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Friday, August 31, 2012

The (If I Were To Do Any Rounding, It Would Certainly Be To Four Hours, Not Three) Marathon Man

Paul Ryan appears to have inflated his accomplishments as a marathon runner by some margin:

Paul Ryan Says He’s Run Sub-3:00 Marathon: We have some new information on Republican vice presidential nominee Paul Ryan's claim in a radio interview of a sub-3:00 marathon.
A spokesman for the Romney-Ryan campaign e-mailed Runner's World today to say Ryan ran Grandma's Marathon in Duluth, Minnesota, while a college student in 1991.
When asked about Ryan’s finishing time, the spokesman said, "His comments on the [radio] show were the best of his recollection."
Ryan's name does not show up in the 1991 race results provided by Grandma's. Runner's World checked 11 years of results for Grandma's Marathon, from 1988 through 1998, and found a finisher in the 1990 race by the name of Paul D. Ryan, 20, of Minneapolis.
Ryan's middle name is Davis, and he was 20 in 1990. The finishing time listed was 4 hours, 1 minute and 25 seconds.
We are awaiting confirmation from the Ryan camp that the vice presidential nominee is the Paul D. Ryan listed in the race results – and, if he is, whether he ran any other marathons faster than 4:01:25. ...
In the interview, after Ryan told Hewitt that he ran in high school, Hewitt asked if Ryan still runs. Ryan replied, "Yeah, I hurt a disc in my back, so I don't run marathons anymore. I just run ten miles or less." When Hewitt asked Ryan what his personal best is, Ryan replied, "Under three, high twos. I had a two hour and fifty-something."
Runner's World has been unable to find any marathon results by Ryan. Requests for more information from Ryan's Washington and Wisconsin offices, and from the Romney-Ryan campaign, have so far gone unanswered. ...

In the interview, after Ryan told Hewitt that he ran in high school, Hewitt asked if Ryan still runs. Ryan replied, "Yeah, I hurt a disc in my back, so I don't run marathons anymore. I just run ten miles or less." When Hewitt asked Ryan what his personal best is, Ryan replied, "Under three, high twos. I had a two hour and fifty-something." ...

Nicholas Thompson at the New Yorker follows up:
... I contacted the campaign this evening about the discrepancy. Ryan, through a spokesman, responded that he'd just mixed things up. “The race was more than 20 years ago, but my brother Tobin—who ran Boston last year—reminds me that he is the owner of the fastest marathon in the family and has never himself ran a sub-three. If I were to do any rounding, it would certainly be to four hours, not three. He gave me a good ribbing over this at dinner tonight." ...

Paul Krugman earlier today:

... I remember the 2000 campaign, when Al Gore was constantly hounded by claims of fibbing on trivial issues — claims that, by the way, were all, as far as I could tell, fabricated. These alleged fibs supposedly showed some deep defect in his character. So if Ryan is making false claims about his physical prowess, this is absolutely fair game. ...

Ryan's budget claims, and many of his claims about Obama are just as outlandish, so it does seem to fit with his character.

    Posted by on Friday, August 31, 2012 at 08:44 PM in Economics, Politics | Permalink  Comments (24) 

    Fed Watch: Bernanke at Jackson Hole

    Tim Duy (my quick reaction to the speech is here -- I agree with Tim that, despite today's speech, "additional easing is not a no-brainer"):

    Bernanke at Jackson Hole, by Tim Duy: A current acute awareness of forecast bias leaves me almost hesitant to comment on today's speech by Federal Reserve Chairman Ben Bernanke.

    What is forecast bias? Here I am thinking of the bias of Fed watchers struggling to interpret every bit of data and ever comment from policymakers in the context of their own views of the economy. One version of such bias is thinking the Federal Reserve will do what you think they should do. Because you view the economy as weak, you assume the Fed will do so as well, and react appropriately. Such a bias, of course, will lead to an erroneous interpretation of the data and Fedspeak as it relates to monetary policy.

    I fear falling into a variation of this bias. For months, the flow of data and the Federal Reserve's own forecasts indicate the Fed will continue to fall short of both its employment and price stability mandates. This has been confirmed by numerous Fed speakers including Bernanke himself. Indeed, Bernanke has often stated disappointment with the pace of the recovery and, in particular, the costs of high levels of long-term unemployment. He has also said that nontraditional policy tools continue to be effective, indicating that the Fed could do more to boost the recovery.

    Yet such action has been fairly limited. I tend to see the extension of Operation Twist as simply maintaining the status quo, not additional easing. Expectations for another round of quantitative easing have been disappointed for the last three meetings. The bar to additional action has simply been higher than many believed.

    So now I ask myself if monetary inaction during 2012 leads me to place a "no action" bias in my own analysis. Am I picking out what I want to hear, and ignoring what I don't?

    Now, in all honesty, I haven't had a strong conviction on the last two meetings. They seemed like relatively close calls. On average, though, the Fed has moved gradually toward another round of quantitative easing, with seemingly only Bernanke holding back policymakers.

    Has Bernanke finally flipped sides, reverting to the Bernanke that we thought we knew back when he was writing about Japan? That is the question we ask as we take apart his Jackson Hole speech. And what biases are we bringing to the table when we do that analysis?

    My first take on the speech was that Bernanke largely rehashed what I think was general knowledge, although with a somewhat dovish spin that would indicate a higher probability of quantitative easing at the next meeting than I had previously believed. No obvious signs, but certainly on the margin pointing to additional easing. And whenever I worry about my bias, I seek confirmation from the bond markets. Right now, yields are down 4 to 5 bp, which is what I think would be the expected market reaction from a slightly more dovish Bernanke. So far so good.

    Bernanke's speech is largely backward looking. He examines the effects of nontraditional tools, both balance sheet tools and communication strategies, and concludes that both have been effective in easing financial conditions and boosting economic activity and employment. This result should really come as no surprise; Bernanke had previously expressed confidence that nontraditional tools had positive policy impacts. And he is not going to reverse course now and say that policy has been a failure.

    More important is his subsequent cost/benefit analysis. For months we have been able to surmise that Bernanke believed the costs of additional action outweighed the benefits. If this wasn't the case, he would have eased already. Is Bernanke's analysis shifting?

    Bernanke lists four potential costs: Impaired functioning of securities market, heightened inflation expectations, risks to financial stability from encouraging excessive leverage, and potential losses to the Fed's balances sheets. He quickly dismisses every concern, leading one to conclude that another round of QE is a no-brainer as the benefits obviously exceed the costs. He concludes the section with:

    In sum, both the benefits and costs of nontraditional monetary policies are uncertain; in all likelihood, they will also vary over time, depending on factors such as the state of the economy and financial markets and the extent of prior Federal Reserve asset purchases. Moreover, nontraditional policies have potential costs that may be less relevant for traditional policies. For these reasons, the hurdle for using nontraditional policies should be higher than for traditional policies. At the same time, the costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant.

    Now I hesitate - is this really a no-brainer? Do "economic conditions warrant" additional action? And notice that the cost/benefit analysis varies over time. While the benefits clearly outweighed the costs during the height of the crisis, is that still true today?

    Bernanke then assess the current economy. He is clearly not happy with the current state of affairs:

    Notwithstanding these positive signs, the economic situation is obviously far from satisfactory.

    Specifically, he identifies persistent high rates of unemployment, and dismisses a structural explanation. Thus, with the problem being cyclical, we have a clear role for monetary policy. This seems to be "warrant" additional action. But what is the explanation for persistent high unemployment rates?

    ...First, although the housing sector has shown signs of improvement, housing activity remains at low levels and is contributing much less to the recovery than would normally be expected at this stage of the cycle.

    Second, fiscal policy, at both the federal and state and local levels, has become an important headwind for the pace of economic growth...It is critical that fiscal policymakers put in place a credible plan that sets the federal budget on a sustainable trajectory in the medium and longer runs. However, policymakers should take care to avoid a sharp near-term fiscal contraction that could endanger the recovery.

    Third, stresses in credit and financial markets continue to restrain the economy. Earlier in the recovery, limited credit availability was an important factor holding back growth, and tight borrowing conditions for some potential homebuyers and small businesses remain a problem today. More recently, however, a major source of financial strains has been uncertainty about developments in Europe...

    Now I am concerned again, as Bernanke appears to be saying that the factors currently restraining the economy cannot be addressed by monetary policy. So what are the benefits to additional nontraditional tools in the current environment? Is he kicking the can back to Congress? Indeed, he later says:

    In addition, in the present context, nontraditional policies share the limitations of monetary policy more generally: Monetary policy cannot achieve by itself what a broader and more balanced set of economic policies might achieve; in particular, it cannot neutralize the fiscal and financial risks that the country faces. It certainly cannot fine-tune economic outcomes.

    This does not sound like he believes additional monetary policy would be particularly effective in the "present context." But he follows with this:

    As we assess the benefits and costs of alternative policy approaches, though, we must not lose sight of the daunting economic challenges that confront our nation. The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.

    So now I am thinking he has focused his comments almost exclusively on the employment portion of the mandate, not the price stability part (which they aren't hitting anyway, but that is a different story). This alone should scream additional easing. But is Bernanke really hinting at a bias toward additional easing, or is he simply trying to convince everyone that he really cares about unemployment even though he has not acted more aggressively to date? He cares, but just can't do much about it? Or is that just my internal bias speaking, the bias from months of the Fed seeming to say one thing while doing another?

    Attempting to take my own bias into account, my takeaways are:

    1. Bernanke gives a very clear defense of nontraditional monetary tools to date. The benefits have clearly outweighed the costs. His rapid dismissal of the potential costs leads one to believe that he is more inclined than not to additional action. This is critical; he is the key to moving the middle ground to additional easing.

    2. That said, the analysis is clearly backward looking. Do current conditions imply the same cost/benefit analysis, which Bernanke clearly states varies over time?

    3. Bernanke express considerable concern about high levels of unemployment. But he also seems to say that the factors preventing more rapid labor market improvement are beyond the scope of monetary policy. This sounds like Bernanke is not confident that more monetary policy will be effective.

    Taken together, Bernanke is attempting to be a man for all seasons, giving a spirited defense of the past that clears the way for additional action while explaining why such action might not be effective or taken in the future. Felix Salmon sums it up with:

    The overall tone here, then, is defensive: Bernanke’s on the back foot, trying to justify past and future actions against critics on all sides. And when an institution is in a defensive crouch, it’s not going to do anything bold. The Fed was bold in 2008-9, at the height of the financial crisis; those days are over now. And so, whether we like it or not, any real boost for the economy going forwards is not going to come from the Fed, and is going to end up having to come from Congress instead. I’m not holding my breath.

    Yes, if Bernanke is leaving it up to Congress, we have some troubling days ahead.

    Bottom Line: On net, Bernanke's speech leads me to believe the odds of additional easing at the next FOMC meeting are somewhat higher (and above 50%) than I had previously believed. His defense of nontraditional action to date and focus on unemployment point in that direction. This is the bandwagon the financial press will jump on. Still, the backward looking nature of the speech and the obvious concern that the Fed has limited ability to offset the factors currently holding back more rapid improvement in labor markets, however, leave me wary that Bernanke remains hesitant to take additional action at this juncture. This suggests to me that additional easing is not a no-brainer, but perhaps that is just my internal bias talking.

      Posted by on Friday, August 31, 2012 at 11:36 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (67) 

      Bad Political Discourse Drives Out Good

      Chris Dillow tries to explain the poor quality of political discourse:

      Adverse selection in political discourse, by Chris Dillow: ...there is adverse selection in political debate: fanatics are given attention whilst sober, rational voices are overlooked. There are four channels through which this happens:
      - Fanatics think their beliefs are so important and true that they set up lobbying groups and "thinktanks" to promote them, whilst rational people devote less time and organization to pushing their opinions. ...
      - Producers want "good" TV/radio, and this means having a violent debate between people with well-defined positions who can talk in soundbites. ...
      - People mistake confidence for knowledge, and so give too much credence to the irrationally overconfident.
      - A tendency has emerged for people to respect strongly-held opinions... This, of course, in the opposite of what should be the case. The fact that someone believes strongly in something is a reason for us to disrespect their belief and to discount it as the product of a fevered, fanatical and irrational mind.
      What I'm suggesting here is an adjunct to something Mancur Olson said in the 1960s. He pointed out that small numbers of people with large interests would organize themselves better than large numbers with smaller interests. The upshot, he said, was that politics would give too much weight to small vested interests to the detriment of aggregate well-being. ... Small groups with strongly-held beliefs are given more credence and deference than they should have.
      And this, in turn, implies that the mass media can sometimes undermine rational political discourse rather than promote it.

        Posted by on Friday, August 31, 2012 at 10:32 AM in Economics, Politics, Press | Permalink  Comments (34) 

        Fed Watch: 2012 Oregon Road Trip

        Tim Duy:

        2012 Oregon Road Trip, by Tim Duy: Something to occupy your time while you wait for Federal Reserve Chairman Ben Bernanke to speak at Jackson Hole...
        We are on the tail end of what is becoming the annual end of summer Oregon road trip. This year we headed out east to the Wallowa Mountains, which, depending on the geologist you talk to, may or may not be considered a part of the Blue Mountains. The Wallowa Mountains are formed from granite lifted by underlying magna, with the landscape later carved by glaciers. The region differs greatly from the volcanic peaks of the Cascades that many typically associate with Oregon. Especially neat are rivers filled with granite pebbles:


        Our first destination was the city of Joseph, notable for an industry cluster of three bronze foundries. The main strip has what must be the most large bronze sculptures per capita of any city on the US:


        I have a certain affinity for this type of region, dominated by cattle ranching and related agriculture (hay). If the number of shiny, new F150s is any guide, the region must be coming off of some fat years. After a night in a roadside motel (I couldn't bear the thought of setting up camp in the dark with two tired and hungry kids), we made our way to our anticipated campground at the Wallowa Lake State Park.
        We spent one night. It was not our kind of place. To be sure, it was clean and well run. But it was large, with no separation between camp sites. For my wife and I, whose camping experience together amounts almost exclusively to wilderness trips backpacking throughout much of the Oregon Cascades and the Olympic National Park in Washington, this just wasn't going to work. Luckily, because of tight reservations, we were forced to pack up the truck with the expectation of a new site within the same campground. Thinking that the site would not be open, we took to the road to explore the region for a few hours.
        We stumbled up the Lostine River, and found numerous Forest Service campgrounds. No showers, but that isn't our camping style anyway. We settled on the Shady Campground near the top of the road. Large, well-separated, clean campsites next to the river. Not having this change in mind, after we set up camp I had to head back down to the town of Lostine for a fresh supply of ice. Not that I minded; I admit to enjoying trashing the overall gas mileage blowing up dust on gravel roads. I realized at the end I had no cash and, as these things seem to go, it turned out the credit card machine at the general store (in continuous operation for more than 100 years) was down. No problem, though. The owner doesn't like to send people back up the river empty handed, so he agreed to send me a bill if I didn't pass by later in the week. Yes, this still does happen in some part of the world. So I told him my name was Paul Ryan and gave him a Wisconsin address. No, of course not.
        The Wallowa Mountains contain the Eagle Cap Wilderness, an opportunity to get high (altitude) fast. The Maxwell Lake trail begins at the Shady Campground:



        After three miles of switchbacks alternating through forest and meadows, the trail shifts to a much steeper grade that carries you into a wonderful basin with vistas such as this:


        Maxwell Lake itself is at the bottom of a steep-sided basin:


        The hike, according to the iPhone GPS:



        And, honestly, we never thought we would make it, but our littlest hikers did a wonderful job:


        They don't realize yet the doors this opens.
        We spent three nights on the Lostine before heading back west (after paying my tab in Lostine) through the Elkhorn Range and its old gold rush towns from the 1800s. A travel find was the Clyde Holliday State Park, sitting right on Highway 26 west of John Day. Thirty one campsites, well-separated, with showers, $22 a night. Not a true camping experience, but a good stopping point. As an added bonus, walking distance to a fishing pond. I was skeptical - late in the season, the water level was low and the weed level was high. But it was stocked annually, and I managed to pull five rainbow trout out of the murky water, throwing them all back to be tortured by the next fisherman.
        We continued west, stopping at the John Day Fossil Beds, first the Sheep Rock Unit:


        Great visitor center (National Park Service) detailing the extent of the fossils collected in the region. Very rich beds in which the fossils of various flora and fauna are found together for a more complete picture of life in the past:



        You can watch the paleontologists work through a glass window:


        We also stopped at the Painted Hills Unit:


        Striking landscapes. We continued on to meet friends staying at Sunriver, and are now on the last legs of the trip with a few days in the Crescent Lake area, back with a steady internet connection. Now waiting for Bernanke like everyone else.

          Posted by on Friday, August 31, 2012 at 09:08 AM in Economics, Fed Watch | Permalink  Comments (11) 

          Paul Krugman: The Medicare Killers

          Paul Ryan’s 'big lie' about Medicare:

          The Medicare Killers, by Paul Krugman, Commentary, NY Times: Paul Ryan’s speech Wednesday night may have accomplished one good thing: It finally may have dispelled the myth that he is a Serious, Honest Conservative. Indeed, Mr. Ryan’s brazen dishonesty left even his critics breathless. ...
          But Mr. Ryan’s big lie — and, yes, it deserves that designation — was his claim that “a Romney-Ryan administration will protect and strengthen Medicare.” Actually, it would kill the program. ...
          The Republican Party is now firmly committed to replacing Medicare with what we might call Vouchercare. The government ... would give you a voucher that could be applied to the purchase of private insurance..., the vouchers almost certainly would be inadequate...
          Why would anyone think that this was a good idea..., wouldn’t private insurers reduce costs through the magic of the marketplace? No. All, and I mean all, the evidence says that public systems like Medicare and Medicaid ... are better than the private sector at controlling costs. ...
          So Vouchercare would mean higher costs and lower benefits for seniors. Over time, the Republican plan wouldn’t just end Medicare as we know it, it would kill the thing Medicare is supposed to provide: universal access to essential care. Seniors who couldn’t afford to top up their vouchers with a lot of additional money would just be out of luck.
          Still, the G.O.P. promises to maintain Medicare as we know it for those currently over 55. Should everyone born before 1957 feel safe? Again, no.
          For one thing, repeal of Obamacare would cause older Americans to lose a number of significant benefits..., including the way it closes the “doughnut hole” in drug coverage and the way it protects early retirees.
          Beyond that, the promise of unchanged benefits for Americans of a certain age just isn’t credible. Think about the political dynamics that would arise once someone born in 1956 still received full Medicare while someone born in 1959 couldn’t afford decent coverage. ... For sure, it would unleash political warfare between the cohorts — and the odds are high that older cohorts would soon find their alleged guarantees snatched away.
          The question now is whether voters will understand what’s really going on (which depends to a large extent on whether the news media do their jobs). Mr. Ryan and his party are betting that they can bluster their way through this, pretending that they are the real defenders of Medicare even as they work to kill it. Will they get away with it?

            Posted by on Friday, August 31, 2012 at 12:21 AM in Economics, Health Care, Politics, Social Insurance | Permalink  Comments (49) 

            Links for 08-31-2012

              Posted by on Friday, August 31, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (32) 

              Thursday, August 30, 2012

              DeLong: Democracy in Tea Party America

              Brad DeLong:

              Democracy in Tea Party America, by Brad DeLong, Commentary, Project Syndicate: When the French politician and moral philosopher Alexis de Tocqueville published the first volume of his Democracy in America in 1835, he did so because he thought that France was in big trouble and could learn much from America. ...
              To the “sick” France of 1835, Tocqueville counterposed healthy America, where attachment to the idea that people should pursue their self-interest was no less strong, but was different. The difference, he thought, was that Americans understood that they could not flourish unless their neighbors prospered as well. Thus, Americans pursued their self-interest, but in a way that was “rightly understood.”
              Tocqueville noted that “Americans are fond of explaining…[how] regard for themselves constantly prompts them to assist each other, and inclines them willingly to sacrifice a portion of their time and property to the general welfare.” The French, by contrast, faced a future in which “it is difficult to foresee to what pitch of stupid excesses their egotism may lead them,” and “into what disgrace and wretchedness they would plunge themselves, lest they should have to sacrifice something of their own well-being to the prosperity of their fellow-creatures.” ...
              Nearly two centuries have passed since Tocqueville wrote his masterpiece. ... And the Republicans gathered in Tampa ... to say that the America that Tocqueville saw no longer exists: Americans no longer believe that the wealth of the rich rests on the prosperity of the rest. Rather, the rich owe their wealth solely to their own luck and effort. The rich – and only the rich – “built” what they have. The willingness to sacrifice some part of their private interest to support the public interest damages the souls and portfolios of the 1%.
              Perhaps the moral and intellectual tide will be reversed, and America will remain exceptional for the reasons that Tocqueville identified two centuries ago. Otherwise, Tocqueville would surely say of Americans today what he said of the French then. The main difference is that it has become all too easy “to foresee to what pitch of stupid excesses their egotism may lead them” and “into what disgrace and wretchedness they would plunge themselves.”

                Posted by on Thursday, August 30, 2012 at 10:39 AM in Economics | Permalink  Comments (43) 

                Agents of Misinformation

                Steve Benen:

                A pass-fail test, by Steve Benen: At the Republican National Convention last night, Paul Ryan told so many demonstrable lies, he raised important questions about his character and what's left of his integrity. What matters next, however, is whether anyone notices.
                It's come as something of a relief to see so many media professionals go after Ryan for his dishonesty last night. ... I'm well aware of the fact that the vast majority of Americans will never see any of this scrutiny, but other reporters, editors, and producers will, and if a consensus begins to emerge that Romney/Ryan is fundamentally dishonest, this is likely to influence the public's perceptions of the race.
                But let's not ignore those inclined to give Ryan a pass. ...
                Not to put too fine a point on this, Ryan, like his running mate, tells obvious falsehoods because he's confident there will be no consequences. He simply assumes he can lie with impunity because the media doesn't care to separate fact from fiction.
                This is a critical test of the political world, and a few too many are failing.

                They have been doing this with economics for a long time, but it has been difficult for reporters to figure out the difference between legitimate disputes about theory and evidence within the profession, and outright misrepresentations (it's not that hard in every case, and it's frustrating reporters still don't do better than this, but it's at least understandable in some instances).

                But this year it is rising to a different level, and what used to bug me about the right's presentation of economics has now been extended to their discussion of everything. The campaign is pretty much laughing at the fact checkers and saying, so what?

                The press is supposed to be helping America understand, not helping to mislead them, and it's time for reporters -- political reporters in particular -- to take a long, hard look inward and figure out where they've gone so wrong.

                  Posted by on Thursday, August 30, 2012 at 09:42 AM in Economics, Politics, Press | Permalink  Comments (27) 

                  Central Planning in the Bronze Age

                  To what extent did ancient economies rely upon central planning?:

                  Comment and Discussion on Central Planning in the Bronze Age, by Daron Acemoglu and James Robinson: In our earlier post, we suggest that the economic organization of Greek Bronze Age civilizations had many elements similar with what we today identify as central planning — centralized control of the economy for extraction and redistribution of resources.

                  William Parkinson and Gary Feinman from the The Field Museum in Chicago have sent this comment pointing to some recent, more nuanced interpretations. Here is their comment:

                  The study of ancient economies is evolving, bolstered by years of painstaking data collection by archaeologists and their collaborators. ... We agree that more-or-less centralized economic and political systems certainly existed in the past, many early states, which in the past were described as centralized, redistributive, economies, now are understood based on new empirical underpinnings to have been much more dynamic systems with characteristics of decentralized economies and even vibrant markets. ...

                  In the case of the Aegean Late Bronze Age, for example, Mycenaean palaces were initially characterized as ... powerful redistributive centers whose primary role was to extract labor and materials from the hinterland, and to support production and distribution of ... specialized craft products.

                  Over the last decade the roles and relationships of Mycenaean palaces have been redefined significantly. Rather than being portrayed as centralized rulers that controlled nearly every aspect of the political economy, the Mycenaean palatial elite now are understood to have been very savvy statesmen who managed to gain some limited political benefits by directing very specific aspects of the palatial economy. This revisionist perspective depicts Mycenaean palaces not as omnipotent, highly centralized, redistributive centers, but as cogs in more delicate, networked, sociopolitical systems that were dependent on economic activities that they could not completely control.

                  Models of ancient Near Eastern temple economies, which previously also were described as centralized, redistributive, centers, have undergone similar modifications. Across the ocean, later prehispanic Mesoamerican economies are now seen as having been characterized by active market systems with flexible economic valuations, and broadly accepted currencies, albeit not coinage. Earlier theoretical perspectives that reflexively applied the centralized and command economy model to this region have largely been rejected as increasing bodies of evidence have revealed that most productive activities for exchange were implemented in domestic contexts and so would have been near impossible to control centrally.

                  Gary Feinman and William Parkinson certainly know more about this literature than we do. ... Nevertheless, it is important to distinguish between absolute control of the governing institutions ... and central planning itself. Central planning involves the suppression of markets and price systems for the governing institutions and elites to better extract resources and politically and economically control society. The fact that the palace elites were “cogs in more delicate, networked, sociopolitical systems that were dependent on economic activities that they could not completely control” does not imply that there was no central planning. ...

                  So though the literature is evolving and though the control of the elite was certainly not absolute, the economic organization of Bronze Age Greek civilizations still appears to have many many parallels with central planning.

                    Posted by on Thursday, August 30, 2012 at 01:11 AM in Economics | Permalink  Comments (25) 

                    The Base of Mount Sharp

                      Posted by on Thursday, August 30, 2012 at 12:15 AM in Science | Permalink  Comments (2) 

                      Links for 08-30-2012

                        Posted by on Thursday, August 30, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (20) 

                        Wednesday, August 29, 2012

                        'It Is Mathematically Impossible for Romney to Keep His Tax-Policy Promises'

                        Greg Mankiw points to Matin Feldstein: Marty runs some numbers.

                        Brad DeLong checks the math. Oops:

                        Martin Feldstein Accidently Proves Either (i) 152 > 186 or (ii) It Is Mathematically Impossible for Romney to Keep His Tax-Policy Promises: The fact that he sought to prove otherwise and wound up confirming the Tax Policy Center's conclusions purely by accident gives me additional confidence that the TPC knows what it is doing. ...

                        More here.

                          Posted by on Wednesday, August 29, 2012 at 03:05 PM in Budget Deficit, Economics, Politics | Permalink  Comments (38) 

                          RomneyRyanomics: A Bad Deal for the Working Class:

                          This is a column I wrote just after Paul Ryan was chosen as Romney's running mate (see also yesterday's column: Republicans: "We Won't Build That"):

                          RomneyRyanomics: A Bad Deal for the Working Class: Mitt Romney’s choice of Paul Ryan as his running mate makes it abundantly clear that the upcoming presidential election presents a choice between two very different views on the role of government in the economy. Republicans believe that smaller, less intrusive government and the reduced tax burden that smaller government allows, particularly for the wealthy, and are the keys to robust economic growth.

                          Democrats do not share the Republican vision of a smaller government, and they are particularly opposed to cuts to social insurance programs such as Medicare and Social Security that are generally at the forefront of Republican proposals to reduce the size of government. Democrats want to preserve existing social insurance programs and perhaps even expand them in this era of increasing uncertainty. They also want to make sure that everyone – including the wealthy – pays an equitable share of the taxes required to support the government programs that we provide.

                          The debate on this topic should be welcomed. We need to figure out how much government we desire as a nation, and how to pay for it. But the debate must be based upon facts. The discussion should not be driven by politicians hoping to satisfy ideological desires through misinformation, false promises, and misplaced blame for our economic problems. Unfortunately, that’s a pretty good description of how the debate on this topic has gone so far during the presidential campaign, particularly what we’ve heard from Romney, Ryan, and other politicians on the political right.

                          In order to support their call for reduced spending on government programs and lower taxes on the wealthy, Romney and Ryan want you to believe that our budget problems were caused by out of control spending on social programs, programs favored by Obama and other Democrats. They also want you to believe that our economic problems stem largely from a government sector that is too large and too involved in private sector affairs. According to this perspective, the solution to all of our problems is to cut incentive killing taxes, particularly for the wealthy, to cut social programs that undermine the desire to work and save, and to leave as much as possible – including whatever remnants of Social Security and Medicare remain after the cuts they’d like to impose – to the private sector.

                          But the Romney-Ryan narrative about out of control spending, an over-zealous government, and growth inhibiting taxes isn’t accurate. First, our present budget problems are primarily the result of the Bush tax cuts, the recession, and the wars in Iraq and Afghanistan. As the CBPP points out, “Without the economic downturn and the fiscal policies of the previous Administration, the budget would be roughly in balance over the next decade.” It wasn’t out of control spending by Democrats or the policies enacted by Obama that created our current deficit problem, it was the decision by Bush and other Republicans to cut taxes and engage in wars.

                          Second, the deficit was also caused by the recession, but here again blame is misplaced. The recession wasn’t caused by over-zealous government policy as Republicans charge. It was an out of control private sector – the decisions of financial executives who made mountains of money as they crashed the economy – that caused our problems.  

                          Third, Romney, Ryan, and other Republicans also argue that a key part of the solution to our troubles is to cut taxes for the wealthy, but there’s very little evidence that tax cuts for the wealthy spur economic growth. The economy’s performance after the Bush tax cuts, for example, does not support this contention.

                          And that’s not the only problem with Romney’s plan. An analysis by the non-partisan Tax Policy Center shows that Romney’s numbers can’t work unless there are large cuts to social programs the middle class relies upon, and regressive middle class tax increases. For reasons that are easy to guess, Republicans are doing their best to hide this from voters. For example, Mitt Romney won’t specify the spending cuts and middle class tax increases that will be needed in order to make his budget work. In fact, Romney insists – laughably according to every honest analyst that examines his plan – that he can balance the books by closing tax loopholes. But no matter how much Republicans try to avoid admitting it, large costs to middle class households cannot be avoided under the Romney plan.

                          When all of the misleading arguments are set aside, Romney’s economic proposal comes down to a simple tradeoff, less social insurance and other government programs for the working class, perhaps higher taxes as well, and more tax cuts for the wealthy.  Perhaps that’s a tradeoff America wants to make, perhaps not – I suspect not. But whatever the choice, people should be fully informed about the decision they are making. Unfortunately, as is all too clear from their misinformation campaign, an informed electorate is not something that Romney, Ryan, and other Republicans have an interest in promoting.

                            Posted by on Wednesday, August 29, 2012 at 10:16 AM in Economics, Politics | Permalink  Comments (26) 

                            'Changing Views of Globalization’s Impact'

                            Edward Alden of the Council on Foreign Relations:

                            Changing Views of Globalization’s Impact, by Edward Allen, Commentary, NY Times: ...For decades, economists resisted the conclusion that trade – for all of its many benefits — has also played a significant role in job loss and the stagnation of middle-class incomes in the United States. ...
                            Rather than focusing on trade, economists argued that other factors – especially “skill-biased technical change,” technological innovation that puts an added premium on skilled workers – played the biggest role in holding down middle-class wages. But now economists are beginning to change their minds. Responding to The Times’s recent survey about the causes of income stagnation, many top economists have cited globalization as a leading cause.
                            While the evidence is still not conclusive, it is pretty strong. Trade’s effect on jobs and income, which was probably modest through the 1990’s, now seems to be growing much larger. [list and discussion of recent studies]...
                            The usual rebuttal to these findings is to argue that they stem mostly from manufacturing. And manufacturing, the argument goes, is facing a long-run, secular decline in employment that is largely technology-driven, not unlike the story of agriculture in the 20th century. The job losses in manufacturing may seem as if they have been caused by trade,... but they have actually been caused by technological change.
                            Through the 1990s, that story was largely plausible. But over the last decade it is not. ... There is no question that over the last decade United States manufacturing has declined, taking away jobs and driving down wages for those who are still employed. Robert Atkinson and colleagues have a useful paper on this topic, showing that the loss of more than five million jobs in manufacturing in a decade was not primarily a technology and productivity story.
                            The real-world evidence makes it surprising that it has taken economists so long to catch on...
                            I've expressed pro-trade views in the past, and I still have them. But it's not enough to say, as we do, that the gains from trade are such that (under fairly general conditions) we can make everyone better off and no one worse off. If the actual result is that all the gains go to the top of the income distribution, and all the costs go to the working class -- if the distribution of the gains results in a large class of losers -- then it is much harder to defend. We must find a way to ensure that trade realizes the promise of "lifting all boats" instead of just the yachts.

                              Posted by on Wednesday, August 29, 2012 at 08:34 AM in Economics, Income Distribution, International Trade, Unemployment | Permalink  Comments (96) 

                              Links for 08-29-2012

                                Posted by on Wednesday, August 29, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (88) 

                                Tuesday, August 28, 2012

                                Republicans: We Won't Build That

                                I couldn't resist commenting on the economic policies being promoted at the Republican National Convention:

                                Republicans: We Won't Build That

                                (The discussion of Republican policy is at the end of the article.)

                                  Posted by on Tuesday, August 28, 2012 at 12:33 AM in Economics, Fiscal Times, Policy, Politics | Permalink  Comments (32) 

                                  The 'Grand Old Marxists'

                                  Who are the real Marxists? This is from Timothy Snyder at the NYRB blog:

                                  Grand Old Marxists, by Timothy Snyder, NY Review of Books: A specter is haunting the Republican National Convention—the specter of ideology. The novelist Ayn Rand (1905-1982) and the economist Friedrich von Hayek (1899-1992) are the house deities of many American libertarians, much of the Tea Party, and Paul Ryan in particular. ...
                                  Romney has lots of money... In the right-wing anarchism that arises from the marriage of Rand and Hayek, Romney’s wealth is proof that ... unhindered capitalism represented by chop-shops such as Bain must in the end be good for everyone. ...
                                  The attempt to add intellectual ballast to Romney’s career pulls the ticket downward into the slog of twentieth-century ideology... Like Marxism, the Hayekian ideology is a theory of everything, which has an answer for everything. Like Marxism, it allows politicians who accept the theory to predict the future, using their purported total knowledge to create and to justify suffering among those who do not hold power. ...
                                  Hayek and Rand are comfortable intellectual company not because they explain reality, but because, like all effective ideologists, they remove the need for any actual contact with it. ...
                                  Rich Republicans such as Romney are of course a small minority of the party..., the Republican electorate ... must be instructed that their troubles are not simply a pointless contrast to the gilded pleasures of the man at the top of the Republican ticket, but rather part of the same story, a historical drama in which good will triumph and evil will be vanquished. Hayek provides the rules of the game: anything the government does to interfere in the economy will just make matters worse; therefore the market, left to its own devices, must give us the best of all possible worlds. Rand supplies the discrete but titillating elitism: this distribution of pleasure and pain is good in and of itself... In her novels, the suffering of ordinary Americans (“parasites,” as they are called in Atlas Shrugged) provides the counterpoint to the extraordinary pleasures of the heroic captains of industry (which she describes in weird sexual terms). A bridge between the pain of the people and the pleasure of the elite which mollifies the former and empowers the latter is the achievement of an effective ideology.
                                  In the Romney/Ryan presidential campaign, Americans who are vulnerable and isolated are told that they are independent and strong, so that they will vote for policies that will leave them more vulnerable and more isolated. Ryan is a good enough communicator and a smart enough man to make reverse Marxism work as a stump speech or a television interview. But as national policy it would be self-destructive tragedy. ...

                                    Posted by on Tuesday, August 28, 2012 at 12:30 AM in Economics, Politics | Permalink  Comments (39) 

                                    'The Party of Capitalism?'

                                    Why do conservatives support job and economy killing austerity?:

                                    The party of capitalism?, by Chris Dillow: Most of us instinctively think of the Tories as the party that promotes capitalists' interests. But is this true? ...
                                    Cameron's apparent desire to see a fall in household debt, would both be bad for profits (except under unlikely conditions). This poses the question: if Tory policies threaten to depress profits, how can we say that the Tories are the party of capitalism?
                                    One answer might be that they'd like to be the party of capitalism, but are also the stupid party, and so are incapable of seeing that capitalists' interests require - at least temporarily - a looser fiscal policy.
                                    Another possibility is that they are playing a longer game. They believe that fiscal austerity will weaken workers' bargaining power and so permit higher profit margins. ...
                                    Yet another answer would be Kalecki's famous one - that governments must renounce activist fiscal policy in order to maintain capitalists' power in the longer-term by ensuring that the economy remains dependent upon business "confidence."
                                    All these answers have a common problem. They render the claim that "the Tories are the party of capitalists" untestable. Pretty much any policy that seems to jeopardize capitalists' near-term interests can be explained away either as stupidity or as being in capitalists' longer-term interests. This poses the question: what evidence would disconfirm the claim that the Tories are the party of capitalism? Unless this can be answered, the claim loses any empirical interest.
                                    There is, though, another possibility. Maybe it's not that Tories like the capitalist class, but rather that they hate the working class.

                                      Posted by on Tuesday, August 28, 2012 at 12:24 AM in Economics | Permalink  Comments (24) 

                                      Links for 08-28-2012

                                        Posted by on Tuesday, August 28, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (60) 

                                        Monday, August 27, 2012

                                        Not Really Deficit Hawks

                                        Ezra Klein notes that Republicans aren't the deficit hawks they claim to be:

                                        Remembering the Republicans’ stimulus, by Ezra Klein: I see that the Republican convention will feature a debt clock ticking away behind the speakers. It will also, as I understand it, consist entirely of speakers who want to make all the Bush tax cuts permanent without paying for them, and who want to pass trillions of dollars more in tax cuts that they also haven’t said how they’ll pay for.
                                        ...The Senate Republicans ... voted for Sen. Jim DeMint’s “American Option: A Jobs Plan That Works.” DeMint’s plan would have extended all of the Bush tax cuts permanently, cut the top marginal rate from 35 percent to 25 percent, the corporate rate from 35 percent to 25 percent and the estate tax to almost nothing.
                                        The proposal would have cost about $3 trillion over the next decade — so a bit less than 400 percent what the stimulus cost — ...not a dollar of it would’ve been paid for..., and the tax cuts were largest for the richest Americans... Yet most every Senate Republican voted for it. And now they’re standing on the stage underneath a debt clock arguing that the Obama administration spent too much. ...
                                         But both Romney’s and Ryan’s budgets include a tax reform that looks very much like what DeMint proposed...

                                          Posted by on Monday, August 27, 2012 at 01:56 PM in Budget Deficit, Economics, Politics | Permalink  Comments (25) 

                                          'Finance Rules Everything'

                                          An interview with Thomas Kochan, the Bunker professor of management, MIT’s Sloan School of Management, and co-director of the MIT Institute for Work and Employment Research:

                                          Can America Compete?, Harvard Magazine: ...Read the complete article, “Can America Compete?” (September-October 2012)
                                          Harvard Magazine: You speak of a fundamental human-capital paradox in the way American employers and workers interact with each other.
                                          Thomas Kochan: American corporations often say human resources are their most important asset. In our national discourse, everyone talks about jobs. Yet as a society we somehow tolerate persistent high unemployment, 30 years of stagnating wages and growing wage inequality, two decades of declining job satisfaction and loss of pension and retirement benefits, and continuous challenges from the consequences of unemployment on family life. If we really valued work and human resources, we would address these problems with the vigor required to solve them.
                                          HM: What causes this disconnection?
                                          TK: The root cause is that we have become a financially driven economy. The view of shareholder value as corporations’ primary objective has dominated since the 1980s. That motivation—to get short-term shareholder returns—then pushes to lower priority all the other things we used to think about as a social contract: that wages and productivity should go together, that there should be an alignment between the interest of American business and the overall American economy and society. That creates a market failure: it’s not in the interest of an individual firm to address all of the consequences of unemployment and loss of high-quality jobs, but the business community overall depends on high-quality jobs to produce the purchasing power needed to sell their goods and services to the American market. Sixty percent of U.S.-based multinational corporations’ revenue still comes from the U.S. market. We’ve got to solve this market failure.
                                          But I think there is also a deep institutional failure in the United States. We have allowed the labor movement and the government and our educational institutions—the coordinating glue that brought these different interests together and provided some assistance in coordinating economic activity—all to decline in effectiveness. Government is completely polarized and almost impotent at the moment. Unions have declined to the point where they are no longer able to discipline management or serve as a powerful and valued partner with business to solve problems. And I’m concerned that our business schools particularly have receded into the same myopic view of the economic system where finance rules everything, so we aren’t training the next generation of leaders to manage businesses in ways that work for both investors and shareholders and for employees in the community. ...

                                            Posted by on Monday, August 27, 2012 at 09:58 AM Permalink  Comments (53) 

                                            Would Lowering the Interest Rate on Excess Reserves Stimulate the Economy?

                                            Many people have called for the Fed to lower the rate it pays on reserves as a way of stimulating loan activity -- the argument is that if the reward to holding funds is lowered then banks are more likely to let go of them -- but Gaetano Antinolfi and Todd Keister of the NY Fed argue that lowering the rate would not have much of an effect on bank lending:

                                            Interest on Excess Reserves and Cash “Parked” at the Fed, by Gaetano Antinolfi and Todd Keister, Liberty Sreet, FRB NY: The European Central Bank recently lowered from 0.25 percent to zero the interest rate it pays on funds that Eurozone banks hold on deposit with it. On the same day, Denmark’s central bank began charging banks 0.20 percent (that is, paying a negative interest rate) on certain deposits. These events have led commentators to ask what would happen if the Federal Reserve were to reduce the interest rate that banks in the United States earn on funds in their reserve accounts from its current level of 0.25 percent. In particular, some people wonder if lowering this rate would lead banks to hold smaller deposits at the Fed and instead lend out some of these “idle” balances. In this post, we use the structure of the Fed’s balance sheet to illustrate why lowering the interest rate paid on reserve balances to zero would have no meaningful effect on the quantity of balances that banks hold on deposit at the Fed.
                                            Since 2008, the amount of money banks hold on deposit at the Federal Reserve has increased dramatically, as shown in the chart below. The vast majority of these funds represent excess reserves, that is, funds held above the level needed to meet an institution’s reserve requirement. (See this Federal Reserve Bank of Richmond paper for a more detailed view.) Some observers have called for the Fed to lower the interest rate it pays on excess reserves (often called the IOER rate) as a way of encouraging banks to maintain lower balances.


                                            The View from the Balance Sheet
                                            It’s important to keep in mind, however, what determines the total quantity of these balances. One way of understanding the issue is by looking at the Fed’s balance sheet, a simple version of which is presented in the table below.

                                            As the table shows, the balances that banks hold on deposit at the Fed are liabilities of the Federal Reserve System. The other significant liability is currency in the form of Federal Reserve notes. Together, this currency and these deposits make up the monetary base, the most basic measure of the money supply in the economy. The composition of the monetary base between these two elements is determined largely by the amount of currency used by firms and households (both in the United States and abroad) to make transactions and by banks to stock their ATM networks.
                                            What determines the size of the monetary base? As with any other institution’s balance sheet, the Fed’s dictates that its liabilities (plus capital) equal its assets. The Fed’s assets are predominantly Treasury and mortgage-backed securities, most of which have been acquired as part of the large-scale asset purchase programs. In other words, the size of the monetary base is determined by the amount of assets held by the Fed, which is decided by the Federal Open Market Committee as part of its monetary policy.
                                            It’s now becoming clear where our story’s going. Because lowering the interest rate paid on reserves wouldn’t change the quantity of assets held by the Fed, it must not change the total size of the monetary base either. Moreover, lowering this interest rate to zero (or even slightly below zero) is unlikely to induce banks, firms, or households to start holding large quantities of currency. It follows, therefore, that lowering the interest rate paid on excess reserves will not have any meaningful effect on the quantity of balances banks hold on deposit at the Fed.
                                            Language Matters
                                            The language used in the press and elsewhere is often imprecise on this point and a source of potential confusion. Reserve balances that are in excess of requirements are frequently referred to as “idle” cash that banks choose to keep “parked” at the Fed. These comments are sensible at the level of an individual bank, which can clearly choose how much money to keep in its reserve account based on available lending opportunities and other factors. However, the logic above demonstrates that the total quantity of reserve balances doesn’t depend on these individual decisions. How can it be that what’s true for each individual bank is not true for the banking system as a whole?
                                            The resolution to this apparent puzzle is that when one bank decides to hold a lower balance in its reserve account, the funds it sheds necessarily end up in the account of another bank, leaving the total unchanged (see FT Alphaville and this New York Fed Current Issues in Economics and Finance article for more detailed discussions of this point). In the aggregate, therefore, these balances do not represent “idle” funds that the banking system is unwilling to lend. In fact, the total quantity of reserve balances held by banks conveys no information about their lending activities – it simply reflects the Federal Reserve’s decisions on how many assets to acquire.
                                            Other Implications
                                            This logic doesn’t imply that changing the IOER rate would have no effect on banks’ lending decisions, of course. A change in this rate could feed through to changes in other interest rates in the economy and thereby potentially affect the incentives for banks to lend and for firms and households to borrow. Lowering this rate may also lead to disruptions in markets that weren’t designed to operate at very low interest rates (see this earlier post for a discussion). Households and firms could respond to these changes in ways that either increase or decrease the amount of currency in circulation, the level of bank deposits, required reserves, and other variables. These shifts would likely be small, however, and should not obscure the basic point: The quantity of balances banks hold on deposit at the Fed would be essentially unaffected by a change in the IOER rate.
                                            A final note: If the IOER rate were set sufficiently far below zero, banks may choose to store currency rather than hold deposits at the Fed, and households may prefer holding cash if banks impose significant fees on deposits. In this case, the level of reserve balances would decline, but the change would simply reflect a shift in the composition of the monetary base; its total size would remain unchanged for the reasons described above.

                                              Posted by on Monday, August 27, 2012 at 09:31 AM in Economics, Monetary Policy | Permalink  Comments (74) 

                                              Paul Krugman: The Comeback Skid

                                              The Jersey comedown:

                                              The Comeback Skid, by Paul Krugman, Commentary, NY Times: There will be two big stars at the Republican National Convention, and neither of them will be Mitt Romney. One will, of course, be Paul Ryan, Mr. Romney’s running mate. The other will be Chris Christie, the governor of New Jersey, who will give the keynote address. And while the two men could hardly look or sound more different, they are brothers under the skin.
                                              How so? Both have carefully cultivated public images as tough, fiscally responsible guys willing to make hard choices. And both public images are completely false.
                                              I’ve written a lot lately deconstructing the Ryan myth, so let me turn today to Mr. Christie.
                                              When Mr. Christie took office in January 2010, New Jersey — like many other states — was in dire fiscal straits thanks to the effects of a depressed economy..., so like other governors, Mr. Christie was forced to engage in belt-tightening.
                                              So ... while Mr. Christie has made a lot of noise about his tough budget choices, other governors have done much the same. Nor has he eschewed budget gimmicks... But ... Mr. Christie talks a good (and very loud) game about his willingness to make tough choices, making big claims about spending cuts — claims, by the way, that PolitiFact has unequivocally declared false.
                                              And for the past year he has been touting what he claims is the result of those tough choices: the “Jersey comeback”... It was ... supposed to demonstrate that good times were back, revenue was on the upswing, and it was now time for what Mr. Christie really wants: a major cut in income taxes ...that ... would do very little for the middle class but give large breaks to the wealthy.
                                              But in any case, the good times are by no means back, and neither is the revenue boom that was supposed to justify a tax cut. So has the very responsible Mr. Christie accepted the idea of at least delaying his tax-cut plan until the promised revenue gains materialize? Of course not.
                                              Which brings me back to the comparison with Paul Ryan. Mr. Ryan, as people finally seem to be realizing, is at heart a fiscal fraud, boasting about his commitment to deficit reduction but actually placing a much higher priority on tax cuts for the wealthy. Mr. Christie may have a different personal style, but he’s playing the same game.
                                              In other words, meet the new boaster, same as the old boaster. And pray that we won’t get fooled again.

                                                Posted by on Monday, August 27, 2012 at 12:24 AM in Economics, Politics | Permalink  Comments (29) 

                                                Links for 08-27-2012

                                                  Posted by on Monday, August 27, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (31) 

                                                  Sunday, August 26, 2012

                                                  David Brooks is 'a Slippery Fellow'

                                                  David Warsh on David Brooks:

                                                  Brooks is a prestidigitator, that wonderful word borrowed from the French, descended from the Latin, meaning juggler, deceiver. He is all the more successful because of his earnest nice-guy manner. But he’s a slippery fellow, frequently passing off Tea Party sleight-of-hand as moderate magic. That’s what makes him fun to read. It also drives his NYT stable-mate Paul Krugman to distraction.

                                                  More here.

                                                    Posted by on Sunday, August 26, 2012 at 02:30 PM in Economics, Press | Permalink  Comments (40) 

                                                    Why No Prosecutions?

                                                    Adam Levitin of Credit Slips explains why "there will not be any serious prosecutions of senior bank executives or institutions for the financial crisis," but he's not happy with the explanation:

                                                    Why No Prosecutions, by Adam Levitin: The NYTimes had a very good editorial today bemoaning, with resignation, that there will not be any serious prosecutions of senior bank executives or institutions for the financial crisis.  The biggest fish to be caught was Lee Farkas. Who? That's the point. There have been prosecutions of some truly small fry fringe players and some settlements that are insignificant from institutional points of view (even $500 million, the SEC's record settlement with Goldman over Abacus was a yawn for Goldman), but that's it. ...
                                                    My prediction is that when the history of the Obama Administration is written, there will be some positive things to say about it, but also two particular blots on its escutcheon.  First, the failure to act decisively to help homeowners avoid foreclosure, and second, the failure to hold anyone accountable for the financial crisis. ... Both are explained by the "Obama administration’s emphasis on protecting the banks from any perceived threat to their post-bailout recovery." 
                                                    The logic here is that financial stability and economic recovery are more important than rule of law. There's an argument to be made that law has to give way to basic economic needs.  I, however, would reject the choice as false. Instead, the best way to restore confidence in markets is to show that there is rule of law.  The best route to economic recovery was through rule of law, not away from it. ...
                                                    The Administration, however, determined that it wasn't going to rock the boat via prosecutions, even though there is no person in the banking system who is so indispensible to economic stability as to merit immunity from prosecution...

                                                      Posted by on Sunday, August 26, 2012 at 10:23 AM in Economics, Financial System | Permalink  Comments (60) 

                                                      Changes in Commodity Prices and the Price of Food

                                                      Michael Roberts argues that changes in commodity prices have very little impact on the price of food:

                                                      What's the price of corn in your meat? Less than you think., by Michael Roberts: ... So much of our food is ultimately derived from corn, or from other commodities like wheat and soybeans whose prices track corn prices fairly closely. But it ... makes little difference.

                                                      Take meat, for example. There are only 3-5 pounds of corn used to make an additional pound of beef, and between 2 and 3 pounds of corn for a pound of chicken or pork. ... This can vary a bit from operation to operation or how it's measured, but feed use efficiency has risen a lot over the last couple decades with the growth of confined animal feeding operations, or CAFOs.

                                                      Let's says 5 pounds of corn per pound of meat. There are 56 pounds of corn in a bushel and since June prices have increased from about $5 to about $8 per bushel. This means the amount corn in your quarter-pound burger have increased from about 11 cents to about 18 cents. If there is market power by processing companies or retailers, retail prices would go up by less than this amount (this is basic microeconomics, but I'll save the details for another time). So, you'll have to squint to see the effect of this year's drought on prices at grocery stores and restaurants.

                                                      There are lots of complaints about CAFOs being inhumane for animals. That may be, but they are also extremely efficient at using resources. Without CAFOs, you would see bigger prices in all kinds of food, and this year's heat and drought would have caused a larger price spike. We would also be using more land in crop production globally, and be using more fertilizers that pollute water and all manner of other environmental problems that follow from crop production. Many environmentalists don't like CAFO's but they may well be doing more good for the environment than eating grass-fed beef, unless the high price of grass fed beef causes you to eat less. (Granted, grass-fed beef is probably healthier.)

                                                      Anyhow, the main point is that commodities are a tiny share of retail prices in developed economies. Prices of most everything, including food, is made up primarily of labor and capital costs, plus rents to producers and retailers with market power. The big concern for high commodity prices in the developed world where the commodity share of food expenditures is much, much greater and people spend a much larger share of their income on food.

                                                      [I have a feeling there will be disagreement about the desirability of CAFO's...]

                                                        Posted by on Sunday, August 26, 2012 at 10:03 AM in Economics | Permalink  Comments (34) 

                                                        Links for 08-26-2012

                                                          Posted by on Sunday, August 26, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (39) 

                                                          Saturday, August 25, 2012

                                                          'Global Warming Has a Fairly Simple and Cheap Technical Solution'

                                                          Robert Frank:

                                                          Carbon Tax Silence, Overtaken by Events, by Robert Frank, Commentary, NY Times: ...Mitt Romney ... has been equivocal about whether rising temperatures are caused by human action. But he has been adamant that uncertainty about climate change rules out policy intervention. ...
                                                          Climatologists are the first to acknowledge that theirs is a highly uncertain science. The future might be better than they think. Then again, it might be much worse. Given that risk, policy makers must weigh the potential cost of action against the potential cost of inaction. And even a cursory look at the numbers makes a compelling case for action. ...
                                                          The good news is that we could insulate ourselves from catastrophic risk at relatively modest cost by enacting a steep carbon tax. ... A carbon tax would also serve two other goals. First, it would help balance future budgets. ... If new taxes are unavoidable, why not adopt ones that ... make the economy more efficient? By reducing harmful emissions, a carbon tax fits that description.
                                                          A second benefit would occur if a carbon tax were ... phased in gradually, only after the economy had returned to full employment. High unemployment persists in part because businesses, sitting on mountains of cash, aren’t investing it... News that a carbon tax was coming would create a stampede to develop energy-saving technologies. ...
                                                          Some people argue that a carbon tax would do little good unless it were also adopted by China and other big polluters. It’s a fair point. But access to the American market is a potent bargaining chip. The United States could ... tax imported goods in proportion to their carbon dioxide emissions if exporting countries failed to enact carbon taxes at home.
                                                          In short, global warming has a fairly simple and cheap technical solution. ...
                                                          Update: I didn't do a very good job of highlighting Robert Frank's point that we shouldn't "expect to hear much about climate change at the Republican and Democratic conventions," but "Many climate scientists ... are now pointing to evidence linking rising global temperatures to the extreme weather we’re seeing around the planet." Thus, "Extreme weather is already creating enormous human suffering, and "If the recent meteorological chaos drives home the threat of climate change and prompts action, it may ultimately be a blessing in disguise."

                                                            Posted by on Saturday, August 25, 2012 at 01:45 PM in Budget Deficit, Economics, Environment, Market Failure, Taxes | Permalink  Comments (71) 

                                                            'Ending High-Income Tax Cuts Would Save Almost $1 Trillion'

                                                            If we had nearly a trillion in additional tax revenue over the next ten years, it would help the budget picture quite a bit:

                                                            CBO: Ending High-Income Tax Cuts Would Save Almost $1 Trillion, CBPP: The Congressional Budget Office’s (CBO) new report shows that allowing President Bush’s 2001 and 2003 income tax cuts on income over $250,000 to expire on schedule at the end of 2012 would save $823 billion in revenue and $127 billion on interest on the nation’s debt, compared to permanently extending all of the Bush tax cuts.  Overall, this would mean $950 billion in ten-year deficit reduction, a significant step in the direction of fiscal stability.

                                                              Posted by on Saturday, August 25, 2012 at 12:47 PM in Budget Deficit, Economics, Taxes | Permalink  Comments (9) 

                                                              Unfounded Fear of Inflation

                                                              As a follow up to this post on Inflation Lessons from Paul Krugman:

                                                              Demand-siders like me saw this as very much a slump caused by inadequate spending: thanks largely to the overhang of debt from the bubble years, aggregate demand fell, pushing us into a classic liquidity trap.

                                                              But many people — some of them credentialed economists — insisted that it was actually some kind of supply shock instead. Either they had an Austrian story in which the economy’s productive capacity was undermined by bad investments in the boom, or they claimed that Obama’s high taxes and regulation had undermined the incentive to work (of course, Obama didn’t actually impose high taxes or onerous regulations, but leave that aside for now).

                                                              How could you tell which story was right? One answer was to look at the behavior of ... inflation. For if you believed a demand-side story, you would also believe that even a large monetary expansion would have little inflationary effect; if you believed a supply-side story, you would expect lots of inflation from too much money chasing a reduced supply of goods. And indeed, people on the right have been forecasting runaway inflation for years now.

                                                              Yet the predicted inflation keeps not coming. ... So what we’ve had is as good a test of rival views as one ever gets in macroeconomics — which makes it remarkable that the GOP is now firmly committed to the view that failed.

                                                              Note what's been happening to estimated inflation expectations lately:

                                                              [Source: Cleveland Fed]

                                                              The Fed has used fear of inflation to argue against doing more for the unemployed, but what's the Fed so afraid of? Where's the evidence fo their fears?

                                                              (When fear of inflation fails as an argument against further easing, as it has, the Fed also relies upon a vague fear that further quantitative easing would somehow break overnight money markets. But as FT Alphaville has noted several times -- and I've noted this as well -- those fears are hard to understand, and the minutes from the last Fed meeting seemed to indicate they were largely unfounded.

                                                              So I, too, "remain curious to get some details about exactly what Bernanke meant when he said that further easing shouldn’t be undertaken lightly because it would pose a risk to 'market functioning' and 'financial stability.'" That's especially true in light of the statement in the the most recent FOMC minutes that they have looked at this worry and determined that, repeating a quote from FT Alphaville, there is "substantial capacity for additional purchases without disrupting market functioning."

                                                              Thus, it appears the biggest worries about further easing -- inflation and market disruption -- are unfounded, and it will be intersting to see what new excuses are invented to forestall action. I'm guessing it will be the old, "it's not in the data yet, but just wait, you'll see, inflation really will be a problem. Soon. Very soon." Never mind that we've been hearing this for years already.)

                                                                Posted by on Saturday, August 25, 2012 at 09:19 AM in Economics, Inflation, Monetary Policy | Permalink  Comments (35) 

                                                                Sarah Obama: Barack was Born in America

                                                                When I was in Kenya earlier this summer with the International Reporting Project, we met with Sarah Obama at her home near Kisumu for a 45 minute interview. She's president Obama's step-grandmother, and she attended his presidential inauguration. During the interview, she was asked by Irin Carmon about "people who believe the president was born in Kenya." Sarah Obama says (through a translator), that the president wasn't born in Kenya, he was born in America:

                                                                [Note: The sound failed on my iPhone video, so this uses audio from Martin Robbins.]

                                                                  Posted by on Saturday, August 25, 2012 at 12:24 AM in Kenya, Politics | Permalink  Comments (11) 

                                                                  Links for 08-25-2012

                                                                    Posted by on Saturday, August 25, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (29) 

                                                                    Friday, August 24, 2012

                                                                    'People Lucky Enough to Find New Work are often Taking Steep Wage Cuts'

                                                                    Are you surprised?:

                                                                    New Jobs Come With Lower Wages, by Sudeep Reddy, WSJ: During the recession, people who lost long-held jobs struggled to find new employment and often took substantial pay cuts if they did find new work. Little appears to have changed after the recession ended, a new Labor Department report shows. ...
                                                                    People lucky enough to find new work are often taking steep wage cuts. Of the displaced workers who lost full-time wage and salary jobs from 2009-2011 and were reemployed by January, just 46% were earning as much or more than they did in their lost job. A third of them reported earnings losses of 20% or more. Both figures are almost identical to those from the prior report. (See our article from last year about these workers: “Downturn’s Ugly Trademark: Steep, Lasting Drop in Wages”)

                                                                      Posted by on Friday, August 24, 2012 at 12:56 PM in Economics, Unemployment | Permalink  Comments (34) 

                                                                      'Evidence vs. Ideology' and 'Romney’s Lying Machine'

                                                                      Laura D’Andrea Tyson:

                                                                      Evidence vs. Ideology in the Medicare Debate, by Laura D’Andrea Tyson, Commentary, NY Times: When formulating public policy, evidence should be accorded more weight than ideology, and facts should matter... The ... Romney campaign has been deliberately misrepresenting President Obama’s Medicare record.
                                                                      Mitt Romney characterizes the $716 billion of Medicare savings over the next 10 years, contained in the Affordable Care Act, as President Obama’s “raid” on the Medicare program to pay for his health care program. This fear-mongering is simply untrue. These savings result from reforms to slow the growth of Medicare spending per enrollee – there are no cuts in Medicare benefits. ...
                                                                      Both Governor Romney and Representative Paul D. Ryan have promised to repeal the Affordable Care Act and with it the reforms behind the $716 billion in Medicare savings (although Mr. Ryan duplicitously counts the savings from these reforms in his deficit-reduction plan). Medicare beneficiaries would ... lose the benefits..., and they would be forced to pay higher premiums and co-pays as a result of faster growth in Medicare costs.
                                                                      President Obama’s health care plan is not a raid on Medicare; it is an investment in a stronger system. If the Affordable Care Act had not met this standard, the AARP would not have endorsed it. ...
                                                                      Now Mr. Ryan has espoused – and Governor Romney has embraced — a proposal to transform Medicare into a premium support system. ... There is no evidence that such a system would control Medicare spending more effectively than the current Medicare program strengthened by Affordable Care Act reforms. Indeed,...the C.B.O. has concluded that ... such plans would drive up total health-care spending per Medicare beneficiary...
                                                                      A voucher system would do little to control the growth of health care costs, but it would shift their burden onto Medicare beneficiaries in the form of higher premiums and reduced care. Cost-shifting should not be confused with cost containment. ...
                                                                      A “serious” deficit hawk committed to saving and strengthening Medicare, not one whose primary goals are repealing health-care reform and cutting taxes for the wealthy, would base his Medicare plan on the evidence. ...

                                                                      Robert Reich is astounded at the Romney-Ryan campaign:

                                                                      Romney’s Lying Machine, by Robert Reich: I’ve been struck by the baldness of Romney’s repetitive lies about Obama — that Obama ended the work requirement under welfare, for example, or that Obama’s Affordable Care Act cuts $716 billion from Medicare benefits. ...
                                                                      Every campaign is guilty of exaggerations, embellishments, distortions, and half-truths. But this is another thing altogether. I’ve been directly involved in seven presidential campaigns, and I don’t recall a presidential candidate lying with such audacity, over and over again. Why does he do it, and how can he get away with it?
                                                                      The obvious answer is such lies are effective. Polls show voters are starting to believe them... Romney’s lying machine is extraordinarily well financed. ... Romney’s lying machine is working.
                                                                      But what does all this tell us about the man who is running this lying machine? (Or if Romney’s not running it, what does it tell us about a man who would select the people who are?)
                                                                      We knew he was a cypher — that he’ll say and do whatever is expedient, change positions like a chameleon, eschew any core principles.
                                                                      Yet resorting to outright lies — and organizing a presidential campaign around a series of lies — reveals a whole new level of cynicism, a profound disdain for what remains of civility in public life, and a disrespect of the democratic process.
                                                                      The question is whether someone who is willing to resort to such calculated lies, and build a campaign machine around them, can be worthy of the public’s trust with the most powerful office in the world.

                                                                      The press is completely dropping the ball in its duty to inform voters (surprise!). If stories consistently opened up with something along the lines of "The Romney campaign continued to make lies and misleading inferences the centerpiece of its campaign today...," this would stop. (It would also be worth noting, I think, that making lies about the other side the most prominent feature of a campaign is a pretty good indication that the candidate has no new ideas of his own to present. But simply pointing out the lies -- and the massive number of flip-flops of convenience -- would go a long way toward fulfilling the duty of the press to inform voters rather than mislead them by presenting false claims as legitimate debate.)

                                                                        Posted by on Friday, August 24, 2012 at 10:42 AM in Economics, Health Care, Politics, Press | Permalink  Comments (59) 

                                                                        Paul Krugman: Galt, Gold and God

                                                                        Paul Ryan appears to have mooched his economic ideas from Ayn Rand:

                                                                        Galt, Gold and God, by Paul Krugman, Commentary, NY Times: ...Paul Ryan, the presumptive Republican nominee for vice president,... is a man of many ideas, which would ordinarily be a good thing.
                                                                        In his case, however, most of those ideas appear to come from works of fiction, specifically Ayn Rand’s novel “Atlas Shrugged.” ... True, in recent years, he has tried to downplay his Randism, calling it an “urban legend.” It’s not hard to see why: Rand’s fervent atheism — not to mention her declaration that “abortion is a moral right” — isn’t what the GOP base wants to hear.
                                                                        But Mr. Ryan is being disingenuous. In 2005, he told the Atlas Society ... that she inspired his political career: “If I had to credit one thinker, one person, it would be Ayn Rand.” He also declared that Rand’s work was required reading for his staff and interns.
                                                                        And the Ryan fiscal program clearly reflects Randian notions..., he is deadly serious about cutting taxes on the rich and slashing aid to the poor, very much in line with Rand’s worship of the successful and contempt for “moochers.” ... He’s... quite explicitly trying to make life harder for the poor — for their own good. In March, explaining his cuts..., he declared, “We don’t want to turn the safety net into a hammock that lulls able-bodied people into lives of dependency and complacency...”
                                                                        Somehow, I doubt that Americans forced to rely on unemployment benefits and food stamps in a depressed economy feel that they’re living in a comfortable hammock.
                                                                        But wait, there’s more: “Atlas Shrugged” apparently shaped Mr. Ryan’s views on monetary policy,... he declared that he always goes back to “Francisco d’Anconia’s speech on money” when thinking about monetary policy. Who? Never mind. That speech ... is a case of hard-money obsession gone ballistic. Not only does the character in question, a Galt sidekick, call for a return to the gold standard, he denounces the notion of paper money and demands a return to gold coins. ...
                                                                        Does any of this matter? Well, if the Republican ticket wins, Mr. Ryan will surely be an influential force in the next administration — and... he would, as the cliché goes, be a heartbeat away from the presidency. So it should worry us that Mr. Ryan holds monetary views that would, if put into practice, go a long way toward recreating the Great Depression.
                                                                        And, beyond that, consider the fact that Mr. Ryan is considered the modern GOP’s big thinker. What does it say about the party when its intellectual leader evidently gets his ideas largely from deeply unrealistic fantasy novels?

                                                                          Posted by on Friday, August 24, 2012 at 12:33 AM in Economics, Politics | Permalink  Comments (112) 

                                                                          Fed Watch: Dueling Fed Presidents

                                                                          Tim Duy:

                                                                          Dueling Fed Presidents, by Tim Duy: Blogging tonight from Joseph, Oregon, on my way for a few days of camping in the Wallowa Mountains. Hopefully I will be able to get some pictures up over the weekend, but I haven't had much luck with the Typepad ap on 3G service.

                                                                          For those of us tracking the odds of QE3 in September, two regional Fed presidents - both non-voting participants - offered opposite views today. Neither was terribly surprising. Chicago Federal Reserve President Charles Evans reiterated his support for additional easing. Via Reuters:

                                                                          "The (July) employment data was a little better than expected," said Evans, one of the Fed's most dovish policymakers and who has led the most recent calls for active easing of monetary policy.

                                                                          "It is still not nearly good enough," he added. "We need 300,000 to 400,000 (new jobs) a month to get to where we should be."...

                                                                          ...Evans reiterated that he thought current economic conditions already warranted action, adding that this was the third successive summer slowdown seen in the United States, and that as the Fed had acted to boost activity in the previous two downturns, there was every reason to be prepared to act this time.

                                                                          Of course, Evans has been pushing this story for awhile, to no avail so far. I think that had he been a voting member, he would have dissented at the last three FOMC meetings. On the other side of the coin is St. Louis Federal Reserve President James Bullard. Again, via Reuters:

                                                                          "I do think that the minutes are a bit stale because we have some data since then that has been somewhat stronger," Bullard, who will be a voting member of the policy-setting committee next year, said in an interview.

                                                                          This is similar to the concern I mentioned yesterday. To what extent have the FOMC minutes been overtaken by events, particularly better US data? Bullard further downplayed the tone of the minutes:

                                                                          "The tone of the discussions, for me anyway, was 'gosh things are not as good as we thought and it if continues to decelerate here, we're going to have to do something'," he said.

                                                                          Still, he believed the probability of another round of easing was less than had been reflected in the pricing seen in financial markets over the summer.

                                                                          "Going along at this slow pace is not enough to justify gigantic action," he said. "I'd like to see...some deterioration or indication we're going to slide down further," in order to support additional easing.

                                                                          Trouble is that we haven't decelerated further, at least according to recent data. That said, sometimes we hear what we want to hear, and Bullard wants to hear things that don't sound like QE3 is imminent. Indeed, he doesn't have high expectations for the economy to begin with:

                                                                          "If we were to resume, which I think we will, 2 percent growth, maybe a bit stronger than that, unemployment ticks down ... that is not a great outcome, but to me that is a good enough outcome to keep us on hold," Bullard said.

                                                                          That's a pretty low bar for growth, which is the same thing as a high bar for QE3.

                                                                          Bottom Line: Two Fed presidents at opposite ends of the spectrum. I tend to think that the middle ground will be pulled by recent data in the direction of Bullard, which is why I see QE3 as less of a slam-dunk than the minutes seemed to imply. Evans pushed his usual agenda; I would expect nothing less from him. He wanted more action before this summer's signs of slowing. No reason to expect the most recent data would change his view.

                                                                            Posted by on Friday, August 24, 2012 at 12:24 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (25) 

                                                                            Links for 08-24-2012

                                                                              Posted by on Friday, August 24, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (26) 

                                                                              Thursday, August 23, 2012

                                                                              'Republicans Eye Return to Gold Standard'

                                                                              In response to this report:

                                                                              Republicans eye return to gold standard, by Robin Harding and Anna Fifield, FT: The gold standard has returned to mainstream US politics for the first time in 30 years, with a "gold commission" set to become part of official Republican party policy.

                                                                              Drafts of the party platform, which it will adopt at a convention in Tampa Bay, Florida, next week, call for ... a commission to look at restoring the link between the dollar and gold.

                                                                              Let me repost this piece from Paul Krugman (from Slate 1996). As he notes, "Very few economists think this would be a good idea," including, I presume, all of the economists who have recently signed a petition backing Mitt Romney's Republican agenda (they are trying to have it both ways, appoint a commission to look into it to satisfy the gold bugs, while at the same time allowing those who know this is crazy to assume the commission would never actually do this -- kind of like what they've done with their budget plan):

                                                                              The Gold Bug Variations, by Paul Krugman, Slate, 1996: The legend of King Midas has been generally misunderstood. Most people think the curse that turned everything the old miser touched into gold, leaving him unable to eat or drink, was a lesson in the perils of avarice. But Midas' true sin was his failure to understand monetary economics. What the gods were really telling him is that gold is just a metal. If it sometimes seems to be more, that is only because society has found it convenient to use gold as a medium of exchange--a bridge between other, truly desirable, objects. There are other possible mediums of exchange, and it is silly to imagine that this pretty, but only moderately useful, substance has some irreplaceable significance.

                                                                              But there are many people--nearly all of them ardent conservatives--who reject that lesson. While Jack Kemp, Steve Forbes, and Wall Street Journal editor Robert Bartley are best known for their promotion of supply-side economics, they are equally dedicated to the belief that the key to prosperity is a return to the gold standard, which John Maynard Keynes pronounced a "barbarous relic" more than 60 years ago. With any luck, these latter-day Midases will never lay a finger on actual monetary policy. Nonetheless, these are influential people--they are one of the factions now struggling for the Republican Party's soul--and the passionate arguments they make for a gold standard are a useful window on how they think.

                                                                              There is a case to be made for a return to the gold standard. It is not a very good case, and most sensible economists reject it, but the idea is not completely crazy. On the other hand, the ideas of our modern gold bugs are completely crazy. Their belief in gold is, it turns out, not pragmatic but mystical.

                                                                              The current world monetary system assigns no special role to gold; indeed, the Federal Reserve is not obliged to tie the dollar to anything. It can print as much or as little money as it deems appropriate. There are powerful advantages to such an unconstrained system. Above all, the Fed is free to respond to actual or threatened recessions by pumping in money. To take only one example, that flexibility is the reason the stock market crash of 1987--which started out every bit as frightening as that of 1929--did not cause a slump in the real economy.

                                                                              While a freely floating national money has advantages, however, it also has risks. For one thing, it can create uncertainties for international traders and investors. Over the past five years, the dollar has been worth as much as 120 yen and as little as 80. The costs of this volatility are hard to measure (partly because sophisticated financial markets allow businesses to hedge much of that risk), but they must be significant. Furthermore, a system that leaves monetary managers free to do good also leaves them free to be irresponsible--and, in some countries, they have been quick to take the opportunity. That is why countries with a history of runaway inflation, like Argentina, often come to the conclusion that monetary independence is a poisoned chalice. (Argentine law now requires that one peso be worth exactly one U.S. dollar, and that every peso in circulation be backed by a dollar in reserves.)

                                                                              So, there is no obvious answer to the question of whether or not to tie a nation's currency to some external standard. By establishing a fixed rate of exchange between currencies--or even adopting a common currency--nations can eliminate the uncertainties of fluctuating exchange rates; and a country with a history of irresponsible policies may be able to gain credibility by association. (The Italian government wants to join a European Monetary Union largely because it hopes to refinance its massive debts at German interest rates.) On the other hand, what happens if two nations have joined their currencies, and one finds itself experiencing an inflationary boom while the other is in a deflationary recession? (This is exactly what happened to Europe in the early 1990s, when western Germany boomed while the rest of Europe slid into double-digit unemployment.) Then the monetary policy that is appropriate for one is exactly wrong for the other. These ambiguities explain why economists are divided over the wisdom of Europe's attempt to create a common currency. I personally think that it will lead, on average, to somewhat higher European unemployment rates; but many sensible economists disagree.

                                                                              So where does gold enter the picture?

                                                                              While some modern nations have chosen, with reasonable justification, to renounce their monetary autonomy in favor of some external standard, the standard they choose these days is always the currency of another, presumably more responsible, nation. Argentina seeks salvation from the dollar; Italy from the deutsche mark. But the men and women who run the Fed, and even those who run the German Bundesbank, are mere mortals, who may yet succumb to the temptations of the printing press. Why not ensure monetary virtue by trusting not in the wisdom of men but in an objective standard? Why not emulate our great-grandfathers and tie our currencies to gold?

                                                                              Very few economists think this would be a good idea. The argument against it is one of pragmatism, not principle. First, a gold standard would have all the disadvantages of any system of rigidly fixed exchange rates--and even economists who are enthusiastic about a common European currency generally think that fixing the European currency to the dollar or yen would be going too far. Second, and crucially, gold is not a stable standard when measured in terms of other goods and services. On the contrary, it is a commodity whose price is constantly buffeted by shifts in supply and demand that have nothing to do with the needs of the world economy--by changes, for example, in dentistry.

                                                                              The United States abandoned its policy of stabilizing gold prices back in 1971. Since then the price of gold has increased roughly tenfold, while consumer prices have increased about 250 percent. If we had tried to keep the price of gold from rising, this would have required a massive decline in the prices of practically everything else--deflation on a scale not seen since the Depression. This doesn't sound like a particularly good idea.

                                                                              So why are Jack Kemp, the Wall Street Journal, and so on so fixated on gold? I did not fully understand their position until I read a recent letter to, of all places, the left-wing magazine Mother Jones from Jude Wanniski--one of the founders of supply-side economics and its reigning guru. (One of the many comic-opera touches in the late unlamented Dole campaign was the constant struggle between Jack Kemp, who tried incessantly to give Wanniski a key role, and the sensible economists who tried to keep him out.) Wanniski's main concern was to deny that the rich have gotten richer in recent decades; his letter is posted on the Mother Jones Web site, and makes interesting reading.

                                                                              But, particularly noteworthy was the following passage:

                                                                              First let us get our accounting unit squared away. To measure anything in the floating paper dollar will get us nowhere. We must convert all wealth into the measure employed by mankind for 6,000 years, i.e., ounces of gold. On this measure, the Dow Jones industrial average of 6,000 today is only 60 percent of the DJIA of 30 years ago, when it hit 1,000. Back then, gold was $35 per ounce. Today it is $380-plus. This is another way of saying that in the last 30 years, the people who owned America have lost 40 percent of their wealth held in the form of equity. ... If you owned no part of corporate America 30 years ago, because you were poor, you lost nothing. If you owned lots of it, you lost your shirt in the general inflation.

                                                                              Never mind the question of whether the Dow Jones industrial average is the proper measure of how well the rich are doing. What is fascinating about this passage is that Wanniski regards gold as the appropriate measure of wealth, regardless of the quantity of other goods and services that it can buy. Since the dollar was de-linked from gold in 1971, the Dow has risen about 700 percent, while the prices of the goods we ordinarily associate with the pursuit of happiness--food, houses, clothes, cars, servants--have gone up only about 250 percent. In terms of the ability to buy almost anything except gold, the purchasing power of the rich has soared; but Wanniski insists that this is irrelevant, because gold, and only gold, is the true standard of value. Wanniski, in other words, has committed the sin of King Midas: He has forgotten that gold is only a metal, and that its value comes only from the truly useful goods for which it can be exchanged.

                                                                              I wonder whether the gods read Slate. If so, they know what to do.

                                                                                Posted by on Thursday, August 23, 2012 at 02:57 PM in Economics, Monetary Policy, Politics | Permalink  Comments (45) 

                                                                                The Real Romney-Ryan Budgets Cuts: Programs for the Poor

                                                                                A useful reminder from Ezra Klein:

                                                                                The real Romney-Ryan budgets cuts aren't to Medicare. They're to programs for the poor., by Ezra Klein: I was pretty sure that when Paul Ryan got tapped to be Robin to Mitt Romney's Batman, it meant we were in for some serious budget talk. Which was great! I love budget talk.

                                                                                Instead, it's actually meant we've spent a lot of time talking about Medicare. Which is odd. Because Paul Ryan's budget isn't that focused on Medicare. And that's even truer for Mitt Romney's budget...

                                                                                But here's the thing. Ryan says his budget cuts more than $5 trillion in the next decade. Less than a trillion of that is coming from Medicare. Romney says his budget cuts about $7 trillion from the budget over the next decade and not a dollar of that comes from Medicare. And neither Romney nor Ryan want to cut Social Security and both increase spending on defense.

                                                                                If you're not cutting Medicare or Social Security or defense you've already taken more than half of the federal budget off the table. And you know what's mainly left, the big pot of money you can still cut? Programs for poor people.

                                                                                And so, if you look at Ryan's specific cuts, most of them are programs for poor people. In fact, the Center for Budget and Policy Priorities estimates that more than six of every 10 dollars Ryan cuts from the federal budget is coming from programs for the poor. ... Moreover, everything we know suggests Romney's on the same page as his running mate. ... To make Romney's numbers add up, you have to assume that by the end of his presidency, Romney will have cut every federal program that's not Medicare, Social Security or defense spending by 57 percent. ...

                                                                                  Posted by on Thursday, August 23, 2012 at 02:03 PM in Budget Deficit, Economics, Politics | Permalink  Comments (10) 

                                                                                  'Savage Attack on Transfer Pricing Rules'

                                                                                  Transfer pricing is a "tax problem":

                                                                                  Top U.S. tax expert in savage attack on transfer pricing rules, Tax Justice Network: Lee Sheppard of Tax Analysts is one of the world's top experts in international tax... She has just issued one of the most devastating critiques ever made of the prevailing system for taxing multinational corporations, in a nine-page document entitled Is Transfer Pricing Worth Salvaging? Tax Analysts have kindly given us permission to republish it.

                                                                                  What is the tax problem?, Sheppard asks, in her (fairly U.S.-focused) article.

                                                                                  "In a nutshell, developments in law and planning have enabled U.S. multinationals to deprive the United States of tax revenue..."

                                                                                  And the main way they do this is through transfer pricing. ...

                                                                                    Posted by on Thursday, August 23, 2012 at 11:18 AM in Economics, Taxes | Permalink  Comments (21) 

                                                                                    Who Benefits from QE?

                                                                                    Via Money Supply at the FT, who benefits from QE?:

                                                                                    The rich. That’s according to a Bank of England study, out today, on the distributional effects of quantitative easing.

                                                                                    This from the research:

                                                                                    By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, but holdings are heavily skewed with the top 5 per cent of households holding 40 per cent of these assets.

                                                                                    This is not a piece of research that the Bank will have welcomed having to publish, keen as it is to avoid criticism for favouring one group of society over another. But it has been forced to by a fierce debate ... about the impact of the Bank’s money-printing on pensioners and those who are just about to retire. ...

                                                                                    The Bank acknowledges that by pushing down on gilt yields, QE has reduced the annuity rate. However, it also claims the policy has raised the value of bonds and equities held in pension pots. Home-owning pensioners – especially the wealthier among them – are among the big winners from QE and the Bank’s ultra-low interest rates. It is the young and others with few assets who have gained the least from the Monetary Policy Committee’s money printing.

                                                                                    It trickles down, right?

                                                                                      Posted by on Thursday, August 23, 2012 at 10:39 AM in Economics, Income Distribution, Monetary Policy | Permalink  Comments (54) 

                                                                                      'The Latest Tory Idiocy'

                                                                                      Chris Dillow:

                                                                                      "Nothing to fear"?, by Chris Dillow: Here's the latest Tory idiocy. Dominic Raab says the "talented and hard-working have nothing to fear" from a scrapping of "excessive protections" for workers.
                                                                                      Let's ignore the fact that the UK has some of the weakest job protection laws in the world. Let's also ignore the fact that there's no evidence that scrapping employment protection would create new jobs. And let's also ignore the fact that employment protection is of only marginal concern to small businesses, and that even a former director-general of the CBI has mocked the idea of abolishing the few protections workers have.
                                                                                      Is Raab right that the best workers have nothing to fear?
                                                                                      No. ...[explains why]... I'm pretty sure, then, that Raab is talking rot. What I'm not so sure about is why. One possibility is that he's so blinded by free market ideology and by romantic ideas about entrepreneurs and managers that he just cannot see that some free market reforms are of negligible benefit and that some bosses are less than heroic.
                                                                                      But you'd have thought that the experience of the crisis - which has seen bankers get multi-million bonuses whilst good workers lose their jobs - would have disabused anyone of the just world theory that capitalism rewards talent and effort. There's comes a point when a cognitive bias shades into a psychiatric disorder.
                                                                                      This leaves another possibility. It's that Raab is simply taking sides in a class war. He wants to further empower bosses to bully workers, even if this has no macroeconomic benefit.

                                                                                        Posted by on Thursday, August 23, 2012 at 08:42 AM in Economics, Market Failure | Permalink  Comments (11) 

                                                                                        What is the 'Appropriate Monetary Policy'?

                                                                                        David Altig responds (after the release of the minutes from the last FOMC meeting, I'm a bit less pesimistic):

                                                                                        The (Unfortunately?) Consistent Record of the Recovery: Duy and Thoma Respond, by David Altig: Mark Thoma, always generous in linking and reposting our musings here at macroblog, took a look at my last post and read a sense of helpless resignation:

                                                                                        David Altig of the Atlanta Fed argues that "the majority of FOMC participants don't seem to think that the unemployment rate will improve that quickly, but "it is not at all obvious that the pace of the recovery is inconsistent with the FOMC's view of achieving its dual mandate." It sounds as though the Fed has given up -- we've done all that we can, there's nothing more we can do, so we won't even try -- and we're not about to risk even the tiniest bit of inflation to find out if we are wrong (and this is despite assurances from Bernanke and others that the Fed is not out of bullets)...

                                                                                        Tim Duy, whose observations in fact motivated my post, had his own response to my comments:

                                                                                        Altig's calculations make the important assumption that the labor force participation rate holds at 63.7%. This effectively assumes that none of the decline in the labor force participation is cyclical. Instead, it is all structural...

                                                                                        There are really two separate thoughts in these comments. So let me take them in turn, but first recap what I said in the previous post (or at least what I meant to say):

                                                                                        • Stepping back and looking at the data, I am drawn to the conclusion that U.S. economy looks like it has settled into a pattern of something like 2 percent GDP growth with net job creation somewhere around 150,000 payroll jobs per month.
                                                                                        • The unemployment projections published in the FOMC participants.' June Summary of Economic Projections (SEP) would, under certain assumptions, be consistent with annual job growth averaging the 150,000 per month pace we have seen over the past year and a half.

                                                                                        The under certain assumptions caveat is obviously important. To Duy's point, my mapping of the apparent employment trend to the SEP unemployment forecasts does assume a constant labor force participation rate. Multiple macroblog posts this year have offered skepticism about exactly that assumption ( here and here, for example), and any rise in the labor force participation rate will require faster job growth to get the same unemployment rate outcomes. But as far as I know—I think as far as anyone knows— participation will rise only if we get that faster job growth in the first place. My only point was that the SEP unemployment rate submissions in June are not obviously out of line with what appears to be the current trend in job creation.

                                                                                        In fact, I cannot tell you what assumptions underlie the unemployment rate (and growth) projections in the SEP. I can tell you only that these are the outcomes the individual participants view as consistent with "appropriate monetary policy." And that brings us to Mark Thoma's concern that the very slow progress toward higher growth and lower unemployment in the SEP implies that the Fed has "given up, "done all that we can," and "won't even try."

                                                                                        I definitively do not want to leave an impression that this view is implied by the SEP. As I noted in my original post (and duly noted in both the Thoma and Duy responses), the definitions of appropriate monetary policy that condition the individual SEP contributions are not spelled out. Lacking that information, one should not infer that monetary policy is assumed by any one individual as fixed or without influence.

                                                                                        Could it possibly be that an unemployment rate at 7.5 percent and GDP growth of 2.8 percent in 2013 (the more optimistic forecasts in the majority, or the "central tendency" range in the June SEP) are consistent with monetary policy having a nontrivial positive impact on the economy?

                                                                                        Of course monetary policy does not operate in a vacuum. As our boss, Atlanta Fed President Dennis Lockhart, said in a speech yesterday:

                                                                                        Monetary policy can exert a powerful positive influence on an economy, but as Chairman Bernanke has pointed out, monetary policy is not a panacea.

                                                                                        I'm not really aware of any models matched to real-world data that suggest monetary policy actions can (at acceptable cost) quickly and completely overcome all of the shocks and headwinds that may present themselves.

                                                                                        You may believe otherwise—that is, you may believe that, for current circumstances, monetary policy is a panacea. Or, less dramatically, you may believe that more monetary stimulus would surely yield something better than what was implied in the June SEP. Fair enough. But you should not believe that lackluster numbers in the SEP tell you anything about individual FOMC participant's views on the efficacy, desirability, or likelihood of further monetary actions, one way or the other.

                                                                                          Posted by on Thursday, August 23, 2012 at 12:24 AM in Economics, Monetary Policy | Permalink  Comments (21) 

                                                                                          Links for 08-23-2012

                                                                                            Posted by on Thursday, August 23, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (32) 

                                                                                            Wednesday, August 22, 2012

                                                                                            Fed Watch: It's All About the Data

                                                                                            Tim Duy:

                                                                                            It's All About The Data, by Tim Duy: The minutes of the July 31 - August 1 FOMC meeting are out. In my opinion, they reiterated the importance of the data flow in assessing the Fed's next move.

                                                                                            The money quote was:

                                                                                            Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.

                                                                                            At first blush, this can be taken to indicate that easing is imminent, as early as September, in direct contradiction to what I wrote yesterday. The key, however, is how have conditions changed since the last meeting? The next line in the FOMC minutes is:

                                                                                            Several members noted the benefits of accumulating further information that could help clarify the contours of the outlook for economic activity and inflation as well as the need for further policy action.

                                                                                            Recall that as we headed into this meeting, the data had turned particularly weak. The pace of job growth had fallen dramatically from the start of the year, retail sales were flattening out, and GDP growth had slowed to 1.5%. This data combined with the downside risks from Europe raised genuine concerns that more easing was necessary. But they held back, instead waiting to see how the data evolved.

                                                                                            Since then, the data have turned upward, much more consistent with the Fed's medium-term forecast. The July employment report was stronger, retail sales picked up, and overall growth is looking stronger, with Goldman Sachs' GDP tracking estimate rising to 2.3% for the third quarter. In addition, equity markets are on firmer ground as the crisis in Europe has at least temporarily receded. While certainly not exciting, the better tone of the data is palpable. I think the better data influenced Atlanta Federal Reserve President Dennis Lockhart to shift his language away from his dovish July comments. In short, I would argue that the data since the last FOMC meeting has in fact pointed toward an improvement in the pace of the recovery, which I think will pull the middle ground back from the brink of additional asset purchases.

                                                                                            That said, the doves can still make a pretty good case for additional easing, even given the improvement in the data flow. But enough to pull Federal Reserve Chairman Ben Bernanke into their camp? I would guess that the data would pull him away from additional asset purchases as the threat of imminent recession has dramatically faded into the background. We will get a chance to hear his thoughts on recent data at Jackson Hole next week. I don't think he will give an obvious clue; as a general rule, that isn't his style. He will give us the data as he sees it and we will need to figure out what that means for policy.

                                                                                            I would also note that we have plenty of data to chew on between now and September 15th. Notably, we will get another look at the employment situation. Note the pattern of the last two years:


                                                                                            Start stop, start stop, but on average, not inconsistent with the Fed's forecast as interpreted by David Altig (my response to Altig here). The April-June slowdown in job creation certainly gave the doves the upper-hand, pushing us closer to QE3. A solid August number would give the hawks the upper-hand once again.

                                                                                            There was much discussion about possible additional tools. Communications could change:

                                                                                            One of the policy options discussed was an extension of the period over which the Committee expected to maintain its target range for the federal funds rate at 0 to 1/4 percent. It was noted that such an extension might be particularly effective if done in conjunction with a statement indicating that a highly accommodative stance of monetary policy was likely to be maintained even as the recovery progressed. Given the uncertainty attending the economic outlook, a few participants questioned whether the conditionality of the forward guidance was sufficiently clear, and they suggested that the Committee should consider replacing the calendar date with guidance that was linked more directly to the economic factors that the Committee would consider in deciding to raise its target for the federal funds rate, or omit the forward guidance language entirely.

                                                                                            I like the idea of tying policy to macroeconomic outcomes rather than dates. I think it would remove one source of uncertainty about policy. There was generally support for additional asset purchases, including this:

                                                                                            Many participants indicated that any new purchase program should be sufficiently flexible to allow adjustments, as needed, in response to economic developments or to changes in the Committee's assessment of the efficacy and costs of the program.

                                                                                            I take this to mean that a new program would not be tied down by a specific date or amount, another policy shift I would like to see. Other options were received less enthusiastically:

                                                                                            Some participants commented on other possible tools for adding policy accommodation, including a reduction in the interest rate paid on required and excess reserve balances. While a couple of participants favored such a reduction, several others raised concerns about possible adverse effects on money markets. It was noted that the ECB's recent cut in its deposit rate to zero provided an opportunity to learn more about the possible consequences for market functioning of such a move. In light of the Bank of England's Funding for Lending Scheme, a couple of participants expressed interest in exploring possible programs aimed at encouraging bank lending to households and firms, although the importance of institutional differences between the two countries was noted.

                                                                                            Bottom Line: Lots of possibilities at this point. If you were looking for additional asset purchases at the last FOMC meeting, you were not crazy. There was obviously widespread concern about the mid-year slowdown and its implications for the stability of the Fed's forecasts. Moreover, policymakers appear to have concluded that additional asset purchases could be effective. If the data had continued to progress as it had since the July/August meeting, I would say that another round of QE was a slam-dunk. But the data has not progressed in the same direction; rather than falling short of expectations, it has tended toward upside surprises. That, of course, could change over the next few weeks. In short, we need to ask ourselves what will constitute a "substantial and sustainable strengthening." If Lockhart is a guide, I am thinking we have seen such a shift already. If so, I would expect that on the basis of current data the Fed would delay action until closer to the end of Operation Twist II and to see if Congress has come to any agreement on the fiscal situation in 2013. If the change in the data has not reached the threshold of "substantial and sustainable strengthening" then we would expect action. It will be interesting to see if any of the doves back off on their dreary forecasts in the coming days; such shifts in tone would be telling. Also note that there is a middle ground in the possibility of further changes to the communication strategy; something that could placate both the doves and the hawks until a clearer image of the path of the US economy emerges.

                                                                                              Posted by on Wednesday, August 22, 2012 at 01:32 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (17) 

                                                                                              'Economics in Denial'

                                                                                              Howard Davies:

                                                                                              Economics in Denial, by Howard Davies, Commentary, Project Syndicate: In an exasperated outburst, just before he left the presidency of the European Central Bank, Jean-Claude Trichet complained that, “as a policymaker during the crisis, I found the available [economic and financial] models of limited help. In fact, I would go further: in the face of the crisis, we felt abandoned by conventional tools.” ... It was a ... serious indictment of the economics profession, not to mention all those extravagantly rewarded finance professors in business schools from Harvard to Hyderabad. ...
                                                                                              But it is not clear that a majority of the profession yet accepts [this]... The so-called “Chicago School” has mounted a robust defense of its rational expectations-based approach, rejecting the notion that a rethink is required. The Nobel laureate economist Robert Lucas has argued that the crisis was not predicted because economic theory predicts that such events cannot be predicted. So all is well. ...
                                                                                              We should not focus attention exclusively on economists, however. Arguably the elements of the conventional intellectual toolkit found most wanting are the capital asset pricing model and its close cousin, the efficient-market hypothesis. Yet their protagonists see no problems to address.
                                                                                              On the contrary, the University of Chicago’s Eugene Fama has described the notion that finance theory was at fault as “a fantasy,” and argues that “financial markets and financial institutions were casualties rather than causes of the recession.” And the efficient-market hypothesis that he championed cannot be blamed...
                                                                                              Fortunately, others in the profession ... have been chastened by the events of the last five years... They are working hard ... to develop new approaches...

                                                                                              There is resistance from the old guard, but I'm modestly optimistic. Some people are trying to ask, and answer, the right questions. However, it's a slow process.

                                                                                                Posted by on Wednesday, August 22, 2012 at 12:43 PM in Economics, Macroeconomics, Methodology | Permalink  Comments (90) 

                                                                                                Like a What?

                                                                                                Some days it's hard to decide which piece of Republican political hackery is most deserving of ridicule, but this is certainly a contender for today:

                                                                                                Like a Boss, Kevin Williamson, National Review Online

                                                                                                Niall Ferguson should say thank you, because this might take the spotlight off of him (well, until the next time he tries to play economist on the internet).

                                                                                                  Posted by on Wednesday, August 22, 2012 at 10:38 AM in Economics, Politics | Permalink  Comments (37) 

                                                                                                  'Patients Would Pay More if Romney Restores Medicare Savings'

                                                                                                  Mitt Romney’s promise to restore Obama's Medicare savings is “both puzzling and bogus":

                                                                                                  Patients Would Pay More if Romney Restores Medicare Savings, Analysts Say, by Jackie Calmes, NY Times: Mitt Romney’s promise to restore $716 billion that he says President Obama “robbed” from Medicare has some health care experts puzzled, and not just because his running mate, Representative Paul D. Ryan, included the same savings in his House budgets.
                                                                                                  The 2010 health care law cut Medicare reimbursements to hospitals and insurers, not benefits for older Americans, by that amount over the coming decade. But repealing the savings, policy analysts say, would hasten the insolvency of Medicare by eight years — to 2016, the final year of the next presidential term, from 2024.
                                                                                                  While Republicans have raised legitimate questions about the long-term feasibility of the reimbursement cuts, analysts say, to restore them in the short term would immediately add hundreds of dollars a year to out-of-pocket Medicare expenses for beneficiaries. That would violate Mr. Romney’s vow that neither current beneficiaries nor Americans within 10 years of eligibility would be affected by his proposal to shift Medicare to a voucherlike system in which recipients are given a lump sum to buy coverage from competing insurers.
                                                                                                  For those reasons, Henry J. Aaron, an economist and a longtime health policy analyst at the Brookings Institution and the Institute of Medicine, called Mr. Romney’s vow to repeal the savings “both puzzling and bogus at the same time.”
                                                                                                  Marilyn Moon, vice president and director of the health program at the American Institutes for Research, calculated that restoring the $716 billion in Medicare savings would increase premiums and co-payments for beneficiaries by $342 a year on average over the next decade; in 2022, the average increase would be $577. ...

                                                                                                    Posted by on Wednesday, August 22, 2012 at 12:24 AM in Economics, Health Care, Politics, Social Insurance | Permalink  Comments (42) 

                                                                                                    Put Inflation Fears Aside

                                                                                                    At the NYT Room for Debate: Me versus John Cochrane and Ed Harrison:

                                                                                                    My position is that the Fed is too worried about inflation and too pessimistic about its ability to lower the unemployment rate, and as a consequence it is not doing enough to fight the unemployment problem.

                                                                                                      Posted by on Wednesday, August 22, 2012 at 12:15 AM in Economics, Monetary Policy | Permalink  Comments (52)