« November 2011 | Main | January 2012 »

Saturday, December 31, 2011

Will the Payroll Tax Cut be Extended Through the End of 2012?

Steve Benen doesn't think there's a very good chance that the payroll tax cut will be extended through the end of 2012:

Enjoy the payroll tax break while it lasts, by Steve Benen: Last week, after a needlessly-contentious process, Congress approved a two-month extension of the payroll tax break. As part of the agreement, a conference committee will try to come up with an agreement to extend the cut through the end of 2012.

I’ve been rather pessimistic about the likelihood of success, and yesterday, the odds got worse.

The Senate Republican leader announced Friday that he had chosen three of his colleagues to try to thrash out a bipartisan deal on payroll taxes, unemployment benefits and Medicare.

The three Republican senators will join four Democratic senators and 13 House members on a conference committee... The newly named Republican conferees are Senators Jon Kyl of Arizona, Michael D. Crapo of Idaho and John Barrasso of Wyoming.

These ... are three senators you’d appoint to a conference committee if you want to be destructive.

Kyl, for example, was instrumental in sabotaging the super-committee process... Crapo and Barrasso, meanwhile, are two far-right senators who’ve never demonstrated any willingness to accept concessions on anything.

What’s more, note that the House GOP leadership has already announced its conferees, most of whom have already said they don’t want a payroll-cut extension no matter what concessions Democrats are willing to make...

What about the risk of being blamed? Remember,... the process itself offers cover. Instead of last week, when House Republicans became the clear villains,... the party will find it easier to spread the blame around.

“It’s not our fault,” GOP leaders will say. “We tried to work with Democrats on a deal, but one didn’t come together. Oh well.”... and the media would feel obligated to say “both sides” failed to reach an agreement.

And even if the payroll tax cut is extended, it's likely that Republicans will demand -- and get -- large concessions in return, e.g. permanent reductions in spending on social insurance programs.

    Posted by on Saturday, December 31, 2011 at 02:38 PM in Economics, Politics, Taxes, Unemployment | Permalink  Comments (9) 

    Peddling a False Narrative on the Financial Crisis

    Richard Green:

    Choice words from William Black: He writes:

    If one had to pick one person in the private sector most responsible for causing the global financial crisis it would be Wallison. ... He complained during the build-up to the crisis that Fannie and Freddie weren’t purchasing more affordable housing loans. He now claims that it was Fannie and Freddie’s purchase of affordable housing loans that caused the crisis. He ignores the massive accounting control fraud epidemics and resulting crises that his policies generate. Upon reading that Fannie and Freddie’s controlling officers purchased the loans as part of a fraud, he asserts that the suit (which refutes his claims) proves his claims.

    The piece is long, but worth reading in its entirely. 

    Here's more on Black from Adam Levitin at Credit Slips:

    A New Theory of the Role of the GSEs in the Housing Bubble, by Adam Levitin: Bill Black has an interesting new take on the role of Fannie and Freddie in the housing bubble. He sees their investment in non-prime mortgages as being driven by executive compensation, rather than a fight for market share against investment bank securitization conduits or govt affordable housing policy. The government affordable housing policy point has been repeatedly debunked (and Susan Wachter and I have a new paper that adds to this debunking via an examination of the commercial real estate bubble, where there was no government involvement whatsoever). Black is not, however, able to disprove the market share theory. What he does point to is that the GSE's involvement with nonprime mortgages was as whole loans kept in portfolio, rather than securitized (and also via purchases of MBS), which he says was a move to increase the short-term yield for the GSEs and thus maximize short-term executive compensation.
    I think this is an interesting theory, but there are a few data points necessary to make it work, and I'm skeptical that they all support Black. ...

    Let me note one other thing. The attempt by many on the right of the political spectrum to blame the financial crisis on government attempts to help the disadvantaged despite an abundance of evidence debunking this view annoys me, and annoys me a lot, but that shouldn't be confused with support for Fannie and Freddie. As I've argued in the past, it's very difficult to find a justification for their existence (the best I can do is conditional lukewarm support). Saying Fannie and Freddie didn't do it -- and they didn't -- is not the same as saying that Fannie and Freddie have, on net, been beneficial. I don't think that's clear.

      Posted by on Saturday, December 31, 2011 at 09:20 AM Permalink  Comments (32) 

      Links for 2011-12-31

        Posted by on Saturday, December 31, 2011 at 12:06 AM in Economics, Links | Permalink  Comments (41) 

        Friday, December 30, 2011

        Brad DeLong: America’s Financial Leviathan

        Brad DeLong:

        America’s Financial Leviathan, by J. Bradford DeLong, Commentary, Project Syndicate: In 1950, finance and insurance in the United States accounted for 2.8% of GDP... Today, it is 8.4% of GDP, and it is not shrinking. The Wall Street Journal’s Justin Lahart reports that the 2010 share was higher than the previous peak share in 2006.
        Lahart goes on to say that growth in the finance-and-insurance share of the economy has “not, by and large, been a bad thing....Deploying capital to the places where it can be best used helps the economy grow...”
        But ... the extra 5.6% of GDP that it is now spending on finance and insurance ... is a good bargain only if it boosts overall annual economic growth by ... 6% per 25-year generation. ... But it is not obvious that the US economy today would be 6% less productive if it had had the finance-insurance system of 1950 rather than the one that prevailed during the past 20 years.
        There are five ways that an economy gains from a well-functioning finance-insurance system. ...[discussion of each]...
        Overall, however, it remains disturbing that we do not see the obvious large benefits, at either the micro or macro level, in the US economy’s efficiency that would justify spending an extra 5.6% of GDP every year on finance and insurance. ...
        Why has the devotion of a great deal of skill and enterprise to finance and insurance sector not paid obvious economic dividends? There are two sustainable ways to make money in finance: find people with risks that need to be carried and match them with people with unused risk-bearing capacity, or find people with such risks and match them with people who are clueless but who have money. Are we sure that most of the growth in finance stems from a rising share of financial professionals who undertake the former rather than the latter?

        The ratings agencies are supposed to solve this problem, i.e. provide the clueless the information about risks that they need to avoid getting taken to the cleaners. We know how well that worked out.

          Posted by on Friday, December 30, 2011 at 10:03 AM in Economics, Financial System, Market Failure | Permalink  Comments (66) 

          Paul Krugman: Keynes Was Right

          There are quite a few people in denial about one lesson from the crisis -- the value of the Keynesian perspective:

          Keynes Was Right, by Paul Krugman, Commentary, NY Times: “The boom, not the slump, is the right time for austerity at the Treasury.” So declared John Maynard Keynes in 1937, even as FDR was about to prove him right by trying to balance the budget too soon, sending the United States economy — which had been steadily recovering up to that point — into a severe recession. Slashing government spending in a depressed economy depresses the economy further; austerity should wait until a strong recovery is well under way.
          Unfortunately, in late 2010 and early 2011, politicians and policy makers in much of the Western world believed that they knew better, that we should focus on deficits, not jobs, even though our economies had barely begun to recover... And by acting on that anti-Keynesian belief, they ended up proving Keynes right all over again.
          In declaring Keynesian economics vindicated ... the real test ... hasn’t come from the half-hearted efforts of the U.S. federal government to boost the economy, which were largely offset by cuts at the state and local levels. It has, instead, come from European nations like Greece and Ireland that had to impose savage fiscal austerity as a condition for receiving emergency loans — and have suffered Depression-level economic slumps, with real GDP in both countries down by double digits.
          This wasn’t supposed to happen, according to ... the Republican staff of Congress’s Joint Economic Committee ... report titled “Spend Less, Owe Less, Grow the Economy.” It ridiculed concerns that cutting spending in a slump would worsen that slump, arguing that spending cuts would improve consumer and business confidence, and that this might well lead to faster, not slower, growth.
          They should have known better...
          Now, you could argue that Greece and Ireland had no choice about imposing austerity ... other than defaulting on their debts and leaving the euro. But another lesson of 2011 was that America did and does have a choice; Washington may be obsessed with the deficit, but financial markets are, if anything, signaling that we should borrow more. ...
          The bottom line is that 2011 was a year in which our political elite obsessed over short-term deficits that aren’t actually a problem and, in the process, made the real problem — a depressed economy and mass unemployment — worse.
          The good news, such as it is, is that President Obama has finally gone back to fighting against premature austerity — and he seems to be winning the political battle. And one of these years we might actually end up taking Keynes’s advice, which is every bit as valid now as it was 75 years ago.

            Posted by on Friday, December 30, 2011 at 12:16 AM in Economics, Fiscal Policy, Macroeconomics, Methodology, Monetary Policy | Permalink  Comments (110) 

            Links for 2011-12-30

              Posted by on Friday, December 30, 2011 at 12:06 AM in Economics, Links | Permalink  Comments (81) 

              Thursday, December 29, 2011

              "Guideposts on the Road Back to Factville"

              Getting tired of the best set of graphs articles, but this is a nice set.

                Posted by on Thursday, December 29, 2011 at 11:48 AM in Economics, Graphs | Permalink  Comments (4) 

                It's the Season for Optimism

                This is the time of year when we get to read all the stories about how the economy is poised to do better in the coming year. There have been a couple of these today, and I expect more will follow.

                Better than what? Yes, signs are pointing in the right direction, but we are still in a deep, deep hole and the signs also point to a long, long road to recovery. The economy still needs help, job creation in particular, but, unfortunately, these stories create an elevated sense of optimism about the coming year. This lets policymakers off the hook and helps them avoid the difficulties they would face if they proposed more aggressive policy actions.

                Doing better is not the same as doing well enough, and policymakers have no reason to relax yet. I hope the people writing these stories will make that clear.

                Maybe we'll be surprised by the strength of job creation in the coming year, I certainly hope so, but we shouldn't count on it.

                  Posted by on Thursday, December 29, 2011 at 10:17 AM in Economics, Politics, Unemployment | Permalink  Comments (15) 

                  "Desperate for Work or Fearful about Losing Their Job"

                  Dean Baker:

                  The Daily Beast Acts Up on the Economy, by Dean Baker: ...The unemployment rate for the year [2011] is likely to average above 9.0 percent. The number of people who are involuntarily underemployed has generally been 8.5 and 9.0 million, close to double the pre-recession level. Millions more have given up looking for work altogether. Real wages have been stagnant or falling for the last 4 years, with little prospect of turning around any time soon as the high rate of unemployment continues to depress wages.
                  In addition, tens of millions of baby boomers are approaching retirement with almost nothing to support themselves other than their Social Security. According to a recent study by the Pew Research Center, the median older baby boomer (ages 55-64) had just $162,000 in wealth. This is roughly enough to buy the median home. This means that if this household took all of their wealth, they can pay off their mortgage. They would then be completely dependent on their Social Security to support them in retirement. And, half of older baby boomers have less wealth than this.
                  In short, most of the country is looking at a situation where they are desperate for work or fearful about losing their job. Older workers are looking at a retirement where they are not far above the poverty level, even after spending a life working in middle class jobs. ...

                  Then we should surely impose austerity immediately to make the jobs picture even worse, and focus it on social insurance programs for older workers looking forward to a retirement near the poverty level. Asking those who are far, far from poverty to help, and waiting until the economy is on solid footing before taking steps to address long-run budget issues is, of course, out of the question.

                    Posted by on Thursday, December 29, 2011 at 01:35 AM in Economics | Permalink  Comments (38) 

                    Links for 2011-12-29

                      Posted by on Thursday, December 29, 2011 at 12:06 AM in Economics, Links | Permalink  Comments (36) 

                      Wednesday, December 28, 2011


                      Robert Reich argues it will be Obama-Clinton in 2012. Seems unlikely to me.

                        Posted by on Wednesday, December 28, 2011 at 12:53 PM in Economics, Politics | Permalink  Comments (39) 

                        Feldstein: France Should Quit "Lashing Out at Britain"

                        Martin Feldstein says The French Don’t Get It:

                        The French government just doesn’t seem to understand the real implications of the euro, the single currency that France shares with 16 other European Union countries.
                        French officials have now reacted to the prospect of a credit rating downgrade by lashing out at Britain. The head of the central bank, Christian Noyer, has argued that the rating agencies should begin by downgrading Britain. The finance minister, Francois Baroin, recently declared that, “You’d rather be French than British in economic terms.” And even the French Prime minister, Francois Fillar, noted that Britain had higher debt and larger deficits than France.
                        French officials apparently don’t recognize the importance of the fact that Britain ... has its own currency, which means that there is no risk that Britain will default on its debt. When interest and principal on British government debt come due, the British government can always create additional pounds to meet those obligations. By contrast,... the French central bank cannot create euros. ... That is why the market treats French bonds as riskier and demands a higher interest rate...
                        There is a second reason why the British situation is less risky than that of France. Britain can reduce its current-account deficit by causing the British pound to weaken relative to the dollar and the euro, which the French, again, cannot do without their own currency. Indeed, that is precisely what Britain has been doing with its monetary policy: bringing the sterling-euro and sterling-dollar exchange rates down to more competitive levels. ...
                        France should focus its attention on its domestic fiscal problems and the dire situation of its commercial banks, rather than lashing out at Britain...

                          Posted by on Wednesday, December 28, 2011 at 11:07 AM in Budget Deficit, Economics, International Finance | Permalink  Comments (13) 

                          "The Proposition is Not Mainstream in the Sense of Being Fully Accepted by Most Economists"

                          I haven't said much about the (most recent) recent flare up over Ricardian equivalence. Why? The answer's simple, the empirical evidence does not support it. Why argue about something when we already know it fails to adequately explain the data? Making the Ricardian equivalence assumption might be okay as a first approximation for some questions -- though I'd argue that it mostly isn't -- but in any case the theory does not adequately capture economic behavior.

                          But let me turn the microphone over to one of the architects of the modern version of the theory, Robert Barro. In the following interview with the Minneapolis Fed (from 2005), Barro emphasizes the point Krugman makes here, i.e. that Ricardian equivalence says nothing about the effectiveness of fiscal policy as a stimulus for the economy (a point that IS worth noting since this point is often confused in discussion of this topic. As Barro tries to make clear, "It's never part of Ricardian equivalence that the level of government expenditure doesn't matter.":

                          Region: The Ricardian equivalence hypothesis, which you brought to prominence in 1974, might be taken to suggest that deficit spending isn't inherently harmful since rational people, expecting to pay higher taxes in the future to pay off government debt, will save more, so private savings will balance out the public deficit.
                          Does that imply that concerns about "irresponsible" levels of debt are unfounded? And is it puzzling to you that the Ricardian equivalence hypothesis isn't a mainstream belief in macroeconomics?
                          Barro: Let me say first that I think the Ricardian equivalence idea is basically right as a first-order proposition. However, people get confused as to exactly what it says. Before I say what that is, I should mention that, although the proposition is not mainstream in the sense of being fully accepted by most economists, the idea has had tremendous influence on the way economists think about this issue.
                          Analysis often begins with Ricardian equivalence as a first-order proposition and then goes on to investigate why there are deviations from precise equivalence. Thus, like the Modigliani-Miller theorem on corporate finance, Ricardian equivalence has become a common starting point for the way people think about budget deficits. This situation is vastly different from what it was before the mid 1970s.
                          To illustrate the potential pitfalls in what Ricardian equivalence says and does not say, one can consider the famous quote attributed to Vice President Cheney to the effect that President Reagan proved that budget deficits don't matter. The Cheney quote is often interpreted to mean that the level of government expenditure does not matter, and that surely is not what Ricardian equivalence says. The Ricardian proposition is about the consequences of paying for a given amount of public expenditure in different ways. Specifically, does it matter—or does it matter a lot—whether the government pays for its spending with current taxes or with current borrowing, which entails higher future taxes?
                          So, a central part of the proposition is that the amount of public expenditure—today and tomorrow—is being held constant. It's never part of Ricardian equivalence that the level of government expenditure doesn't matter. As [University of Chicago economist] Milton Friedman put it, the costs or benefits of government outlays depend on the amount and nature of what the government spends—there is no free lunch about paying for that spending. So whether you pay for it now or later is secondary.
                          As a first-order proposition, it is right that it matters little whether you pay for government spending with taxes today or taxes tomorrow...

                          [For a more academic discussion of this topic, see this discussion from David Romer's graduate macro text. Romer explains (contra Barro) why ""there is little reason to expect Ricardian equivalence to provide a good first approximation in practice."]

                            Posted by on Wednesday, December 28, 2011 at 10:58 AM in Budget Deficit, Economics, Taxes | Permalink  Comments (14) 

                            Links for 2011-12-28

                              Posted by on Wednesday, December 28, 2011 at 12:06 AM in Economics, Links | Permalink  Comments (38) 

                              Tuesday, December 27, 2011

                              "I Can't Think of a Better Intellectual Qualification"

                              Richard Green on Jeremy Stein (nominated earlier today to fill an open position on the Federal reserve Board):

                              Personally, I am a big fan of Stein's work. The shortest way to explain why is to list the titles of his five most cited papers:

                              • Herd Behavior and Investment
                              • A Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset Markets
                              • Rick Management: Coordinating Investment and Financing Policies
                              • Bad News Travels Slowly: Size, Analyst Coverage and the Profitability of Momentum Strategies
                              • Internal Capital Markets and the Competition for Corporate Resources.

                              Stein has spent his career trying to figure out how capital markets really work instead of pledging fealty to models that don't work very well.  I can't think of a better intellectual qualification for a Federal Reserve Board member.

                                Posted by on Tuesday, December 27, 2011 at 01:29 PM in Economics, Monetary Policy | Permalink  Comments (18) 

                                Obama Noninates Jeremy Stein and Jerome Powell to Fed Board of Governors

                                During the biggest financial panic in many, many decades, Congress has refused to confirm nominees to the Federal Reserve Board leaving the Fed short-handed. David Wessel reports there's some chance that will change:

                                President Barack Obama will announce Tuesday that he plans to nominate a Harvard University finance professor and a former private-equity executive to fill the two vacancies on the seven-member Federal Reserve Board, a White House official said.

                                The nominees are Jeremy Stein, 51 yeas old, an economist who did a five-month stint in the Treasury and White House in the early months of the Obama administration, and Jerome Powell, 58, who was undersecretary of the Treasury for domestic finance in the early 1990s during the George W. Bush administration.

                                If confirmed by the Senate...

                                A Republican and a Democrat -- this looks like an attempt to get both through by allowing one from each side of the political fence. But as Justin Wolfers said, "An independent Fed is not one that is half from one team, and half from the other."

                                More on Stein from Noam Scheiber.

                                ...he’s an absolutely terrific choice. He was consistently on the side of more capital for banks (often to the discomfort of other Obama officials and regulators throughout Washington). Relatedly, he was in favor of bank shareholders suffering large losses through dilution, and even favored foisting losses onto some of the banks' junior debt-holders, which put him at odds with colleagues in Tim Geithner’s Treasury Department. Anyway, anyone frustrated with a generally overly-credulous, overly-sympathetic posture toward the banks among the powers-that-be in Washington should want to see Stein confirmed. ...

                                Powell is more of a mystery. From the first link above:

                                Mr. Powell would fill a different niche on the Fed board, which has been without a governor with Wall Street experience since Kevin Warsh, a Morgan Stanley alumnus, left in April. A lawyer, Mr. Powell worked before and after his Treasury stint at investment bank Dillon Read & Co. He also has worked at private-equity firms Carlyle Group and Global Environment Fund and at Bankers Trust Co.

                                Known as Jay, Mr. Powell ... took a high-profile role over the summer warning about the adverse consequences of a failure to lift the federal debt ceiling.

                                One outcome would be for Powell to get confirmed, but not Stein (the reverse -- Stein but not Powell -- is harder to imagine).

                                  Posted by on Tuesday, December 27, 2011 at 10:42 AM in Economics, Monetary Policy, Politics | Permalink  Comments (5) 


                                  While I try to find something to post, a quick thought.

                                  A few weeks ago Paul Krugman said:

                                  what strikes me is just how wrong-headed the Obama administration’s “pivot” away from jobs and toward the deficit back in 2010 really was. It was bad economics; but it was also really bad politics, shifting the debate to exactly the ground where the right tends to have an (undeserved) advantage.

                                  The good news for Democrats is that Obama is now in the process of unpivoting.

                                  But the political establishment and the Very Serious Pundits are doing their best to turn the discussion back to deficit reduction.They already are.

                                  Don't let them.

                                    Posted by on Tuesday, December 27, 2011 at 08:46 AM in Budget Deficit, Economics, Politics, Unemployment | Permalink  Comments (9) 

                                    Links for 2011-12-27

                                      Posted by on Tuesday, December 27, 2011 at 12:06 AM in Economics, Links | Permalink  Comments (28) 

                                      Monday, December 26, 2011

                                      The Futility of Moving to the Middle

                                      Will the real Robert Samuelson please stand up:

                                      Robert Samuelson Again Forgets What He Said About the Budget Deficit, by Dean Baker: Less than a month ago Robert Samuelson told readers that it was unreasonable to expect the Super Committee to solve the country's deficit problem since the real issue is health care. He said that the Super Committee was not going to come up with a politically acceptable way to fix health care in three months so it was unrealistic to imagine that it would produce a solution to the long-run deficit problem.
                                      His comments in today's column suggest that he is unfamiliar with the piece he wrote last month. (Hot rumor: there are two Robert Samuelsons.) This one tells us that the problems is that the Republicans don't want to raise taxes and the Democrats refuse to consider cuts in spending, therefore we are going to have a long-term budget problem that will lead to an enormous economic crisis.
                                      Of course Samuelson's column last month was completely right. We pay more than twice as much per person as the average for other wealthy countries. If we get out health care costs in line with other countries we would be looking at budget surpluses not deficits. ...
                                      There are a few other points worth hitting Samuelson on in this piece. First, if we get military spending back down to its pre-September 11th share of GDP (3.0 percent), it will go far towards getting our future deficits down to sustainable course. (This would imply a savings of roughly $2 trillion over the next decade, if the reduction took place immediately.) ...
                                      Finally, the idea that if we don't get the deficit down something really bad is going to happen ignores the fact that something really bad is happening now. ... It is remarkable how easily Samuelson can ignore the disaster in front of his eyes, and would instead have us divert our attention to a vaguely defined really bad disaster in the indeterminate future. ...

                                      The Democrats "refuse to consider cuts in spending"? This reminds me of something Paul Krugman said not too long ago:

                                      Reality just doesn’t matter here — which is why Obama might as well reach out to his base instead of the unreachable right.

                                      What Samuelson and others like him need to understand is that failing to place blame where it belongs enables the very behaviors they find so appalling (of course, if the real target is social insurance rather than the deficit, then the strategy of blaming the Democrats for spending no matter the reality makes more sense).

                                        Posted by on Monday, December 26, 2011 at 09:48 AM in Budget Deficit, Economics, Politics | Permalink  Comments (38) 

                                        "One in Five American Families Have Medical Bill Problems"

                                        Melissa Jacoby at Credit Slips notes some bad news on medical bills:

                                        One in Five American Families Have Medical Bill Problems ... according to this new report.

                                        The error bands are relatively large:

                                        As Mirya Holman and I have explained in the bankruptcy context, measuring medical bill problems and debt is notoriously contested, but the Center for Studying Health System Change does try to make clear its methods and also uses similar metrics over time. The report also contains statistics on the proportion of their sample that considered filing for bankruptcy and actually did file. Definitely worth reading.  

                                        Even allowing for the uncertainty, the numbers are much larger than I find tolerable.

                                          Posted by on Monday, December 26, 2011 at 09:02 AM in Economics, Health Care | Permalink  Comments (27) 

                                          Paul Krugman: Springtime for Toxics

                                          The EPA's new rules on mercury and other airborne toxics should produce large benefits -- if they can survive opposition from the GOP:

                                          Springtime for Toxics, by Paul Krugman, Commentary, NY Times: Here’s what I wanted for Christmas: something that would make us both healthier and richer. And since I was just making a wish, why not ask that Americans get smarter, too?
                                          Surprise: I got my wish, in the form of new Environmental Protection Agency standards on mercury and air toxics for power plants. ...
                                          As far as I can tell, even opponents of environmental regulation admit that mercury is nasty stuff. It’s a potent neurotoxicant... The E.P.A. explains: “Methylmercury exposure is a particular concern for women of childbearing age, unborn babies and young children, because studies have linked high levels of methylmercury to damage to the developing nervous system, which can impair children’s ability to think and learn.”
                                          That sort of sounds like something we should regulate, doesn’t it?
                                          The new rules would also have the effect of reducing fine particle pollution, which is a known source of many health problems... The ... payoff to the new rules is huge: up to $90 billion a year in benefits compared with around $10 billion a year of costs in the form of slightly higher electricity prices. ...
                                          And it’s a deal Republicans very much want to kill.
                                          With everything else that has been going on in U.S. politics recently, the G.O.P.’s radical anti-environmental turn hasn’t gotten the attention it deserves. ... And I’m not exaggerating: during the fight over the debt ceiling, Republicans tried to attach riders that ... would essentially have blocked the E.P.A. and the Interior Department from doing their jobs. ...
                                          More generally, whenever you hear dire predictions about the effects of pollution regulation, you should know that special interests always make such predictions, and are always wrong. For example, power companies claimed that rules on acid rain would disrupt electricity supply and lead to soaring rates; none of that happened, and the acid rain program has become a shining example of how environmentalism and economic growth can go hand in hand.
                                          But again, never mind: mindless opposition to “job killing” regulations is now part of what it means to be a Republican. And I have to admit that this puts something of a damper on my mood: the E.P.A. has just done a very good thing, but if a Republican — any Republican — wins next year’s election, he or she will surely try to undo this good work.
                                          Still, for now at least, those who care about the health of their fellow citizens, and especially of the nation’s children, have something to celebrate.

                                            Posted by on Monday, December 26, 2011 at 12:33 AM in Economics, Environment, Market Failure, Regulation | Permalink  Comments (57) 

                                            Links for 2011-12-26

                                              Posted by on Monday, December 26, 2011 at 12:06 AM in Economics, Links | Permalink  Comments (31) 

                                              Sunday, December 25, 2011

                                              Merry Christmas, Happy Holidays, or, For Some, Just Plain Old Have a Nice Day

                                              I hope everyone has a great day.

                                                Posted by on Sunday, December 25, 2011 at 09:15 AM in Economics, Miscellaneous | Permalink  Comments (9) 

                                                Links for 2011-12-25

                                                  Posted by on Sunday, December 25, 2011 at 12:06 AM in Economics, Links | Permalink  Comments (47) 

                                                  Saturday, December 24, 2011

                                                  Twas the Night Before Christmas

                                                  This is a repeat from previous years, something my grandfather read to us each Christmas Eve, Twas The Night Before Christmas (other repeats: What Happens at the North Pole Stays at the North Pole... and "Sinte Klaas"):


                                                  Continue reading "Twas the Night Before Christmas" »

                                                    Posted by on Saturday, December 24, 2011 at 06:31 PM in Economics, Miscellaneous | Permalink  Comments (3) 

                                                    Fiscal Policy Can Help the Economy

                                                    For the doubters:

                                                    Fiscal Policy Works, by Paul Krugman: Via Brad DeLong, there’s a paper by David Romer (pdf) summarizing recent research on fiscal policy, inspired by the crisis and aftermath. And his conclusion is not at all what you hear on the talk shows; it is that there is now overwhelming evidence that fiscal policy does in fact work when it’s not offset by monetary policy. And since we’re now in a liquidity trap in which conventional monetary policy has no traction, that’s the world we’re in.

                                                    And for the austerity minded, stabilization policy works the same in both directions -- expansionary policy is expansionary, and contractionary policy is contractionary.

                                                      Posted by on Saturday, December 24, 2011 at 02:46 PM in Economics, Fiscal Policy | Permalink  Comments (5) 

                                                      Hoping Employment Takes Off...

                                                      Landing...but can't help worrying that this will happen.

                                                      Things do look better, but assuming recent trends don't end up like the skier in the link the question is how strong growth will be. Will it be just enough to absorb population growth, but no more? Or will there be an acceleration of growth that allows us to provide jobs for new entrants to the labor force and also begin to reemploy the milllions of people who lost jobs during the recession and have had no luck finding new ones?

                                                      I wish I was confident that will happen, and happen fairly soon. In the past, such bursts of activity during the recovery phase were normal and expected. But as I noted recently, it's hard to see where the needed jump in demand will come from:

                                                      ...no matter which sector you point to, government, business, households, or foreigners, there is little reason to expect the large increase in demand needed to drive an economic recovery. Things are looking better, and the green shoots might just be real this time around, but we are still a long, long way from returning to whatever our new normal might be.

                                                      It doesn't have to be this way. Although recessions that are caused by financial collapses are among the most difficult to recover from and lost decades are not at all unusual, as Christina Romer recently highlighted effective government policy (monetary and fiscal) can shorten the recovery time considerably.

                                                      As policymakers head home for the holidays, I hope they will give some thought to the families that could be having a much merrier Christmas if they had pursued more aggressive policy. And if they (and the powerful interests pulling their strings) do have such a "Christmas Carol" revelation, I hope they will also realize that it's not too late to do more.

                                                      I know this is a wish that's unlikely to come true -- we'll be lucky to avoid job-killing austerity measures in the coming year (lumps of coal for all!). But it's Christmas Eve, and maybe Santa will bring a surprise.

                                                        Posted by on Saturday, December 24, 2011 at 12:51 PM in Economics, Unemployment | Permalink  Comments (16) 

                                                        Totally Doable?

                                                        The Atlantic says:

                                                        There are just over 526,000,000 Christian kids under the age of 14 in the world who celebrate Christmas on December 25. In other words, Santa has to deliver presents to almost 22 million kids an hour, every hour, on the night before Christmas. That’s about 365,000 kids a minute; about 6,100 a second. Totally doable.

                                                        On the "totally doable" point, an old post (2005) gives the physicist's view:

                                                        Is there a Santa Claus? - a physicist view : Consider the following:

                                                        1) No known species of reindeer can fly. But there are 300,000 species of living organisms yet to be classified, and while most of these are insects and germs, this does not COMPLETELY rule out flying reindeer which only Santa has ever seen.

                                                        2) There are 2 billion children (persons under 18) in the world. BUT since Santa doesn't (appear) to handle the Muslim, Hindu, Jewish and Buddhist children, that reduces the workload to 15% of the total - 378 million according to Population Reference Bureau. At an average (census) rate of 3.5 children per household, that's 91.8 million homes. One presumes there's at least one good child in each.

                                                        3) Santa has 31 hours of Christmas to work with, thanks to the different time zones and the rotation of the earth, assuming he travels east to west (which seems logical).

                                                        This works out to 822.6 visits per second. This is to say that for each Christian household with good children, Santa has 1/1000th of a second to park, hop out of the sleigh, jump down the chimney, fill the stockings, distribute the remaining presents under the tree, eat whatever snacks have been left, get back up the chimney, get back into the sleigh and move on to the next house.

                                                        Assuming that each of these 91.8 million stops are evenly distributed around the earth (which, of course, we know to be false but for the purposes of our calculations we will accept), we are now talking about .78 miles per household, a total trip of 75-1/2 million miles, not counting stops to do what most of us must do at least once every 31 hours, plus feeding and etc.

                                                        This means that Santa's sleigh is moving at 650 miles per second, 3,000 times the speed of sound. For purposes of comparison, the fastest man- made vehicle on earth, the Ulysses space probe, moves at a poky 27.4 miles per second - a conventional reindeer can run, tops, 15 miles per hour.

                                                        4) The payload on the sleigh adds another interesting element. Assuming that each child gets nothing more than a medium-sized lego set (2 pounds), the sleigh is carrying 321,300 tons, not counting Santa, who is invariably described as overweight.

                                                        On land, conventional reindeer can pull no more than 300 pounds. Even granting that 'flying reindeer' (see point #1) could pull TEN TIMES the normal amount, we cannot do the job with eight, or even nine.

                                                        We need 214,200 reindeer. This increases the payload - not even counting the weight of the sleigh - to 353,430 tons. Again, for comparison - this is four times the weight of the Queen Elizabeth.

                                                        5) 353,000 tons traveling at 650 miles per second creates enormous air resistance - this will heat the reindeer up in the same fashion as spacecraft re-entering the earth's atmosphere. The lead pair of reindeer will absorb 14.3 QUINTILLION joules of energy. Per second. Each.

                                                        In short, they will burst into flame almost instantaneously, exposing the reindeer behind them, and create deafening sonic booms in their wake. The entire reindeer team will be vaporized within 4.26 thousandths of a second.

                                                        Santa, meanwhile, will be subjected to centrifugal forces 17,500.06 times greater than gravity. A 250-pound Santa (which seems ludicrously slim) would be pinned to the back of his sleigh by 4,315,015 pounds of force. In conclusion - If Santa ever DID deliver presents on Christmas Eve, he's dead now.

                                                        (NOTE: This appeared in the SPY Magazine (January, 1990) )

                                                        Of course Santa, like markets, is magic and that is not accounted for in this analysis.

                                                          Posted by on Saturday, December 24, 2011 at 10:28 AM Permalink  Comments (10) 

                                                          Links for 2011-12-24

                                                            Posted by on Saturday, December 24, 2011 at 12:06 AM in Economics, Links | Permalink  Comments (85) 

                                                            Friday, December 23, 2011

                                                            "Do Low Corporate Tax Rates Attract Inward Investment?"

                                                            Henry Farrell:

                                                            Do Low Corporate Tax Rates Attract Inward Investment?, by Henry Farrell: It may seem like a no-brainer that low corporate tax rates will attract investment from multinational corporations. However, the empirical evidence is surprisingly scanty, and in a forthcoming article in Comparative Political Studies (earlier non-paywalled version here), Nate Jensen finds no significant relationship across OECD countries...

                                                              Posted by on Friday, December 23, 2011 at 11:18 AM in Economics | Permalink  Comments (33) 

                                                              Paul Krugman: The Post-Truth Campaign

                                                              The truth is out there, but don't expect to find it in the Romney campaign:

                                                              The Post-Truth Campaign, by Paul Krugman, Commentary, NY Times: ...[C]onsider what Mr. Romney ... said on Tuesday: “President Obama believes that government should create equal outcomes. In an entitlement society, everyone receives the same or similar rewards, regardless of education, effort, and willingness to take risk. That which is earned by some is redistributed to the others.”
                                                              And in an interview the same day, Mr. Romney declared that the president “is going to put free enterprise on trial.” ...
                                                              Mr. Obama has never said anything suggesting that he holds such views... Over all, Mr. Obama’s positions on economic policy resemble those that moderate Republicans used to espouse. Yet Mr. Romney portrays the president as the second coming of Fidel Castro and seems confident that he will pay no price for making stuff up.
                                                              Welcome to post-truth politics. ...Mr. Romney ... has based pretty much his whole campaign ... attacking Mr. Obama for doing things that the president hasn’t done and believing things he doesn’t believe.
                                                              For example, in October Mr. Romney pledged that as president, “I will reverse President Obama’s massive defense cuts.” That line presumably plays well with Republican audiences, but what is he talking about? The defense budget has continued to grow steadily since Mr. Obama took office.
                                                              Then there’s Mr. Romney’s frequent suggestion that the president has gone around the world “apologizing for America.” This is a popular theme on the right — but the so-called Obama apology tour is a complete fabrication... Mr. Romney just invents stuff to make his case.
                                                              But won’t there be some blowback? ... Oh, Mr. Romney will probably be called on some falsehoods. But, if past experience is any guide, most of the news media will feel as though their reporting must be “balanced,”... even if what the Democrat said was actually true or, at worst, a minor misstatement.
                                                              This isn’t an abstract speculation. Politifact, the project that is supposed to enforce truth in politics, has declared Democratic claims that Republicans voted to end Medicare its “Lie of the Year.” It did so even though Republicans did indeed vote to dismantle Medicare as we know it and replace it with a voucher scheme that would still be called “Medicare,” but would look nothing like the current program....
                                                              So here’s my forecast for next year: If Mr. Romney is in fact the Republican presidential nominee, he will make wildly false claims about Mr. Obama and, occasionally, get some flack for doing so. But news organizations will compensate by treating it as a comparable offense when, say, the president misstates the income share of the top 1 percent by a percentage point or two.
                                                              The end result will be no real penalty for running an utterly fraudulent campaign. As I said, welcome to post-truth politics.

                                                                Posted by on Friday, December 23, 2011 at 12:47 AM in Economics, Politics | Permalink  Comments (96) 

                                                                Links for 2011-12-23

                                                                  Posted by on Friday, December 23, 2011 at 12:06 AM in Economics, Links | Permalink  Comments (57) 

                                                                  Thursday, December 22, 2011

                                                                  Central Banks and Treasuries Need to be "Pumping Out Safe Assets"

                                                                  Brad DeLong is hoping that if he and others make this point often enough, policymakers will finally listen:

                                                                  Why the U.S. Treasury, the Bundesrepublik Treasury, the Japanese Treasury, the Fed, the ECB, and the BoJ Need to Be Pumping Out Safe Assets at a Much Faster Pace..., by Brad DeLong: Full-employment equilibrium in the demand and supply of currently-produced goods and services requires that there be enough cash to grease all the transactions so that sellers are happy selling to would-be buyers. If not--if there is a liquidity squeeze--we see a downturn and the shortage of cash reflected in low asset prices of (and high interest rates on) pretty much all other financial assets as people scramble to dump other assets for cash and do so until they can no longer bear the cost of letting value go at fire-sale prices.
                                                                  Full-employment equilibrium in the flow of funds through financial markets requires that businesses (and governments) issue enough liquid savings vehicles to absorb all the planned full-employment saving in financial assets. If not--if there is a savings vehicle shortage--we see a downturn and not low but high prices of financial assets and we see what should be the transactions balances of the economy diverted as cash is transformed into a savings vehicle.
                                                                  Right now, however, it is not the case that we are in a liquidity squeeze: the debts of credit-worthy governments are not at a discount but at a premium. Right now, however, it is not the case that we have a shortage of liquid savings vehicles: equities and corporate and junk bonds--and the bonds of non-credit worthy governments--are selling not for high prices but for low ones.
                                                                  There is, however, a third market equilibrium condition: a credit-channel equilibrium condition. The economy must possess enough AAA-rated assets suitable to serve as collateral to keep the moral hazard associated with lending your wealth to somebody who knows more about the deal than you do from causing a Minsky meltdown. If not we see a downturn and what we see now: relatively low asset prices for risky assets and assets perceived as safe selling at values far above any reasonable estimate of long-run fundamentals that does not take account of their value as collateral for greasing financial-intermediation transactions.
                                                                  It is in that context that we need to look at what has happened to the global supply of suitable AAA assets as shown in Cardiff Garcia's unwanted mutant offspring of the most important chart in the world:

                                                                    Posted by on Thursday, December 22, 2011 at 11:59 AM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (41) 

                                                                    I Am Worried about My Grade

                                                                    I've had this conversation many times:

                                                                      Posted by on Thursday, December 22, 2011 at 11:22 AM in Economics, Universities | Permalink  Comments (28) 

                                                                      The GOP is Creating Uncertainty that Hurts the Economy

                                                                      Menzie Chinn summarizes recent work on the economic impact of uncertainty. The bottom line -- that it's uncertainty about fiscal policy such as the GOP has created that hurts the economy -- is worth noting:

                                                                      With the Republicans in the House maximizing policy uncertainty, I think it useful to recount some of the recent research on how uncertainty is affecting output...
                                                                      For me, the policy conclusion emanating from all three of these pieces is that if there is important policy uncertainty, it is that related to fiscal policy. Empirical (i.e., econometric) evidence that regulatory uncertainty is important is, to my knowledge, non-existent. Hence, we can conclude that repeated crises over the raising of debt ceilings, continuing resolutions, and the like should be avoided.

                                                                        Posted by on Thursday, December 22, 2011 at 09:51 AM in Economics, Fiscal Policy, Politics, Regulation | Permalink  Comments (14) 

                                                                        Failure to Extend the Payroll Tax Cut Will Slow Recovery

                                                                        I have some comments on the GOP's payroll tax increase:

                                                                        Failure to extend tax cut will slow recovery

                                                                          Posted by on Thursday, December 22, 2011 at 05:16 AM in Economics, Fiscal Policy, Taxes | Permalink  Comments (13) 

                                                                          Links for 2011-12-22

                                                                            Posted by on Thursday, December 22, 2011 at 12:06 AM in Economics, Links | Permalink  Comments (22) 

                                                                            Wednesday, December 21, 2011

                                                                            Romney Endorses "The Big Lie "

                                                                            Mitt Romney will say anything to be president:

                                                                            Romney-Gingrich Bid to Pin Crisis on Gov’t, by David J. Lynch: The leading Republican candidates for president have embraced an explanation of the financial crisis that has been rejected by the chairman of the Federal Reserve, many economists and even three of the four Republicans on the government commission that investigated the meltdown.
                                                                            Both former House Speaker Newt Gingrich and former Massachusetts Governor Mitt Romney lay much of the blame on U.S. government housing policies... The Republicans say the federal government pressed banks to make risky housing loans under a 1977 law called the Community Reinvestment Act, helping inflate home prices and ultimately sparking the crash.
                                                                            “The reason we have the housing crises we have is that the federal government played too heavy a role in our markets,” Romney said in a Nov. 9 Republican debate. “The federal government came in with Fannie Mae and Freddie Mac, and Barney Frank and Chris Dodd told banks they had to give loans to people who couldn’t afford to pay them back.” ...

                                                                            What Romney is showing us is that he is willing to embrace a false narrative in order to reach his goals. George Bush showed us how dangerous it can be to have someone with that attitude holding the reins of power.

                                                                              Posted by on Wednesday, December 21, 2011 at 03:49 PM in Economics, Politics | Permalink  Comments (50) 

                                                                              Sanity Clauses

                                                                              Olivier Blanchard:

                                                                              2011 In Review: Four Hard Truths, by Olivier Blanchard: What a difference a year makes …
                                                                              We started 2011 in recovery mode, admittedly weak and unbalanced, but nevertheless there was hope. ... Yet, as the year draws to a close, the recovery in many advanced economies is at a standstill, with some investors even exploring the implications of a potential breakup of the euro zone, and the real possibility that conditions may be worse than we saw in 2008.
                                                                              I draw four main lessons from what has happened.
                                                                              •First, post the 2008-09 crisis, the world economy is pregnant with multiple equilibria—self-fulfilling outcomes of pessimism or optimism, with major macroeconomic implications.
                                                                              Multiple equilibria are not new. We have known for a long time about self-fulfilling bank runs; this is why deposit insurance was created. Self-fulfilling attacks against pegged exchange rates are the stuff of textbooks. And we learned early on in the crisis that wholesale funding could have the same effects, and that runs could affect banks and non-banks alike. This is what led central banks to provide liquidity to a much larger set of financial institutions.
                                                                              What has become clearer this year is that liquidity problems, and associated runs, can also affect governments. Like banks, government liabilities are much more liquid than their assets—largely future tax receipts. If investors believe they are solvent, they can borrow at a riskless rate; if investors start having doubts, and require a higher rate, the high rate may well lead to default. The higher the level of debt, the smaller the distance between solvency and default... Without adequate liquidity provision to ensure that interest rates remain reasonable, the danger is there.
                                                                              •Second, incomplete or partial policy measures can make things worse.
                                                                              We saw how perceptions often got worse after high-level meetings promised a solution, but delivered only half of one. Or when plans announced with fanfare turned out to be insufficient or unfeasible.
                                                                              The reason, I believe, is that these meetings and plans revealed the limits of policy, typically because of disagreements across countries. Before the fact, investors could not be certain, but put some probability on the ability of players to deliver. The high-profile attempts made it clear that delivery simply could not be fully achieved, at least not then.  Clearly, the proverb, “Better to have tried and failed, than not to have tried at all,” does not always apply.
                                                                              •Third, financial investors are schizophrenic about fiscal consolidation and growth.
                                                                              They react positively to news of fiscal consolidation, but then react negatively later, when consolidation leads to lower growth—which it often does. Some preliminary estimates that the IMF is working on suggest that it does not take large multipliers for the joint effects of fiscal consolidation and the implied lower growth to lead in the end to an increase, not a decrease, in risk spreads on government bonds.  To the extent that governments feel they have to respond to markets, they may be induced to consolidate too fast, even from the narrow point of view of debt sustainability.
                                                                              I should be clear here. Substantial fiscal consolidation is needed, and debt levels must decrease. But it should be, in the words of Angela Merkel, a marathon rather than a sprint. It will take more than two decades to return to prudent levels of debt. There is a proverb that actually applies here too: “slow and steady wins the race.”
                                                                              •Fourth, perception molds reality.
                                                                              Right or wrong, conceptual frames change with events. And once they have changed, there is no going back. For example,... not much happened to change the economic situation in the Euro zone in the second half of the year. But once markets and commentators started to mention the possible breakup of Euro, the perception remained and it also will not easily go away. Many financial investors are busy constructing strategies in case it happens.
                                                                              Put these four factors together, and you can explain why the year ends much worse than it started.
                                                                              Is all hope lost? No, but putting the recovery back on track will be harder than it was a year ago. It will take credible but realistic fiscal consolidation plans. It will take liquidity provision to avoid multiple equilibria. It will take plans that are not only announced, but implemented. And it will take much more effective collaboration among all involved.
                                                                              I am hopeful it will happen. The alternative is just too unattractive.

                                                                              As Krugman notes here and here -- the former memorable for the line "there is a sanity clause" -- the IMF wasn't as crazy as the ECB and the OECD (and policy elites more generally) on the austerity issue:

                                                                              ...the [IMF] report takes on Alesina-type studies, which have been heavily promoted... The IMF basically finds them all wrong, largely for the reasons I have pointed out in the past: their methodology does a really terrible job at identifying actual changes in fiscal policy. ... And it turns out that identifying the episodes right reverses the results: contractions are contractionary, after all.

                                                                              However, while sanity may have prevailed on fiscal policy, the lack of comments on monetary policy -- particularly as it relates to the euro and the ECB -- is notable. Blanchard has, in the past, called for higher inflation targets and more aggressive policy, and I doubt it's an accident that this is omitted from his comments. There are vague references to this, e.g. "Without adequate liquidity provision to ensure that interest rates remain reasonable, the danger is there," but nothing specific. I think there's a big lesson to be learned about what can happen if a central bank refuses to act as a lender of last resort, and would have liked to have seen something along these lines included among the bullet points.

                                                                                Posted by on Wednesday, December 21, 2011 at 09:46 AM in Economics, International Finance | Permalink  Comments (31) 

                                                                                Links for 2011-12-21

                                                                                  Posted by on Wednesday, December 21, 2011 at 12:06 AM in Economics, Links | Permalink  Comments (83) 

                                                                                  Tuesday, December 20, 2011

                                                                                  The Great Economic Divide Makes Everyone Poorer

                                                                                  I have a new column:

                                                                                  The Great Economic Divide Makes Everyone Poorer

                                                                                  A divided society is a poorer society.

                                                                                    Posted by on Tuesday, December 20, 2011 at 12:24 PM in Economics, Fiscal Times, Income Distribution, Market Failure, Taxes | Permalink  Comments (72) 

                                                                                    Johnson: Austerity and the Modern Banker

                                                                                    Simon Johnson says "concentrated financial power is a gift that keeps on giving":

                                                                                    Austerity and the Modern Banker, by Simon Johnson, Project Syndicate: Santa Claus came early this year for four former executives of Washington Mutual (WaMu), a large US bank that failed in fall 2008. The Federal Deposit Insurance Corporation (FDIC) had brought a lawsuit against the four, actions that included taking huge financial risks while “knowing that the real estate market was in a ‘bubble.’” The FDIC sought to recover $900 million, but the executives have just settled for $64 million, almost all of which will be paid by their insurers; their out-of-pockets costs are estimated at just $400,000. ...
                                                                                    But, according to the FDIC, the four still earned more than $95 million from January 2005 through September 2008. So they are walking away with a great deal of cash. ... At the same time, their actions – and similar actions by other bankers – are directly responsible for both the run-up in housing prices and the damaging collapse that followed..., including through the loss of more than eight million jobs.
                                                                                    It is also leading to austerity – taxes are increasing and government spending is falling at the local and state level around the country. ... Precipitate austerity is hardly likely to help the economy find its way back to higher employment levels. ...
                                                                                    Big banks represent the ultimate in concentrated economic power in today’s economies. They are able to resist all meaningful reform that could really change their compensation schemes. Their executives want to get all the upside while facing none of the true downside.
                                                                                    But capitalism without the prospect of failure is not any kind of market economy. We are running a large-scale, nontransparent, and dangerous government subsidy scheme for the benefit primarily of a very few, extremely wealthy people. ... concentrated financial power is a gift that keeps on giving – but not to you.

                                                                                    I don't understand why those who thought they would benefit the most from the inflated asset prices before the crash -- the ones who pushed the bubble the hardest -- and in many, many cases did reap huge gains even after the losses from the crash are accounted for aren't being asked to shoulder a disproportionate share of the costs of cleaning up the mess (I guess I do understand, power talks). One of those costs, and a big one, is the increase in the deficit due to the loss of tax revenue and the increased use of public services after the crash. But instead of asking those who gained so much to give some of it back to help to pay these costs and clean up the mess they created, we are cutting social programs and putting the costs on those who had nothing to do with causing the problems we are having.

                                                                                      Posted by on Tuesday, December 20, 2011 at 11:01 AM in Budget Deficit, Economics, Financial System, Taxes | Permalink  Comments (18) 

                                                                                      Links for 2011-12-20

                                                                                        Posted by on Tuesday, December 20, 2011 at 12:06 AM in Economics, Links | Permalink  Comments (11) 

                                                                                        Monday, December 19, 2011

                                                                                        ...and a Government for the Special Interests

                                                                                        Is government working for you?:

                                                                                        The Defining Issue: Not Government’s Size, but Who It’s For, by Robert Reich: The defining political issue of 2012 won’t be the government’s size. It will be who government is for.
                                                                                        Americans have never much liked government. After all, the nation was conceived in a revolution against government. But the surge of cynicism now engulfing America isn’t about government’s size. It’s the growing perception that government isn’t working for average people. It’s for big business, Wall Street, and the very rich instead. ...
                                                                                        “Big government” isn’t the problem. The problem is big money is taking over government. ... If we want to get our democracy back we’ve got to get big money out of politics. ...

                                                                                          Posted by on Monday, December 19, 2011 at 06:16 PM in Economics, Politics | Permalink  Comments (22) 

                                                                                          "Obama's Stimulus Failure"

                                                                                          Dean Baker:

                                                                                          Obama's stimulus failure, by Dean Baker: The economy badly needs stimulus. ... In total, the economy has lost close to $1.3tn in annual demand as a result of the collapse of the housing bubble. This explains the economy's weak growth and high unemployment. There is no simple way to replace this demand.
                                                                                          We can gather together a coven of market-worshipping Republicans and sacrifice all the workers and retirees we want, it still will not replace the demand gap. We can love the private sector as much as we want and it still will not make firms go out and invest and hire when they don't see demand for their products. ...
                                                                                          This means that we need the government to generate demand to boost the economy. That was the point of President Obama's stimulus. Of course it was nowhere near large enough, as his advisors told him at the time. ...
                                                                                          If President Obama had been doing his job, he would have immediately begun pushing for more stimulus the day after the first one passed. He should have been straightforward with the American people and said that the stimulus approved by Congress was an important first step, but that the severity of the downturn was so great we would likely need more.
                                                                                          Instead of being honest with America, he started talking about the "green shoots of recovery" and said he was going to focus on the budget deficit. This was an error of unbelievable proportions. By raising the budget deficit front and centre, he backed himself into a corner from which it is almost impossible to now escape.
                                                                                          It was essential that Obama keep leading the charge on stimulus, explaining to the country the cause of the economy's weakness was a lack of demand. This story is counterintuitive, so it requires the voice of the president, along with many others, to constantly explain the logic to the country. People had to understand that we are poor because the country as a whole is spending too little to keep the workforce fully employed, not because the government is spending too much. ...
                                                                                          It's not surprising that they don't have the political support for more effective stimulus when they abandoned the effort to make the case almost two years ago.

                                                                                          The political constraints were and are real, and difficult to overcome -- but with strong leadership who knows? Unfortunately, we didn't get the leadership we needed (and the blame extends beyond the president, Democrats in Congress gave up without a fight as well). But the pivot to deficit reduction was surely a mistake.

                                                                                            Posted by on Monday, December 19, 2011 at 01:13 PM in Economics, Fiscal Policy, Politics | Permalink  Comments (84) 

                                                                                            Hiding Behind Links

                                                                                            A recent email prompts me to explain something.

                                                                                            I post lots of excerpts from articles about economics, but one thing you can't read at this site is the stuff I write for other outlets, instead I mostly link (e.g. the links to CBS, The Economist, and FDL from the last day or so in the posts below, and there will be a link to a column tomorrow).

                                                                                            I should explain the reason, because it may not be what you think. It's not an attempt to send traffic to the other sites. It's because I am one of those people who never, ever thinks the things they write are any good. Thus, when I'm done with a piece I never think it is good enough to post here. So I try to hide behind links. And sometimes, I don't even link (occasionally I find the courage to post things, but mostly I don't, and I can hardly read the comments when I do).

                                                                                            Deep down I hope you'll click through and not hate what you read, and it's always a big relief when the response is positive. That keeps me going. But I always fear otherwise -- that the dumb-ass of the day award is surely coming my way (perhaps for this post).

                                                                                            Anyway, because of the email I thought I should explain why I mostly link to my own stuff instead of highlighting it on my site. It's just me and my silly self-consciousness -- me thinking my stuff isn't good enough to post on my site.

                                                                                            Against my better judgement, here are the two posts I linked to earlier today:


                                                                                            Will the economy turn around in 2012?, by Mark Thoma, CBS News [link]

                                                                                            (Federal Reserve Bank of San Francisco)

                                                                                            (MoneyWatch) With the latest sightings of green shoots in the economy, it's natural to ask how long it will be until the economy recovers. Is an acceleration in economic activity just around the corner? Are we anywhere near the end of the long road back to a more normal economy?

                                                                                            UCLA's Edward Leamer provides a nice summary of the typical way in which the economy exits from a recession. The first and most important two sectors to pick up after a recession are housing construction and household consumption. Once the recovery is fully underway, business investment picks up as well, but that doesn't happen until housing and consumption lead the way.

                                                                                            The problem we face is that the sectors that generally lead us out of a recession are the sectors that were most damaged from the collapse of the housing bubble and the subsequent recession. Housing construction is unlikely to increase anytime soon, and households are still struggling to pay off their debt, debt that was made worse by the unemployment, stock crash, and housing price crash that came with the recession. (The automobile sector is also important in recoveries, but the signs there aren't any better.)

                                                                                            Recessions have different causes, and some types of recessions are easier to recover from than others. An increase in oil prices or an interest-rate hike by the Federal Reserve can be reversed quickly, and the recovery time is generally relatively fast. But as Carmen Reinhart and Kenneth Rogoff explain in their book This Time is Different, recessions that are caused by financial collapses are among the most difficult to recover from. When this type of a recession hits an economy, lost decades are not at all unusual.

                                                                                            Unfortunately for us, both housing markets and household balance sheets were severely damaged by the recession, and repairing them will take time. Housing values remain depressed with no sign of a robust recovery in sight, and households continue with the debt deleveraging process. Neither sector seems poised to lift us out of the doldrums in the near future.

                                                                                            These two graphs give a good indication of where things currently stand:

                                                                                            Is there anything else that could lead us out of the recession? Recall that aggregate demand is the sum of household, business, government, and foreign demand for our goods and services. As just noted, households are in no position to help, businesses -- including housing construction -- are also unlikely to provide the needed boost, so what about government and the foreign sector? Can they provide the needed demand? We certainly can't expect expansionary policy from government, if anything the size of government will contract, and with all the uncertainties in Europe the foreign sector is not the answer either. The Fed is another potential source of help, but it's given little reason to expect it will take additional steps to try to simulate the economy.

                                                                                            In short, no matter which sector you point to, government, business, households, or foreigners, there is little reason to expect the large increase in demand needed to drive an economic recovery. Things are looking better, and the green shoots might just be real this time around, but we are still a long, long way from returning to whatever our new normal might be.


                                                                                            Persistent trade gaps leave economies vulnerable, by Mark Thoma, The Economist [link]

                                                                                            A country that runs a current account deficit is borrowing money from the rest of the world. As with any loan, that money will need to be paid back at some point in the future.

                                                                                            The cost of these loans is the interest that must be paid, and any vulnerabilities to speculative attacks that come with them. But so long the benefits from the investment of the borrowed money exceed the costs, then there is no reason to be concerned about running a deficit. The profits from the loans will be more than sufficient to pay back the interest and principle.

                                                                                            There is another reason a country might want to run a current account deficit. For example, if there is a recession from, say, unexpected bad weather wiping out crops, a country may wish to borrow from foreigners in order to smooth output and avoid a large drop in consumption. As Krugman and Obstfeld note in their discussion of this topic in International Economics: Theory and Policy (6th ed.), "In the absence of this borrowing, the price of present output in terms of future output would be higher in the low-output country than abroad, so the intertemporal trade that eliminates this price differential leads to mutual gains."

                                                                                            Thus, it should be clear that trade deficits, at least on a temporary basis, are justified in many instances. Insisting that trade is balanced at all points in time would give up the opportunity to pursue profitable investment and to stabilise the economy during bad times.

                                                                                            However, although current conditions may justify a deficit, conditions can change rapidly—this is a lesson many countries in the euro have relearned recently—and when they do it can be difficult to adjust the current account quickly enough to avoid problems. This is why governments tend to avoid large and persistent current account deficits.

                                                                                            For one, large and persistent deficits may signal that a government has not been careful to invest the money it borrowed wisely. If the loans are used to fund extravagant spending by the powerful within the country and do nothing to raise productive capacity, then it will be difficult for the country to repay the money it has borrowed. Even with the best intentions, i.e. money borrowed to fund infrastructure projects, projections of the benefits are often overly inflated and when the reality hits—when the projects fail to deliver the promised benefits—countries can find themselves with debts that exceed their ability to meet their obligations. Once it becomes clear to financial markets that a country is headed for default, creditors become reluctant to lend to it driving interest rates up, and this brings on the speculators who can then drive the country's financial system to collapse.

                                                                                            What about large and persistent surpluses, are they safe? If the money is invested wisely, yes, but it can put a substantial fraction of a county's wealth at risk. If those who borrowed from you don't pay off, the wealth could be lost. In addition, countries that run a large surplus are often accused rightly or wrongly of following protectionist policies, and they face the potential for retaliatory action. However, for the most part a surplus is more acceptable than a deficit.

                                                                                            There are reasons to run an unbalanced trade account in the short-run, and a fairly large deficit can be justified if the money is being put to good use. The investments pay for themselves through the benefits they bring. But when the a trade deficit is large and persistent, it's generally a sign that the money is not being used productively and that at some point the country will not be able to meet its obligations. The loans may continue to be available in the short-run as interest rates rise and creditors are compensated for the risk they are taking—if you expect default in two years there is money to be make in the intervening period. But if the debts continue to pile up, at some point markets will say enough is enough and the end can come suddenly and swiftly as the loans needed to finance the deficit are no longer available.

                                                                                              Posted by on Monday, December 19, 2011 at 12:24 PM in Economics | Permalink  Comments (30) 

                                                                                              Are We There Yet?

                                                                                              This is something I wrote on Friday for CBS on how long it will take the economy to recover, but it didn't get posted until today:

                                                                                              Are we there yet?

                                                                                              I noted that policy can speed the recovery, and that we are not doing enough -- hence the forecast for a slow recovery. But I wish I would have emphasized the point made by Christina Romer a bit more, i.e. that even though the recession is due to a financial collapse, and recovery from this type of recession is notoriously slow, we are not destined to have our own lost decade. Effective policy can shorten the recovery time. But as things stand now, including the forecast for (the lack of aggressive) policy, it's hard to see how things can turn around anytime soon.

                                                                                                Posted by on Monday, December 19, 2011 at 10:32 AM in Economics, MoneyWatch | Permalink  Comments (6) 

                                                                                                Are Persistent Trade Deficits a Bad Thing?

                                                                                                The Economist asks:

                                                                                                Are persistent trade deficits a bad thing? Under what conditions are trade deficits benign, and under what conditions might they be a problem?

                                                                                                My answer is rather text-bookish (I consulted Krugman and Obstfeld's International Economics text before answering):

                                                                                                Other responses:

                                                                                                [All responses here.]

                                                                                                  Posted by on Monday, December 19, 2011 at 10:10 AM in Economics, International Trade | Permalink  Comments (38) 

                                                                                                  Paul Krugman: Will China Break?


                                                                                                  Will China Break?, by Paul Krugman, Commentary, NY Times: Consider the following picture: Recent growth has relied on a huge construction boom fueled by surging real estate prices, and exhibiting all the classic signs of a bubble. There was rapid growth in credit — with much of that growth taking place not through traditional banking but rather through unregulated “shadow banking” neither subject to government supervision nor backed by government guarantees. Now the bubble is bursting — and there are real reasons to fear financial and economic crisis.
                                                                                                  Am I describing Japan at the end of the 1980s? Or am I describing America in 2007? I could be. But right now I’m talking about China, which is emerging as another danger spot in a world economy that really, really doesn’t need this right now. ...
                                                                                                  The most striking thing about the Chinese economy over the past decade was the way household consumption, although rising, lagged behind overall growth. At this point consumer spending is only about 35 percent of G.D.P., about half the level in the United States.
                                                                                                  So who’s buying the goods and services China produces? Part of the answer is, well, us:... China increasingly relied on trade surpluses to keep manufacturing afloat. But the bigger story from China’s point of view is investment spending, which has soared to almost half of G.D.P.
                                                                                                  The obvious question is, with consumer demand relatively weak, what motivated all that investment? And the answer, to an important extent, is that it depended on an ever-inflating real estate bubble. ...
                                                                                                  And there was another parallel with U.S. experience: as credit boomed, much of it came not from banks but from an unsupervised, unprotected shadow banking system..: in China as in America a few years ago, the financial system may be much more vulnerable than data on conventional banking reveal.
                                                                                                  Now the bubble is visibly bursting. How much damage will it do to the Chinese economy — and the world? ...
                                                                                                  For what it’s worth, statements about economic policy from Chinese officials don’t strike me as being especially clear-headed. In particular, the way China has been lashing out at foreigners — among other things, imposing a punitive tariff on imports of U.S.-made autos that will do nothing to help its economy but will help poison trade relations — does not sound like a mature government that knows what it’s doing. ...
                                                                                                  I hope that I’m being needlessly alarmist here. But it’s impossible not to be worried: China’s story just sounds too much like the crack-ups we’ve already seen elsewhere. And a world economy already suffering from the mess in Europe really, really doesn’t need a new epicenter of crisis.

                                                                                                    Posted by on Monday, December 19, 2011 at 12:34 AM in China, Economics, Financial System, Housing | Permalink  Comments (44) 

                                                                                                    Links for 2011-12-19

                                                                                                      Posted by on Monday, December 19, 2011 at 12:06 AM in Economics, Links | Permalink  Comments (19)