17 fiscal authorities have independence from the one monetary authority?
Is this democratic? Of course not. Might it happen? I don't know.
Endgame Approaching, by Tim Duy: Wall Street is again taking Europe seriously, at least for the moment. Today was unpleasant. The most important news of the day is that Germany and France are planning for a new Europe. From Reuters:
Merkel said Europe's plight was now so "unpleasant" that deep structural reforms were needed quickly, warning the rest of the world would not wait. "That will mean more Europe, not less Europe," she told a conference in Berlin.
She called for changes in EU treaties after French President Nicolas Sarkozy advocated a two-speed Europe in which euro zone countries accelerate and deepen integration while an expanding group outside the currency bloc stays more loosely connected -- a signal that some members may have to quit the euro.
"It is time for a breakthrough to a new Europe," Merkel said. "A community that says, regardless of what happens in the rest of the world, that it can never again change its ground rules, that community simply can't survive."
For the Eurozone to work, there needs to be greater fiscal integration. But Germany and France do not see a place for Greece and likely Italy, possibly Spain and Portugal as well, in such a fiscal union. And, in all honesty, it is hard to find fault with such a conclusion. The clearly dysfunctional behavior of the Italian and Greek governments has made it all but impossible to erect a firewall around the crisis at this point. The credibility of the Eurozone decision making process, allready severly weakened by the endless inconclusive summits, is now completely non-existent.
Interestingly, the IMF appears to be holding out hope that a firewall is still possible:
Christine Lagarde, head of the International Monetary Fund, told a financial forum in Beijing that Europe's debt crisis risked plunging the global economy into a Japan-style "lost decade."
"If we do not act boldly and if we do not act together, the economy around the world runs the risk of downward spiral of uncertainty, financial instability and potential collapse of global demand."...
..Lagarde said she was hopeful the technical details on boosting the European Financial Stability Fund (EFSF) to around 1 trillion euros would be ready by December.
How viable is the idea of leveraging up the EFSF now that Sarkozy and Merkel have openly breached the topic of a breaking of the Euro? Do the Europeans really take the Chinese for such fools that they will save the Euro when the economic backbone of the Continent no longer believes it is worth saving?
A wild card in this disaster is the European Central Bank. The calls for action are deafening, yet they apparently fall on deaf ears. I think we all agree that the ECB can at least put a floor under Italy, and arguably should be doing that to prevent what appears to be largely a liquidity crisis from becoming a solvency crisis. They would also send a strong signal that the Eurozone does in fact have a lender of last resort. Make no mistake, they can't stop the blinding painful recession that is about to descend upon Europe. That is already backed into the cake, and the ECB would put the icing on the top by calling for harsh austerity in any nation receiving its backstop. But they could prevent a depression. And everyone believes they will step up to the plate eventually.
But what if they don't? What if Germany and France absolutely forbid it? If Germany and France are already planning for a new Europe, they certainly don't want it to begin with a central bank holding a massive piece of the debt from those nations they intend to eject from the Euro. As it is, they probably already fear that a Greek default is inevitable in the next few months, and the ECB will be left holding the bag on their Greek debt holdings. Why add further to those potential/likely losses?
Now where is the Fed in all of this? Quiet, very quiet. To be sure, they will stand ready to provide dollar liquidity via swap agreements with their foreign counterparts. And will likely expand the balance sheet in the event of sharp deceleration in US economic acivity. But such a deceleration is not likely to be revealed in the near term data. And, interestingly, note that despite all the turmoil, the implied inflation rate via the TIPS market is 1.88 and 1.99 at the 5 and 10 year horizons, respectively. I believe the Fed would like to see clearer deflationary pressures before they engaged in another round of QE.
Brad DeLong pleads with the Fed to get in front of the curve:
The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash before the increase in eurorisk leads American finance to tighten credit again and send us down into the double dip.
Here too it is probably already too late. The time to move was this summer.
At a minimum, the Fed could be preparing a credit facility to take European sovereign debt as collateral. Beyond that, I find it hard to imagine the Fed making large scale European debt purchases. After all, what will they define as an American financial instituion? Deutsche Bank has a US financial holding company - would a Fed commitment include all of Deutsche Bank's European bond portfolio? I don't think the Fed is ready to make such distinctions, especially after the public relations beating they took for lending to foreign banks during the US financial crisis.
In my opinion, they did not have a choice - the foreign banks are part of the US banking system and thus needed to be part of the emergency lending facilities. And, of course, the interconnectiveness of the European and US financial sectors argues for exactly what Brad proposes, even it if meant taking European debt off the hands of European banks. But isn't that the ECB's job? I find it hard to see the Fed eager to take on the role of global lender of last resort. Just as I find it difficult to see the US supporting an expansion of the IMF to aid Europe. Europe has both the capital and the lender of last resort to deal with this crisis themselves. They don't need external financing, they need internal rebalancing. Ultimately, the Europeans will need to find the political willpower to solve the crisis. I just don't see much US involvement in the process, either fiscal or monetary. And if such involvement did occur, it would not happen until conditions became much, much worse.
Bottom Line: The tide turned from optimism to pessimism today. Perhaps the opposite happens tomorrow. But ultimately, I believe pessimism will rule the day. The point of no return was reached when Germany and France openly discussed a smaller Eurozone. To be sure, the ECB could still offer upside surprise by serving as the lender of last resort, which would ease the downside pain. I don't anticipate the Fed will take on this role. The Fed is probably still mulling over what they perceive to be the limited US exposure to Europe, just as they did with the US subprime debt. And the relatively painless demise of MF Global probably reinforces that sense of complacency. The Fed will react eventually, but US conditions will need to deteriorate markedly before they do so.
- The Hypocritical Oath? - Eric Schoenberg
- Is U.S. Upward Economic Mobility Impaired? - Scott Winship
- Recoveries From Recessions and Banking Crises - Economic Brief
- President Obama’s Economic Performance in 2010 - Rortybomb
- European Policy Makers Don’t Understand But Markets Do - Wilder View
- A First Look into Some Distributional Student Loan Data - Rortybomb
- Are teachers are overpaid? I don't think so - Richard Green
- Rational Irrationality: Keynes vs. Hayek: Debate Diary - John Cassidy
- General Gluts, Secular Stagnation and the World Economy - Livio Di Matteo
- Backgrounder on 'net neutrality' - latimes.com
- The Debt Ceiling as a “Fiscal Rule” - Liberty Street
- Europe’s Next Nightmare - Dani Rodrik
- The euro crisis: Finito? - The Economist
- Interview with James K. Galbraith - NachDenkSeiten
Wednesday, November 09, 2011
Antonio Fatás responds to the "increasing pessimism" in the Econ Blogosphere over the economic problems in Europe:
Plan B for Europe: Do Not Stare Into the Abyss, by Antonio Fatás: Everyone is running out of hope regarding a solution for the economic problems in Europe. A change in government in Greece, the possibility of Berlusconi stepping down are not enough to bring confidence to markets or the public. In the Econ Blogosphere we only see increasing pessimism: Mark Thoma, Barry Eichengreen, Paul Krugman, and many others.
Tim Duy makes the point that so far stock markets, in particular, Wall Street is ignoring the risks that are building in Europe. He draws an analogy to what was going on in 2007 when stock markets were still booming and ignoring the fact that we were literally looking into the abyss but we could not see it. He believes that today Europe is unable to see the abyss ahead of them and Wall Street is ignoring the problem assuming that it will not hit the US.
But what does the abyss looked like in 2007? In 2007 we had built a set of imbalances on asset prices, in particular housing prices... While some did not want to see the abyss, those who saw it were looking into a fall in asset prices, financial disruption and a sharp fall in economic activity. ...
But here is where the 2011 abyss looks very different from the 2007 one: this time the crisis is much more linked to confidence. In 2007 the adjustment in asset prices was unavoidable. Today, we debate about whether the Italian government or the Spanish government are solvent and the answer is much less clear. Why? Because solvency depends on confidence and confidence depends on how we see solvency. If Italy keeps losing the confidence of markets, as it is happening today, then they are insolvent, too big to fail but too big to be rescued.
So if we keep staring at the abyss, we are just making it deeper. And the deeper the abyss is, the more we want to stare into it.
So the solution is to stop staring into the abyss. Given where we are today there is only one way to do that, to have the ECB taking a very aggressive stance on how they are willing to support the governments of Italy or Spain if their interest rates keep increasing. Communication from European governments, over stretching the EFSF is not going to be enough anymore, you need the ECB to stand between us and the abyss so that we stop staring into it.
I have to say, I'm puzzled. Recent developments in the euro zone seem incredibly negative to me. The probability of a reasonably orderly conclusion of the crisis appears to be falling. Yet equities aren't dropping; indeed, they're up from early September. Has the roadrunner sprinted off the cliff but not yet looked down? Or am I missing something?
Avent is trying to wrap his mind around equity market behavior. I wish him the best - I hope he gives me a call if he finds a meaningful answer. All I can say is that we have been here before. Recall 2007:
By the middle of 2007 the TED spread was exploding, signaling enormous financial turmoil. Yet equities kept heading upward, fueled by data that was just not that bad coupled with ongoing expectations that a solution was just around the corner. And now we find ourselves in almost the exact same position. Avent is correct, the news out of Europe is abysmal. He is not missing anything. There is no solution, no magic summit at hand. At this point, it is a choice between severe recession and depression. There is no happy ending to this story.
Consider the news from Greece. CR points us to Athens News, which declares the Greek government rudderless. The latest EU demand, that everyone in power sign a commitment to the last bailout proposal, might simply be the straw that broke the camel's back. The key sentence:
The demand came a day after ND issued a nonpaper saying that the party will support the new government’s policies, only to reverse them when the conservatives come to power.
The implication is that the New Democracy party hopes to pull in the next tranche of aid, then default. CR suggests they just say so, and get the default over with. I have to agree - we all know the latest haircut of 50% - not including official debtholders, of course - will prove to be insufficient, as additional austerity measures erodes the government's fiscal position.
And that story is growing throughout the Eurozone. Consider this report:
France announced 65 billion euros of tax hikes and budget cuts over five years on Monday, as President Nicolas Sarkozy seeks to protect the country's creditworthiness in financial markets without killing his chances of re-election in six months time...
...But economists said the government's growth outlook was still too optimistic, even after cutting the forecast for 2012 to 1 percent from 1.75, meaning the latest measures might not be enough for France to meet its deficit reduction goals.
As the periphery moves to austerity, it weakens the core, and the core turns to additional austerity. Which then weakens the periphery. Slow, but vicious, cycle.
And then we move to Italy. From the FT:
Silvio Berlusconi, Italy’s embattled prime minister, pledged last night that he would resign after parliament passes a new financial stability law that will implement fresh austerity measures demanded by the European Union.
Good luck with that - it has obviously worked so well in the rest of the Eurozone. Meanwhile, the 10 year Italian bond rate rose to 6.77 percent, a whopping 497bp premium to Germany. Many believe that 6 percent is the point of no return, and we are well past that mark. Italian bonds might get some relief from Berlusconi's departure, but within three to six months they too will be falling short of their fiscal benchmarks, and bond markets will be forced to react.
Meanwhile, the ECB is effectively on the sidelines. Ed Harrison at Credit Writedowns has been providing some excellent commentary, and believes it is only a matter of time before the ECB brings out the big guns and gives Europe what it needs, a lender of last resort. Which makes perfects sense because that is the only way in which the Eurozone does not fall into depression. That said, ECB members are determined to prove him wrong. From Bloomberg:
European Central Bank council member Jens Weidmann said the ECB cannot bail out governments by printing money.
“One of the severest forms of monetary policy being roped in for fiscal purposes is monetary financing, in colloquial terms also known as the financing of public debt via the money printing press,” Weidmann, who heads Germany’s Bundesbank, said in a speech in Berlin today. The prohibition of monetary financing in the euro area “is one of the most important achievements in central banking” and “specifically for Germany, it is also a key lesson from the experience of hyperinflation after World War I,” he said.
In the United States, we live under the legacy of the 1970's. For Europeans, it is the 1920's. And with that fateful decade in mind, the resistance of certain Eurozone stakeholders - yes, Germany - remains steadfastly in the path of very aggressive monetary policy.
Bottom Line: Yes, Europe is bad. And getting worse. By the time European policymakers reach an agreement, the goalposts have moved. They are literally looking into the abyss, caught like deer in the headlights. And like the US in 2007, they cannot avoid the abyss. And yet, US equities markets hang on, edging upward in the apparent belief - or delusion - that a European financial crisis will not filter back into the US. I hope that is correct, but suspect it is not. And if it not correct, I don't anticipate equities will react until it is obvious corporate profits will suffer.
- Manufacturing is special - Dani Rodrik
- Let them eat NGDP - Noahpinion
- The Corporate Pledge of Allegiance - Robert Reich
- Clear thinking about economic policy - Vox EU
- Plosser on Communications - Money Supply
- Fed’s Plosser: Wrong to Allow Inflation to Cut Unemployment - WSJ
- Looking Back at Four Years - Narayana Kocherlakota
- Expansionary Contraction Theory Takes Another Hit - Jared Bernstein
- More Churn in Job Market Is Hopeful Sign - NYTimes.com
- Spatial frictions - Vox EU
- Boom For Whom - Paul Krugman
- Greece, home of democracy, deprived of a vote - Dean Baker
- Europe’s Darkness at Noon - Barry Eichengreen
- The Return Of Secular Stagnation - Paul Krugman
- The negative unnatural rate of interest - interfluidity
- Can the Fed Stimulate Growth or Only Inflation? - Bruce Bartlett
- Bubble Land - Michael Roberts
Tuesday, November 08, 2011
Relative to the health care ruling today -- I wrote this awhile back, and just reposted it CBS News:
I have a new column (my title was "Help Households and the Banks Will Be Just Fine"):
This passage from Luigi Zingales is a good intro:
...nothing upsets people like the perception that the rules don’t apply equally to everybody..., what many people felt after the 2008 bailouts of the financial system. The system was certainly at risk, and some government intervention was just as certainly necessary. Yet it ... didn’t escape most Americans that TARP was the largest welfare program for corporations and their investors ever created in human history. ... TARP wasn’t just the triumph of Wall Street over Main Street; it was the triumph of K Street over the rest of America.
The way the bailout was conducted damaged Americans’ faith in their financial system, in their government, and in the market economy. ... Their altered feelings weren’t the consequence of any ideological bias against government involvement; on the contrary, a majority of respondents believed that the government should regulate financial markets. They objected, rather, to the specifics of what the government was doing. One reason they objected was their perception that lobbying interests had influenced the intervention: 50 percent of respondents, for instance, thought that Paulson had acted in the interest of Goldman Sachs, not the United States.
But a stronger reason, presumably, was that the bailout made the system suddenly look fundamentally unfair. Why should outsourced workers, whose only fault was to have entered the wrong sector, bear the burden of market discipline, while rich bankers were offered a government safety net? ...
Senators, Republicans and two Democrats in particular, have not received anywhere near enough criticism for this:
Last week’s Senate decision to kill a modest $60bn bill to upgrade America’s infrastructure before it came to debate may have exceeded even that august chamber’s recent record. The package, which included $10bn in seed money for a public infrastructure bank, was blocked by every Republican and two Democrats. They objected because it would have been funded by a 0.7 per cent surtax on earnings over $1m.
And that was that. At a time when US businesses prefer to hoard rather than invest their cash, and when long-term interest rates are so low the money is virtually free, the political system is unable to accomplish what ought to be a no-brainer. Until now, America has never faced an ideological divide on infrastructure: both parties accepted the need to upgrade roads, dams, bridges, energy and water systems.
Forget Abraham Lincoln and Dwight Eisenhower, the presidents most often cited as having unleashed growth-boosting infrastructure – transcontinental railroads and federal highways respectively. Forget even Bill Clinton’s cheerleading for the “information superhighway”, which helped pave the way for the spread of the internet...
We need go back only to 2005 when a Republican-controlled Capitol Hill pushed through the infamous $280bn Highways Act, which was the largest transport bill in US history. ...
The US spends just 2 per cent of its gross domestic product on infrastructure. The European Union spends twice that, and China more than four times. It is showing. ...
It's not just the crumbling infrastructure, though that that alone is enough to justify the spending -- especially at a time when interest and other costs are so low -- it's the way in which Congress has all but turned its back on the unemployed. We have an opportunity to provide employment and at the same time invest in projects that have clear net benefits. Yet politics stands in the way and millions of unemployed face a less hopeful future because of it. People who have done nothing wrong except get caught up in a recession -- people who, when they have jobs, show up every day and work hard in support of their families -- are stamped with permanent scars from long-term unemployment. They wonder when, if ever, they will find a job again (and if they do find one what type of job it will be). Yet we do nothing to help them even though meeting our great infrastructure needs could help with the unemployment crisis. Grrr.
- End Bonuses for Bankers - Nassim Taleb
- The Blooey Factor - Paul Krugman
- Does Nudge require rational regulators ? - Knowing and Making
- Exploding, Once Again, the “Non-Payer” Tax Myth - CBPP
- Who is Screwing Up More: Europe or the US? - Jeff Frankel
- Bankruptcy of the Greek government vs California - Dani Rodrik
- What Moves the Interest Rate Term Structure? - FRBSF
- "What can exports tell us about the economy?" - Econbrowser
- Is Overregulation Driving U.S. Companies Offshore? - NYTimes.com
- The myth of financial innovation and the Great Moderation - Vox EU
- 'It's in Greece's Interest to Reintroduce the Drachma' - Spiegel
- Remaining Risks in the Tri-Party Repo Market - Liberty Street
- Wishful Thinking And The Road To Eurogeddon - Paul Krugman
- Bailouts: Geithner vs Barofsky - Felix Salmon
Monday, November 07, 2011
I am going to have to plead not guilty to the charge that "mainstream and left-wing economists" should be criticized "for their lack of attention to monopoly power." I've also wondered many times why this issue doesn't get more attention and, more importantly, why the increasing concentration of power doesn't draw more action from regulators:
Who Rules the Global Economy?, by Nancy Folbre, Commentary, NY Times: ...Three Swiss experts on complex network analysis have recently examined the architecture of international ownership, analyzing a large database of transnational corporations. They concluded that a large portion of control resides with a relatively small core of financial institutions, with about 147 tightly knit companies controlling about 40 percent of the total wealth in the network. ... An article in the British magazine New Scientist describes the research as evidence of a global financial oligarchy. ...
A recent article in the socialist journal Monthly Review, by John Bellamy Foster, Robert W. McChesney and R. Jamil Janna, criticizes both mainstream and left-wing economists for their lack of attention to monopoly power.
Focusing on the United States, they note that the percentage of manufacturing industries in which the largest four companies account for at least 50 percent of shipping value has increased to almost 40 percent, up from about 25 percent in 1987.
Even more striking is the increase in retail consolidation, largely reflecting a “Wal-Mart effect.” In 1992, the top four companies accounted for about 47 percent of all general merchandise sales. By 2007, their share had reached 73.2 percent.
Banking, however, takes the cake. Citing my fellow Economix blogger Simon Johnson, the Monthly Review article notes that in 1995, the six largest bank-holding companies (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley) had assets equal to 17 percent of gross domestic product in the United States. By the third quarter of 2010, this had risen to 64 percent. ...
Public concerns about economic concentration are stoked by hard times. Congress authorized a full-scale investigation of the topic back in days of the Great Depression. Seems like the time has come for a fully international update.