This is an essay I did for the Social Science Research Council's initiative on Academia and the Public Sphere:
Monday, November 07, 2011
Who doesn't like solar energy?:
Here Comes the Sun, by Paul Krugman, Commentary, NY Times: ...We are, or at least we should be, on the cusp of an energy transformation, driven by the rapidly falling cost of solar power. That’s right, solar power. If that surprises you,... blame our fossilized political system, in which fossil fuel producers have both powerful political allies and a powerful propaganda machine that denigrates alternatives.
Speaking of propaganda..., let’s talk briefly about hydraulic fracturing, aka fracking.
Fracking — injecting high-pressure fluid into rocks deep underground, inducing the release of fossil fuels — is an impressive technology. But it’s also a technology that ... contaminates drinking water; there is reason to suspect ... that it also contaminates groundwater; and the heavy trucking ... inflicts major damage on roads.
Economics 101 tells us that an industry ... should be required to “internalize” those costs... Yet ... the industry and its defenders demand ... that it be let off the hook... Why? Because we need that energy! ...
So it’s worth pointing out that special treatment for fracking makes a mockery of free-market principles. Pro-fracking politicians claim to be against subsidies, yet letting an industry impose costs without paying compensation is in effect a huge subsidy. ...
And now for ... the success story you haven’t heard about.
These days, mention solar power and you’ll probably hear cries of “Solyndra!” Republicans have tried to make the failed solar panel company ... a symbol of government waste — although claims of a major scandal are nonsense...
But Solyndra’s failure was actually caused by technological success: the price of solar panels is dropping fast, and Solyndra couldn’t keep up with the competition. ... If the downward trend continues — and if anything it seems to be accelerating — we’re just a few years from the point at which electricity from solar panels becomes cheaper than electricity generated by burning coal. ...
But will our political system delay the energy transformation now within reach?
Let’s face it: a large part of our political class, including essentially the entire G.O.P., is deeply invested in an energy sector dominated by fossil fuels, and actively hostile to alternatives. This political class will do everything it can to ensure subsidies for the extraction and use of fossil fuels, directly with taxpayers’ money and indirectly by letting the industry off the hook for environmental costs, while ridiculing technologies like solar.
So what you need to know is that nothing you hear from these people is true. Fracking is not a dream come true; solar is now cost-effective. Here comes the sun, if we’re willing to let it in.
- What caused the financial crisis? The Big Lie goes viral - Barry Ritholtz
- Brains Built To Cooperate - Scientific American
- Thinking, Fast and Slow - Bill Easterly
- Autos, housing, and the business cycle - Econbrowser
- Reefer Madness - NYTimes.com
- How Eurozone governments have failed to produce confidence - Vox EU
- An unbridged divide takes its toll - FT.com
- But Is the Planet Really Burning? - Economic Principals
Sunday, November 06, 2011
There's nothing particularly new here, but it's still worth emphasizing that a flat tax doesn't have the magical properties that supporters claim, and that its distributional consequences are tilted heavily in favor of the wealthy:
The Problem With Flat-Tax Fever, by Robert Frank, Commentary, NY Times: Close watchers of presidential politics weren’t surprised to see many of this year’s Republican hopefuls proposing ... a flat tax. Such plans reliably surface every four years...
Yet none will be adopted, for at least two reasons. One is that a flat tax would do nothing to make filing tax returns any simpler. But, more important, it would greatly exacerbate longstanding growth in income inequality. ...
The contention that a flat tax would be simpler because it involves only a single rate is flatly wrong. The complexity of the current system has nothing to do with its multiple income brackets.
The hard step in figuring your tax bill is to compute your adjusted gross income — roughly, the amount you earn, less the myriad exemptions, deductions and various other offsets described in the 3.4-million-word code of the Internal Revenue Service. You’d also have to calculate your adjusted gross income under a flat tax. But once you’ve completed that step under either system, you consult the tax tables to see how much you owe..., so this step is no harder than it would be under the tables for a flat tax.
The much more serious concern is that a flat tax would reinforce the trends toward greater income inequality that have been seen over the last several decades. ...
According to an analysis by the nonpartisan Tax Policy Center, Mr. Cain’s proposal would increase the annual tax bill of a typical family of four earning $50,000 a year by more than $4,000, but would reduce the taxes owed by a similar family earning between $500,000 and $1 million by almost $60,000. The center also estimated that families in the top one-tenth of 1 percent of households would enjoy an average annual tax reduction of nearly $1.4 million... Similar distributional effects are common under all flat-tax plans, not just Mr. Cain’s. ...
For the time being, then, our best bet is to do all we can to reduce the gratuitous complexity of our progressive income tax.
This discussion of the politics of austerity supports the point I was trying to make yesterday in the post on hypocrisy. However, it's not just the politics of austerity that is important, the power behind the politics matters too and I will be curious to see how much of the long-run deficit problem is solved by cutting programs for the less powerful (or in the case of a flat tax, increasing their tax burden) rather than asking the powerful to pay more, or at least give up deductions like home mortgage interest. To state the more than obvious, the powerful have the upper hand:
The Politics of Austerity, by Thomas Edsall, Commentary, NY Times: The economic collapse of 2008 transformed American politics. In place of shared abundance, battles at every level of government now focus on picking the losers who will bear the costs of deficit reduction and austerity. ...
The new embattled partisan environment allows conservatives to pit taxpayers against tax consumers, those dependent on safety-net programs against those who see such programs as eating away at their personal income and assets.
In a nuanced study, “The Tea Party and the Remaking of Republican Conservatism,” the sociologist and political scientist Theda Skocpol and her colleagues at Harvard found that opposition to government spending was concentrated on resentment of federal government “handouts.” Tea Party activists, they wrote, “define themselves as workers, in opposition to categories of nonworkers they perceive as undeserving of government assistance.”
In a March 15 declaration calling for defunding of most social programs, the New Boston Tea Party was blunt: “The locusts are eating, or should we say devouring, the productive output of the hard working taxpayer.”
The conservative agenda, in a climate of scarcity, racializes policy making, calling for deep cuts in programs for the poor. The beneficiaries of these programs are disproportionately black and Hispanic. ...
Less obviously, but just as racially charged, is the assault on public employees. “We can no longer live in a society where the public employees are the haves and taxpayers who foot the bills are the have-nots,” declared Scott Walker, the governor of Wisconsin.
For black Americans, government employment is a crucial means of upward mobility. The federal work force is 18.6 percent African-American, compared with 10.9 percent in the private sector. The percentages of African-Americans are highest in just those agencies that are most actively targeted for cuts by Republicans...
- Incremental Analysis, With Two Yards to Go - NYTimes.com
- Worldly Philosophers Wanted - NYTimes.com
- Restoring Capitalism: Unequal Justice - Bruce Judson
- The Politics of Austerity - Thomas Edsall
- Flat Tax Doesn’t Solve Inequality Problem - Robert Frank
- Can Politicians Really Create Jobs? - NYTimes.com
- Will Robots Take Our Jobs? - Episodes
- Why Spotting Bubbles Is Harder Than It Looks - WSJ.com
- Maybe the problem is Boehner, not Bernanke - Creative Destruction
- Occupy Wall Street Deserves Our Respect - Ralph Gomory
- Paul Krugman accepts EPI's Distinguished Economist Award - YouTube
- Roubini On Internal Devaluation - Paul Krugman
Saturday, November 05, 2011
Larry Summers :
To end slump, United States must spend, MIT News: ... Summers also weighed in on economists’ performance in light of the largely unanticipated economic crisis. For the most part, Summers defended economists, arguing that the profession has made world leaders better informed in recent decades.
“I’ve had meetings with vice premiers, number-two people in China, who have asked me questions about NBER [National Bureau of Economic Research] working papers in macroeconomics,” Summers said. “That says the work has an enormously positive and important impact.”
However, Summers asserted, the dynamic stochastic general equilibrium models used by many economists, which often assume the economy will naturally return to a basic equilibrium with full employment, have been of little value in these complex times.
“In four years of reflection and rather intense involvement with this financial crisis, not a single aspect of dynamic stochastic general equilibrium has seemed worth even a passing thought,” Summers said, adding: “I think the profession is not entirely innocent.”
Still, Summers said, the complaint that economists should have seen the crisis coming represents “a confusion” on the part of critics. Identifying financial bubbles and knowing when they will burst, he claimed, “is to ask more of the profession than it can reasonably expect to discover.”
The Polarization of Job Opportunities in the U.S. Labor Market, by David Autor: ... Conclusion Although the U.S. labor market will almost surely rebound from the Great Recession, this article presents a somewhat disheartening picture of its longer-term evolution. Rising demand for highly educated workers, combined with lagging supply, is contributing to higher levels of earnings inequality. Demand for middle-skill jobs is declining, and consequently, workers that do not obtain postsecondary education face a contracting set of job opportunities.
Perhaps most alarmingly, males as a group have adapted comparatively poorly to the changing labor market. Male educational attainment has slowed and male labor force 16 Community Investments, Fall 2011 – Volume 23, Issue 2 participation has declined. For males without a four-year college degree, wages have stagnated or fallen over three decades. And as these males have moved out of middleskill blue-collar jobs, they have generally moved downward in the occupational skill and earnings distribution.
The obvious question, as Scrooge asks the Ghost of Christmas Yet to Come is: “[A]nswer me one question. Are these the shadows of the things that Will be, or are they shadows of things that May be, only?” Is the labor market history of the last three decades inevitably our destiny—or is it just that it could end up being our destiny if we do not implement forward-looking policy responses?
While this article is intended as a spur to policy discussion rather than a source of policy recommendations, I will note a few policy responses that seem especially worthy of discussion.
First, encouraging more young adults to obtain higher education would have multiple benefits. Many jobs are being created that demand college-educated workers, so this will boost incomes. Additionally, an increased supply of college graduates should eventually help to drive down the college wage premium and limit the rise in inequality.
Second, the United States should foster improvements in K-12 education so that more people will be prepared to go on to higher education. Indeed, one potential explanation for the lagging college attainment of males is that K-12 education is not adequately preparing enough men to see that as a realistic option.
Third, educators and policymakers should consider training programs to boost skill levels and earnings opportunities in historically low-skilled service jobs—and more broadly, to offer programs for supporting continual learning, retraining, and mobility for all workers.
Finally, another potential policy response is to consider R&D and infrastructure investments that will have broadly distributed benefits across the economy. Examples might include expanding job opportunities in energy, the environment, and health care. The return of the classic manufacturing job as a path to a middle-class life is unlikely. But it may be that various service jobs grow into attractive job opportunities, with the appropriate complementary investments in training, technology, and physical capital. Perhaps these could be the shadows of what is yet to come.
Beijing Forum 2011, by Dan Little: I'm attending the Beijing Forum 2011 this week, and it's a superb international conference. Much of the conference took place at Peking University. ... The focus is on academic perspectives and dialogues around the overarching theme of "The Harmony of Civilizations and Prosperity for All." This year's organizing theme is "Tradition and Modernity, Transition and Transformation." ...
My paper, "Justice Matters in Global Economic Development," was included in the Economic Growth theme. I argued five basic points: We generally agree about the basics of a just society. The current state of the world badly contradicts those values (poverty, inequality, abuse and coercion). Amartya Sen's writings provide a powerful basis for those commonsense ideas about justice. The greatest impediment to improving justice is the untrammeled power private and state interests have vis-a-vis the poor. And injustice matters because it causes serious social problems. So states need to strive to reduce injustice.
I didn't really have a good sense of how the argument was received by the participants, but there was a fairly clear split between "laissez-faire" growth advocates and economists who took inequalities of income and health very seriously. I assume the latter group was more receptive than the former.
The academic question I received during the formal discussion period came from an American economist. He pointed out that China's 10% annual growth since the 1990s has greatly improved the standard of living for a hundred million people in coastal China, and created job opportunities for tens of millions of migrant workers. He wanted to know if I was seriously advocating a slower rate of growth as the price of greater justice. The question reflects the assumptions of many of the economists in the session: state policies aimed at enhancing equality are highly destructive to economic growth. So, by inference, preferring economic justice is harmful for a society.
My response, in a nutshell, was "yes". Economic development involves choices. And it is possible that a strategy with a lower growth rate would do a better job of bringing all of China up together, rather than creating a broadening gap between rural poor and affluent urban people. I am indeed arguing that it would be best to choose the second strategy. (This might take the form of investing a larger percentage of China's formidable savings and reserves in substantially enhanced public goods for the rural poor -- education, healthcare, and retirement.)
What is equally important, is that the power differential between poor people and propertied interests in China today almost guarantees that the poor will lose out. Property confiscations by businesses and municipal development authorities are a good example. (Coincidentally, the Thai urban planning expert I talked with said this is precisely the case in and around Bangkok, and the Angola urban planner made similar comments about Angolan farmers and the residual white settlers.) So injustice is as much about power as it is about exploitation. And this means that legal and institutional reforms are needed if China's inequalities are to be reduced.
It was striking to me that the thrust of my talk seemed to be most resonant with the Peking University students in the room. A cluster of them came over to talk about the implications of these ideas for China during the break. These young people seemed genuinely concerned about how China might address some of the large issues of social inequality that have arisen since the economic reforms began in the 1980s. (In fact, even some officials I've talked with here in China believe that more serious attention to justice issues is needed in China's future -- for example, with regard to China's rural poor and to migrant workers and their families.)
Paul Krugman has a question for you:
Genuine Hypocrisy, And Attitudes Thereto, by Paul Krugman: Not sure how much blogging I can do this weekend... But here’s an item that caught my eye, given what I wrote about hypocrisy yesterday:
Deadbeat Rep. Joe Walsh, Who Owes $100k In Child Support, Receives ‘Pro-Family’ Award From Family Research Council.
Now that’s real hypocrisy — and if the past is any indication, it won’t matter at all for Rep. Walsh’s career.
There’s a big difference between the left and the right in such matters, one that I don’t fully understand, although I’m trying. Here’s how it goes: if a liberal politician is caught behaving badly — enriching himself while preaching the need to help the poor, or just in general showing himself less than admirable by having an affair, visiting call girls, whatever — his career is over.
But if a conservative politician who preaches stern traditional morality is caught engaging in actions that are at odds with what he preaches — buying sex, taking wide stances in restrooms, or, in this case, stiffing his family even while preaching family values — he may well ride right through the scandal. Witness what’s going on now with Herman Cain.
How can this be? Here’s what I understand: on the right, “moral values” are considered to be, literally, God-given principles. And a politician is well-regarded for advocating those values, no matter what he does personally. Instead of his personal behavior devaluing his political position, his political position excuses his personal behavior; a philandering politician who preaches the sacred bond of marriage is considered a good man because of what he says, no matter what he does.
And I sort of understand the logic of that position; if the cause is what matters, the flaws of those who serve that cause can be overlooked.
In a way the liberal attitude is more puzzling. Why don’t people like me show an equal willingness to overlook the sins of those who espouse ideas we like? And we don’t. I’m willing to cut some slack; it really matters not at all whom FDR may have turned to for solace, but I can’t imagine forgiving a liberal politician who behaved like Walsh.
The answer may lie in a greater degree of openness, which makes the principles less absolute and therefore gives greater weight to the personal attributes of the messenger. But I’m not entirely sure. Discuss.
I am not sure about this, but let me give another explanation a try anyway. The right believes that the need for government programs derives from the lack of morals of the lower classes. That is, the reason some people are asked to give up a portion of their income to support others -- a redistribution of income the right abhors -- is because these people make poor choices. If they had the necessary morals, if they behaved better, we wouldn't have to take so many resources from those who are successful and waste them on people who could do better if they only had the right value structure.
A successful politician, businessperson, etc. obviously doesn't have these problems. They are successful and their transgressions won't, in the end, result in someone else having to give up income to bail them or their families out. They are not the problem the right is trying to solve. If a poor person takes drugs, endangers their family, drinks too much, etc. the result is a strain on social services and hence on the successful. But when a successful person doesn't live up to the moral code in every way, there's no danger that it will cost others anything -- there are no social externalities to worry about as there are with the poor.
The moral code for the right is really about finding a way to stop asking the good, hard-working people to support people who could support themselves, but make bad choices the hard-working who care about their families would never make. Everyone makes mistakes and people who are basically moral -- and have proven they must be by their success -- should be forgiven when they step over the line, politicians included, it's the fundamentally immoral people that are the problem.
The left, of course, believes social conditions rather than exogenous personal choices have a lot to do with economic outcomes, and that part of this is due to the moral transgressions of those who are better off exploiting the vulnerable. Thus, moral transgressions by the powerful are harder to forgive -- they are a sign that the powerful have no respect for those who are less powerful (e.g. sexual harassment). A tax cheat probably cheats on wages, safety, etc. too, their morals matter for the economic outcomes of the less fortunate, and transgressions are harder to forgive.
But surely you'll have better explanations in comments...
- When offshoring backfires - Vox EU
- The Polarization of Job Opportunities - David Autor
- Overcoming the Great Disconnect - Thoma - Public Sphere Forum
- The Economics Public Sphere - The Monkey Cage
- Artificial intelligence: Luddite legacy - The Economist
- Economists Debate Slowing Release Of US GDP Report - NASDAQ
- Capitalism can’t just be about money - FT.com
- Yes, unemployment is still a crisis - The Washington Post
- A Creditor’s Playland, or: Cato on Housing Crisis Policy - Rortybomb
- The International Agenda for Financial Regulation - FRB: Speech - Tarullo
- The Greek revolt: Good news for Europe - Vox EU
- Canada's redistribution policy - Stephen Gordon
- Summers: To end slump, United States must spend - MIT News
- The Lasting Financial Impact of a Layoff - NYTimes.com
Friday, November 04, 2011
Swamped today -- quick one on "successful (and sometimes corrupt) rent-seekers":
The Globalization of Protest, by Joseph E. Stiglitz, Commentary, Project Syndicate: The protest movement that began in Tunisia in January, subsequently spreading to Egypt, and then to Spain, has now become global, with the protests engulfing Wall Street and cities across America. Globalization and modern technology now enables social movements to transcend borders as rapidly as ideas can. And social protest has found fertile ground everywhere: a sense that the “system” has failed, and the conviction that even in a democracy, the electoral process will not set things right – at least not without strong pressure from the street.
In May, I went to the site of the Tunisian protests; in July, I talked to Spain’s indignados; from there, I went to meet the young Egyptian revolutionaries in Cairo’s Tahrir Square; and, a few weeks ago, I talked with Occupy Wall Street protesters in New York. There is a common theme, expressed by the OWS movement in a simple phrase: “We are the 99%.”
That slogan echoes the title of an article that I recently published, entitled “Of the 1%, for the 1%, and by the 1%,” describing the enormous increase in inequality in the United States: 1% of the population controls more than 40% of the wealth and receives more than 20% of the income. And those in this rarefied stratum often are rewarded so richly not because they have contributed more to society – bonuses and bailouts neatly gutted that justification for inequality – but because they are, to put it bluntly, successful (and sometimes corrupt) rent-seekers. ...[continue reading]...
We need to create 100,000 to 125,000 jobs per month just to keep up with the growth in population. In order to reabsorb the millions of workers who have lost jobs during the recession back into the labor force, we need to create several hundred thousand jobs per month, and even at that rate it would take years for employment to fully recover.
Unfortunately, according to the latest employment report from the BLS, the economy only created 80,000 jobs in October:
Nonfarm payroll employment continued to trend up in October (+80,000), and the unemployment rate was little changed at 9.0 percent... Employment in the private sector rose, with modest job growth continuing in professional and businesses services, leisure and hospitality, health care, and mining. Government employment continued to trend down.
The average over the last three months was 114,000. That's enough to keep up with population growth, but no more. Unemployment did fall slightly, from 9.1 percent to 9.0 percent, and the the employment to population ratio also increased by 0.1 pp to 58.4 percent. Those numbers are moving in the right direction, but the rate of change is much slower than needed. Again, at this rate it will be years before we get back to full employment. And the fall in government employment, something under our control, at a time when we need to be creating jobs doesn't help at all.
The big picture from this report is that we are not experiencing the kind of growth typical in recoveries -- it is much slower than the recovery from previous recessions. We are moving sideways -- we aren't losing ground but we aren't gaining ground either, at least not at a satisfactory rate -- and looking forward it's hard to see anything that will change the painfully slow recovery the economy is currently experiencing.
Why does rising inequality matter?:
Oligarchy, American Style, by Paul Krugman, Commentary, NY Times: Inequality is back in the news, largely thanks to Occupy Wall Street, but with an assist from the Congressional Budget Office. ... The budget office ... documented a sharp decline in the share of total income going to lower- and middle-income Americans. ...
So who is getting the big gains? A very small, wealthy minority.
The budget office report tells us that essentially all of the upward redistribution of income away from the bottom 80 percent has gone to the highest-income 1 percent of Americans. That is, the protesters who portray themselves as representing the interests of the 99 percent have it basically right, and the pundits solemnly assuring them that it’s really about education, not the gains of a small elite, have it completely wrong.
If anything, the protesters are setting the cutoff too low..., almost two-thirds of the rising share of the top percentile in income actually went to the top 0.1 percent...
Who’s in that top 0.1 percent? Are they heroic entrepreneurs creating jobs? No... Recent research shows that around 60 percent of the top 0.1 percent either are executives in nonfinancial companies or make their money in finance... Add in lawyers and people in real estate, and we’re talking about more than 70 percent of the lucky one-thousandth.
But why does this growing concentration of income and wealth in a few hands matter? Part of the answer is that rising inequality has meant a nation in which most families don’t share fully in economic growth. Another part of the answer is that once you realize just how much richer the rich have become, the argument that higher taxes on high incomes should be part of any long-run budget deal becomes a lot more compelling.
The larger answer, however, is that extreme concentration of income is incompatible with real democracy. Can anyone seriously deny that our political system is being warped by the influence of big money, and that the warping is getting worse as the wealth of a few grows ever larger?
Some pundits are still trying to dismiss concerns about rising inequality as somehow foolish. But the truth is that the whole nature of our society is at stake.
As Regulators Pressed Changes, Corzine Pushed Back, and Won, by Azam Ahmed and Ben Protess, NY Times: Months before MF Global teetered on the brink, federal regulators were seeking to rein in the types of risky trades that contributed to the firm’s collapse. But they faced opposition from an influential opponent: Jon S. Corzine, the head of the then little-known brokerage firm.
As a former United States senator and a former governor of New Jersey, as well as the leader of Goldman Sachs in the 1990s, Mr. Corzine carried significant weight in the worlds of Washington and Wall Street. While other financial firms employed teams of lobbyists to fight the new regulation, MF Global’s chief executive in meetings over the last year personally pressed regulators to halt their plans.
The agency proposing the rule, the Commodity Futures Trading Commission, relented. Wall Street, which has been working to curb many financial regulations, won another battle.
Yet with ... $630 million in missing customer funds, Mr. Corzine’s effort may come back to haunt him.
The proposed rule would have restricted a complicated transaction that allowed MF Global in essence to borrow money from its own customers. ... While such financing is not unknown on Wall Street, it carries substantial risk. ... Regulators are now examining whether these transactions explain the missing money at MF Global. ...
- As Regulators Pressed, Corzine Pushed Back, and Won - NYTimes.com
- The legal scope of Fed purchases - JP Koning
- Does sports make your kids smarter? - Vox EU
- Washington Pre-Occupied - Robert Reich
- Technological Plateau or Promise? - Digitopoly
- Bernanke’s Take on Fed Communications - Real Time Economics
- Extreme Poverty Is Up, Brookings Report Finds - NYTimes.com
- Weekly Initial Unemployment Claims below 400,000 - Calculated Risk
- Calculating Poverty - NYTimes.com
- Inequality Trends In One Picture - Paul Krugman
- A Gravity Test for the Euro - Kenneth Rogoff
- Why we subsidise arts majors - The Economist
- Gender Gap on Wages Is Slow to Close - NYTimes.com
- Growing Economies, Stagnant Wages - NYTimes.com
- Exports in the Recovery - Econbrowser
Thursday, November 03, 2011
Quick Bites, by Tim Duy: So much news, so little time. A list of items crossing my screen over the last two days, in no particular order:
Greece referendum off, at least for today. Greece Prime Minister George Papandreou backtracked on his calls for referendum, much to the relief of market participants. I hesitate to think this story is over. The citizens of Greece might not react calmly to having democracy snatched back out of hand's reach. It is never easy to put the genie back inside the bottle.
The ECB cuts rates. Better late than never, I suppose. The surprise rate cut by the ECB is also credited with bolstering markets today. Given the worsening economic situation, we should expect more sooner than later. And note that with the benchmark rate at only 1.25%, the zero bound is clearly in sight. How do you say liquidity trap in German?
Red flags in the German data. Germany, the juggernaught of the European economy, looks to be under stress. The German Purchasing Managers Index crossed over into contrationary territory last month for the first time in two years, while German unemployment rose for the first time in two years. From Bloomberg:
“It’s too early to call this a trend change in the labor market, but it shows that growth forces are weakening,” Lothar Hessler, an economist at HSBC Trinkaus & Burkhardt AG (TUB) in Dusseldorf, said in an interview. “The dynamism of the economic upswing is lessening more than thought.”
I am more willing to call a shift in Germany's labor market - the austerity that Germany is fond of foisting on the rest of Europe is coming home to roost.
Italian economy also shifted into low gear. The Italian PMI dropped a whopping 5 points to 43.3, a notch below Spain's 43.9. No wonder Italy's Prime Minister Silvio Berlusconi is having trouble pushing through another austerity package. Rebecca Wilder highlights the importance of growing political risk in Italy:
Another driver of the increasing Italian risk premium is political risk. You can see this in the spread between Italian 10yr bond yields and the Spanish 10yr bond yields, which has collapsed since the summer and is now trading at -70 bps. That means the Spanish sovereign is borrowing at a 10yr yield that is 70 bps cheap to Italy, where it used to pay a premium. Something idiosyncratic is going on with Italy.
It is tough to see how a Europe still struggling to put a ring around Greece can find the time and resolve to get a ring around Italy as well.
More on Europe. Is this the tip of the iceberg? Ambercrombie does complete reversal on the European outlook:
The retailer was hurt by a “slowing trend” in the region, while same-store sales in Japan and Canada continued to decline, according to a statement today. The shares slumped 21 percent to $58.50 at 10:53 a.m. in New York after dropping as much as 23 percent for the biggest intraday loss since Nov. 30, 2000.
Abercrombie & Fitch surprised investors after Chief Executive Officer Michael Jeffries said in August that there was a “strong momentum” in Europe. The retailer is joining a growing list of consumer companies, from Whirlpool Corp. to Kimberly-Clark Corp., that saw a slowdown in the region mired by a sovereign debt crisis.
The US service sector comes in on the soft side. The ISM nonmanufacturing headline number was down slightly, with mixed internals. Production came in down 3.3 points, while new orders dropped 4.1 points. Both measures held above 50. On the postive side, the employment component rebounded, offering some hope for tomorrow's employment situation report. In related new, initial unemployment claims edged below 400k. Overall, Calculated Risk is not impressed, expecting another weak report.
The Fed hold steady. Mark Thoma has the story here. Inexplicably, monetary policymakers slashed forecasts, claimed dissapointment at the state of the economy, and yet choose to take no policy action. The path to additional action is blocked by the lack of clear indications of deflation risks. The economy is bad, just not bad enough.
Another financial casaulty of the European crisis? First was Dexia, next was MF Global. Is Jefferies Group the third to fall? That was concern today as investors took the stock down 20% before it rebounded. More disconcerting is the message the price actions sends about the vulverability of US financial markets to European contagion:
“It is a testament to the fragile nature of the markets that the collapse of MF Global, following a monumental display of bad judgment by that company’s management, should generate contagion,” said Chris Kotowski, an Oppenheimer & Co. analyst in New York. Jefferies is “a very conservatively run firm where management has enormous ‘skin in the game.’”
Bottom Line: This is starting to feel like 2007 all over again. Then, like now, equity markets discounted the smoldering financial crisis, sending stocks higher through much of that year. I continue to think Europe is much further from a solution than American observers appear to believe, and that as the global situation deteriorates further, so too will the US economy. But we have yet to see that story fully emerge in the US data, and thus I understand the hope that the US is able to squeak through this episode with only limited bruising.
David Andolfatto notes that the real interest rate is near zero, even negative in some cases, and says "Surely there are public infrastructure projects that can be expected to yield a real return higher than zero? This is a great time for the U.S. treasury to borrow":
Negative real interest rates, Macromania: ...In macroeconomic theory, the nominal interest rate plays second-fiddle to the so-called real interest rate. The real rate of interest is ... a relative price. It is the price of output today measured in units of future output... So, if the risk-free annual interest rate on an inflation-indexed U.S. treasury is 2%, then one unit of output today is valued at 1.02 units of output in the future....
Economists typically focus on the real interest rate because people presumably care about output and not money (they care about money only to the extent that it may be used to purchase output). ... The higher the real interest rate, the more output is valued today vis-a-vis future output. A high real interest rate reflects the market's strong desire to have you part with your output today (in exchange for a promise of future output). Unlike the nominal interest rate, however, there is nothing that naturally prevents the real interest rate from becoming negative; see Nick Rowe. And indeed, this appears to have happened recently in the U.S. The following diagram plots the real interest rate as measured by the n-year treasury inflation-indexed security (constant maturity) for n = 5, 10, 20; see FRED.
Prior to the Great Recession, real interest rates are hovering around 2% p.a. and the yield curve is upward sloping (long rates higher than short rates), at least until early 2006 (when it flattens). Following the violent spike up in real interest rates (associated with the Lehman event), real interest rates have for the most part declined steadily since then. The 20 year rate is below 1%, the 10 year rate is basically zero, and the 5 year rate is significantly negative. What does this mean?
The decline in real rates that has taken place, especially since the beginning of 2011, is a troubling sign. ... This premium may be signaling an expected scarcity of future output. If so, then this is a bearish signal.
The decline in market real interest rates is consistent with a collapse (and anemic recovery) of investment spending (broadly defined to include investments in job recruiting). For whatever reason, the future does not look as bright as it normally does at the end of a recession. To some observers, this looks like a "deficient aggregate demand" phenomenon. To others, it is the outcome of a rational pessimism reflecting a flow of new regulatory burdens and a potentially punitive tax regime. Both hypotheses are consistent with the observed "flight to safety" phenomenon and the consequent decline in real treasury yields.
Unfortunately, the two hypotheses yield very different policy implications. The former calls for increased government purchases to "stimulate demand," while the latter calls for removing whatever barriers are inhibiting private investment expenditure. There seems to be room for compromise though. Surely there are public infrastructure projects that can be expected to yield a real return higher than zero? This is a great time for the U.S. treasury to borrow (assuming that borrowed funds are not squandered, of course).
In the event of an impasse, can the Fed save the day? It is hard to see how. The Fed's influence on real economic activity is usually thought to flow through the influence it has (or is supposed to have) on the real interest rate. One could make the case that real interest rates are presently low in part owing to the Fed's easing policies. But this would be ignoring the fact that the Fed's easing policies were/are largely driven by the collapse in investment spending. (I am suggesting that in a world without the Fed, these real interest rates would be behaving in more or less the same way.)
In any case, real interest rates are already unusually low. How much lower should they go? Is it really the case that our economic ills, even some of them, might be solved in any significant manner by driving these real rates any lower? My own view is probably not. If there is something the Fed can do, it is likely to operate through some other mechanism. ...
David also looks at inflation expectations and concludes:
there is no evidence to suggest that inflation expectations are whirling out of control, one way or the other. I'm not sure to what extent this constitutes success. At the very least it is not utter failure.
I am more confident that David is that the Fed can still help the economy, but it can't do it on its own and too much focus on the Fed takes the pressure off of Congress to do its part to help to overcome the unemployment crisis. Members of Congress need to be worried that their own jobs are at risk if they don't do something to help the unemployed (and they shouldn't be allowed to get away with claiming that cutting the deficit by cutting social insurance programs is a means to this end). That's one of the reasons I keep calling for fiscal policy as well -- both sets of policymakers need to feel as much pressure to act as possible.
Infrastructure needs are high, costs are unusually low, and people need jobs. In addition infrastructure spending, which enhances future economic growth, can be viewed as a supply-side policy.
If our financial infrastructure was crumbling we'd do something about it, so why not do the same for our physical infrastructure, especially since the benefit to cost ratio is unusually high? I suppose we all know the answer, but it's still worth making members of Congress show their votes:
Creating Jobs and Boosting the Economy: The Case for Rebuilding our Transportation Infrastructure, by Aaron Klein, Treasury Notes: Today, the Senate begins its consideration of the Rebuild America Jobs Act, which would put hundreds of thousands of construction workers back on the job and modernize America’s crumbling infrastructure. The President proposed this measure to Congress as part of the American Jobs Act as a way to create jobs and improve the Nation’s long-term economic competitiveness by allowing goods and services to more efficiently reach domestic and global markets. The White House also released a report today that provides examples of recent infrastructure projects which have produced significant economic benefits.
Our economy is as interconnected as our infrastructure, and well-targeted infrastructure investments create immediate and long-term economic benefits to both local communities and those further away. ... As Secretary Geithner said when he visited the UPS Worldport Facility in Louisville, Kentucky recently, “If you do a better job of repairing roads and bridges, highways, airports, railways, it makes companies more competitive. It lowers their costs. It’s like a tax cut.” Simply put, wise investments in infrastructure save companies and consumers both time and money.
In addition to laying the foundation for stronger economic growth, we must also work to address a crucial problem facing our economy today - unemployment. Investments in infrastructure today will put Americans back to work. And with over 1 million construction workers currently unemployed, now is the right time to invest in infrastructure. Eighty percent of jobs created by investing in infrastructure will likely be created in three occupations - construction, manufacturing, and retail trade - which are among the hardest hit from the recession. Treasury Department analysis shows that these sectors pay middle-class wages, so employment in these sectors bolsters middle-class jobs. ...
I am a bit worried about the privatization of infrastructure in some of these proposals, but that's about how the programs are structured, not about whether they are needed.
Were the Bush tax cuts worse for progressivity or for revenues?, by Lane Kenworthy: The Bush tax cuts of the early 2000s reduced the progressivity of federal taxes, but not that much. The chart below shows the effective federal tax rate for each quintile of households and for the top 1% in the business-cycle peak years of 2000 and 2007. The tax rate dropped by a similar amount for each quintile, and only slightly more for the top 1%. (For more discussion and analysis, see pages 24-31 of this CBO report .)
What should we make of this? On the one hand, it’s good that there was little reduction in progressivity. The progressivity of federal taxes helps to offset the regressivity of state and local sales taxes.
On the other hand, there was a compelling case in the early 2000s (and still today) for increasing the progressivity of federal taxes. One of the chief rationales for progressive taxation is that those with high income can afford to contribute a larger share of that income. In the 1980s and 1990s, the top 1% of Americans enjoyed whopping income gains. ... For households in the bottom 20%, average income barely budged... Given these developments, it would have been sensible to increase the effective tax rate a bit for those at the top and perhaps reduce it a little for those at the bottom. President Bush and the Congress instead chose to reduce rates for everyone.
The chief harm inflicted by the Bush tax cuts wasn’t to progressivity. It was to government revenues. The average effective federal tax rate for all households dropped from 23% in 2000 to 20.4% in 2007. Judging from the CBO’s data on income, that two-and-a-half percentage point decline subtracted roughly $300 billion from federal tax revenues in 2007. Proponents of the tax cuts hoped the economy would grow faster, mitigating the revenue loss caused by the lower rates, but that didn’t happen.
$300 billion a year wouldn’t address all of our revenue needs, but it could do a lot of good.
- What Went Down at MF Global? - Brad DeLong
- "NGDP targeting" means "print money and buy stuff" - Noahpinion
- When Partisan Obstruction Goes Too Far - Treasury Notes
- A Mind Is A Terrible Thing To Lose - Paul Krugman
- The High Cost of Long-Term Unemployment - Pew
- Government Revenues in U.S. Are Low by International Standards - CBPP
- On the tradeoff between growth and stability - Vox EU
- A Reply to John Taylor - Uneasy Money
- More On Economic Freedom and Monetary Policy - John Taylor
- The Man Who Saw Through the Euro - John Cassidy
- The ECB’s Risky Business - Daniel Gros
- Impulse Response Functions From VECMs - Dave Giles
- Monetary Policy and Central Banking after the Crisis - Thomas Palley
- Italy's Future - The Street Light
- A brief post on competitive devaluation - The Economist
- Republicans and the Filibuster - Kevin Drum
- EU's latest steps won't end Greece crisis - Dimitri Papadimitriou
Wednesday, November 02, 2011
A few comments on the FOMC meeting:
It's disappoinnting that the fed didn't do more to help th eeconomy, but not unexpected.
Update: Here is a response to Bernanke's Press Conference. "I don't think Bernanke explained adequately why the Fed is reluctant to do more to help the economy."
One more from Tim Duy:
Meanwhile, Back on This Side of the Pond..., by Tim Duy: The break down in the relationship between consumer confidence and actual spending is something that has been nagging at me for awhile. This picture:
While confidence is at recession levels, real personal consumption expenditures continue to grow at a reasonable clip. Should confidence numbers be totally dismissed, or do they signal an underlying fragility among households that should not be ignored? Some hints at an answer may be found in the September income and spending report. Notably, real personal disposable income looks to have rolled over:
So where is the spending power coming from? A plunge in the saving rate:
It looks like households are struggling to hold onto the even meager spending gains achieved since the recession ended, and that struggle may be what is reflected in the consumer confidence numbers. Overall, this suggests to me that consumer spending is much more fragile than commonly believed.
Manufacturing activity also looks shaky. To be sure, it is reasonable to expect some momentum from the surge in equipment spending in the third quarter. But it is also reasonable to believe that some of this demand was pulled forward as firms try to get ahead of the expiration of the accelerated depreciation benefit. And even with that surge, note the ISM report surprised on the downside Tuesday morning. On the positive side, the new orders measure climbed back above 50, while on the negative, both the export and import components fell. The latter point is a troubling indication of spillover from slowing manufacturing activity in China and Europe. A contraction in global activity isn't exactly what we need at this juncture, especially as it will first bleed through to what has been one of the bright spots in the US recovery.
Bottom Line: With all attention focused on the Greek drama, plus the well-received Q3 GDP report, it has been easy to overlook the underlying fragility in the US economy. This was especially the case when US equities looked to be on a nonstop trip to the moon. Perhaps the US economy can squeak through the next few quarters, and perhaps, in contrast to my expectations, Europe is able to bring an end to the crisis with limited collateral damage to the economy. But I can't shake the feeling that the US economy closer to running on fumes than is commonly believed, and will run out of gas in a very hostile global environment.
- A Foreclosure Settlement That Wouldn’t Sting - NYTimes.com
- Should we believe the German labour-market miracle? - Vox EU
- Capitalism need not be about greed and gambling - John Kay
- Nominal GDP Targeting - Oregon Office of Economic Analysis
- Gingrich and the estate tax - Linda Beale
- Greek's Choice -- and Ours: Democracy or Finance? - Robert Reich
- Why the GOP loves ‘dynamic scoring’ - The Washington Post
- Obama, the G20, and the 99 Percent - Jeffrey Sachs
- Notes from Xi'an - Dan Little
- Eurodämmerung - Paul Krugman
- The case for an NGDP target - The Economist
- NGDP targeting will not provide a Volcker moment - The Economist
Tuesday, November 01, 2011
Aftershocks, by Tim Duy: The reality of the worsening European situation came home to roost on Wall Street this week. Last week's "summit to end all summits" offered up only broad brush strokes to begin with, and even those were rapidly erased by plans for a Greek referendum on the deal. A rumor circulated earlier today that the referendum was dead, but that has since been refuted by the Greek government. It appears that either the Greek government collapses or the referendum will occur - and neither outcome is good for market participants looking for certainty in these uncertain times.
Let me suggest this as well - that even if Greece comes back on board with the existing agreement, the damage is already done. Three thoughts today:
A deepening Eurozone recession is inevitable. Even if full-blown financial crisis is avoided, the cost will be continued austerity programs that will sink the Eurozone economy ever deeper into recession. This will only exacerbate the problems facing European banks as nonperforming loans rise, which will be on top of the credit contraction to follow plans to have banks recapitalizing themselves with private money by next summer.
The unintended consequences of the EFSF. The EFSF was already a farce to begin with, underfunded and relying on leverage to cover up a lack of money. The farce continued as European leaders sought handouts from China to fund a project they themselves were not committed to. Then the lack of details within the latest plan is hampering the ability of the EFSF to issue debt. From the FT (hat tip to Zero Hedge):
The bond from the European financial stability facility will seek to raise €3bn ($4bn) and will be in 10-year bonds rather than a 15-year maturity because of worries over demand, say bankers. A 10-year bond is more likely to attract interest from Asian central banks than a longer maturity.
Bankers familiar with the issue said the EFSF had been considering a €5bn issue. However, the EFSF has denied this, saying it had always sought a €3bn issue...
...EFSF officials decided to price this week because market conditions might deteriorate if they hold off any longer, according to bankers.
The bond is expected to price at yields of about 3.30 per cent, about 130 basis points over Germany, the European market benchmark. This represents a big mark-up since the middle of September, when existing 10-year EFSF bonds were trading at about 2.60 per cent, only 70bp over Germany.
Now the insurance component of the EFSF is blowing back in their faces. From the FT:
“It is kind of ironic: it is Draghi’s first day. His first decision is ‘yes, buy Italian bonds’,” said Gary Jenkins, head of fixed income at Evolution Securities. He added that the move to make Europe’s rescue fund, the European financial stability facility, issue insurance on new Italian and Spanish debt was deterring buyers: “They have created a situation where the only people buying Italian debt are themselves.”
A trader of Italian government bonds said: “It was meltdown at one point before the ECB came in. There were no prices in Italian government bonds. That is almost unheard of in a big market like Italy. There were just no buyers and therefore no prices.”
By not creating a backstop for previously issued bonds, the Europeans have clearly identified those bonds at risk of default. If the Europeans are not willing to buy or insure the bonds, why should investors? Answer: They shouldn't. Consequently, the ECB was forced to do what it hates, buy Italian debt, and even then yields climbed above 6%, nearing levels that many believe is the point of no return for Italy.
Moreover, one should question the what is the meaning of "insurance" for Europe. I can't imagine the ESFS actually making good on any promises to insure bondholders, as the Europeans appear adept at defining defaults as "voluntary" and therefore not credit events covered by insurance.
Will the ECB be Europe's white knight? I think we all agree that lacking a lender of last resort, Europe has something of a credibility problem. As in, no credibility. And it has been pointed out repeatedly that the ECB could step into this role. After all, we are talking about the future of the Euro, which should be something of a concern for central bankers. And, as noted by Kash Mansori at The Street Light, by guaranteeing a price for Italian debt, the ECB would like have to buy far less than they think. But here is the problem - why should the Italians get an ECB backstop at 6%, while the Irish pay 8% and the Portuguese 12%? Politically, the ECB needs to backstop either everybody equally or nobody. Setting a ceiling on Italian debt alone risks setting off a firestorm of public anger within those nations already struggling under the weight of austerity programs. And note that even if the ECB does come into the fight, the will only do so in return for additional austerity. In other words, they might stave off financial collapse, but not recession.
Bottom Line: No matter how many summits they have, there is no easy out for the Europeans at this point.
David Glasner is displeased with John Taylor (for good reason, as he documents in the full post):
A Walk Down Memory Lane with John Taylor, Uneasy Money: John Taylor has had a long and distinguished career both as an academic economist and as a government official and policy-maker. He is justly admired for his contributions as an economist and well-liked by his colleagues and peers as a human being. So it gives me no pleasure to aim criticism in his direction. But it was pretty disturbing to read Professor Taylor’s op-ed piece (“A Slow-Growth America Can’t Lead the World”) in today’s Wall Street Journal, a piece devoid of even the slightest attempt to make a reasoned argument rather than assemble a hodge podge of superficial bromides about the magic of the market and the importance of fiscal discipline and sound monetary policies. It is almost surprising that Taylor failed to mention motherhood, apple pie, and American flag while he was at. Even more disturbing, Taylor proceeds, with no hint of embarrassment, to trash the half-hearted attempts by the Federal Reserve to use monetary policy to promote recovery even though the Fed’s policies are similar to, though much less aggressive than, the “quantitative easing” that he applauded the Japanese government and the Bank of Japan for adopting from 2002 to 2004 to extricate Japan from a decade-long period of deflation and slow growth starting in the early 1990s. ... Oh my what a difference four or five years make. Things do change, don’t they?
The view from Europe:
Politics: the beginning and the end of the Euro, by Antonio Fatas: As much as economists have been wondering for years about the economic benefits and costs of sharing a currency, such as the Euro, the decision to create the Euro area and to be one of its members has always been a political one. As an academic, I have written about the costs and benefits of sharing a currency and my work has led me to the belief that, in the case of the Euro, the benefits outweigh the costs. When I have had an occasion to present my work in this area to those in charge of making the decision (politicians) I always realized that economic arguments matter very little when there are political constraints. ...
The countries that are part of the Euro area joined under different political agendas. There is the core (France, Germany) who has been driving European integration through the years (for reasons linked to the end of WWII). There is the periphery (Greece, Spain) who wanted to be like the core. With relatively low income per capita, their societies aspired to converge not only in terms of development but also from an institutional point of view to the levels of the rich Euro partners. And this was the reason why these countries supported every step of European integration, including membership to the Euro area.
And now are looking at the possibility of exit. In the last months, when I have been asked whether Euro exit was a possibility I have always said that it would be economic suicide for any country to leave the Euro area. But economic and political incentives are not always aligned and I have also argued that I could imagine a country leaving the Euro area if the political dynamics of the country produce a potential referendum where the question of Euro membership is simply read as "us versus them". In that environment you could imagine a country leaving the Euro area simply because its citizens have lost faith in the European project and the other countries are seen as enemies not allies. ...
Today the Greek government has surprised other Euro members and financial markets announcing a referendum on the last Euro bailout plan. This can be the end of the Euro, at least in some countries. Given the difficult economic situation in Greece and Europe, a "No" vote is not just possible but very likely. And while the vote will be just on the details of the plan, it will be seen as a referendum on the Euro. And ... there will be no second chance to repeat the vote if we do not like the outcome. And my fear is that just the announcement of a vote and the anticipation of that scenario might lead to a crisis months before the referendum takes place.
We are not going to solve our long-term deficit problem without more revenue. Is it time for the mortgage interest deduction to go?:
How my taxes are raised matters, by Richard Green: .To get to fiscal balance, I need to pay higher taxes. ... The federal government can get at me one of two ways: it can scale back or eliminate my deductions, or it can raise my rates. If my mortgage interest deduction goes away, for example, my federal tax liability would increase by around 10 percent; alternatively, the federal government could just charge me a ten percent surtax on income.
If my income is taxed, the impact on my desire to work is ambiguous. On the one hand, because the cost of leisure would fall, I would have an incentive to work less. On the other hand, if I want to restore my previous after tax standard of living, I would have an incentive to work more.
If you take away my mortgage interest deduction, however, the impact is not ambiguous--I will have an incentive to work more. Leisure is no less expensive (there is no substitution effect), but my desire to restore my previous income remains as before.
Who would this affect the most?:
The white bar in the graph shows the distribution of the home mortgage interest deduction. The deduction is concentrated in the upper end of the income distribution, e.g. 69% goes to households making at or over over $100,000 (in 2004).
From Suzanne Mettler, the source of the graph and statistics:
In an age of rising economic inequality, our nation has permitted the continuation of these submerged policies that aid primarily the most advantaged Americans and sharply reduce federal revenues, making programs that could assist low to moderate income people far more difficult to afford. The design of these policies obscures them from view, and neither policymakers nor the media do much to reveal them to the public. They are also shrouded by the fact that they are not part of the regular budget process: they face fewer hurdles in being enacted in Congress than regular spending programs, and once in place, they operate essentially on “autopilot.” Even if they grow into large entitlements, like the ones mentioned above, policymakers are never obligated to revisit the question of their value or costs.
As the supercommittee looks for how to proceed, reducing tax breaks—at the very least, curtailing their bias toward the wealthy—could go far to improve the nation’s balance sheet and to reduce inequality.
When I was a renter, I didn't think this deduction was fair. Now I am sort of attached to it, but if taxes need to go up -- and they do -- this is one way to do it.
- The More You Pay a Rating Agency... - David Dayen
- Monitoring and enforcement - Environmental Economics
- The impact of disaster expectations on asset prices - Vox EU
- Is QE working? Evidence from the UK - Vox EU
- Swiss Magic and Central Bank Price-Targeting - The Street Light
- Niall Ferguson and "Western Civilization" - Noahpinion
- Fed policymakers mull how to share goals - Washington Post
- Is Income Inequality A 'Myth'? -The New Republic
- The Occupiers' Responsive Chord - Robert Reich
- Who Killed Horatio Alger? - Luigi Zingales
- Q4 Economics Bloggers Survey (a word cloud time series) - Growthology
- Does Italy Really Deserve To Be A Scary Halloween Story? - EconoSpeak
- Parting Of The Waters (Somewhat Wonkish) - Paul Krugman
- Prolegomenon to Any Useful Discussion of Modern Finance - Brad DeLong
- The Depreciation of Care at Home - Nancy Folbre