« October 2012 |
| December 2012 »
The good old days hold lessons for today:
The Twinkie Manifesto, by Paul Krugman, Commentary, NY Times: The Twinkie
... will forever be identified with the 1950s... And the demise of Hostess has
unleashed a wave of baby boomer nostalgia for a seemingly more innocent time.
Needless to say, it wasn’t really innocent. But the ’50s ... do offer lessons
that remain relevant in the 21st century. ... Consider the question of tax rates
on the wealthy. The modern American right, and much of the alleged center, is
obsessed with the notion that low tax rates at the top are essential to growth.
Yet in the 1950s ... taxes on corporate profits were twice as large... The best
estimates suggest that circa 1960 the top 0.01 percent ... paid an effective
federal tax rate of more than 70 percent, twice what they pay today.
Nor were high taxes the only burden wealthy businessmen had to bear. They also
faced a labor force with a degree of bargaining power hard to imagine today. In
1955 roughly a third of American workers were union members. In the biggest
companies, management and labor bargained as equals...
Squeezed between high taxes and empowered workers, executives were relatively
impoverished by the standards of either earlier or later generations. ...
Between the 1920s and the 1950s real incomes for the richest Americans fell
Today, of course, the mansions, armies of servants and yachts are back, bigger
than ever — and any hint of policies that might crimp plutocrats’ style is met
with cries of “socialism.” ... Surely, then, the far less plutocrat-friendly
environment of the 1950s must have been an economic disaster, right? ...
On the contrary,... the high-tax, strong-union decades after World War II were
in fact marked by spectacular, widely shared economic growth...
Which brings us back to the nostalgia thing.
There are, let’s face it, some people in our political life who pine for the
days when minorities and women knew their place, gays stayed firmly in the
closet and congressmen asked, “Are you now or have you ever been?” The rest of
us, however, are very glad those days are gone. We are, morally, a much better
nation... Oh, and the food has improved a lot, too.
Along the way, however, we’ve forgotten something important — namely, that
economic justice and economic growth aren’t incompatible. America in the 1950s
made the rich pay their fair share; it gave workers the power to bargain for
decent wages and benefits; yet contrary to right-wing propaganda..., it
prospered. And we can do that again.
Posted by Mark Thoma on Monday, November 19, 2012 at 12:24 AM in Economics, Income Distribution, Taxes, Unions |
Fiscal Madness, by Tim Duy: What is it about fiscal policy that brings out the crazy? Because it all seems pretty simple. Joe Weisenthal hits the nail on the head:
Weisenthal points us to Ryan Avent and Josh Lehner, both showing in different ways the better post-recession outcomes experienced by the US compared to other economies. Paul Krugman extends the argument by comparing the divergent path of Eurozone and US unemployment rates. The key difference in policy - the US pursued a more aggressive fiscal policy and didn't pull back too quickly. I don't think you can emphasize this point enough.
The U.S. recovery has been remarkable on a comparative basis precisely for one reason: Because despite all of the rhetoric, the U.S. has completely avoided the austerity madness that's gripped much of the world.
Which brings us to the fiscal cliff (or slope, which is more accurate and avoids creating the false impression that all is lost come January 1). The tax increases and spending cuts in place promise to repeat the mistakes of the UK and the Eurozone by pivoting too fast and too hard into the realm of fiscal austerity. A solution to the fiscal cliff means smoothing the path to fiscal consolidation (optimally, with no austerity in the near term, but I don't see that as an outcome). The proximate cause of Weisenthal's ire is former Federal Reserve Chairman Alan Greenspan, who says:
All of the simple low hanging fruits have been picked and the presumption that we are going to resolve the big issue on spending by making a few little twitches here and there I think is a little naive. If we get out of this with a moderate recession, I would say that the price is very cheap. The presumption that we will solve this problem without paying I think is grossly inappropriate...I think the markets are getting very shaky. And they are getting shaky because I think fiscal policy is out of control. And I think the markets will crater if we run into any evidence that we cannot solve this problem.
As Weisenthal notes, this is a completely backwards analysis. Let's make this clear: If you think fiscal policy is out of control, you should welcome the fiscal cliff. From the CBO:
If markets are shaky, they are shaky because participants recognize the recessionary impact of this level of fiscal austerity and they don't like it. Market participants want Congress and the President to do exactly what Greenspan claims is impossible, minimize the impact of spending cuts.
It is truly time for Greenspan to simply fade away; he no longer has anything useful to add to the discussion. Of anything. Who should join him is Dallas Federal Reserve President Richard Fisher. Fisher laid further claim to the title of "Worst Monetary Policymaker Ever" in a speech last week, first by describing Congress as "parasitic wastrels." It should be obvious that this is not exactly speech conducive to maintaining an independent central bank. He continues with this tirade:
The jig is up. Our fiscal authorities have mortgaged the material assets of our grandchildren to the nth degree. We are at risk of losing our political heritage of reaching across the aisle to work for the common good. In the minds of many, our government’s fiscal misfeasance threatens the world’s respect for America as the beacon of democracy...So my only comment today regarding the recent federal elections is this: Pray that the president and the Congress will at last tackle the fiscal imbroglio they and their predecessors created and only they can undo.
The rise in neo-Nazi's in Greece is a democratic outcome of austerity? Again, Fisher just doesn't get it. He seems to believe that the challenge upon us is to radically cut spending. Again, this is absolutely not the challenge upon us. In the middle of this tirade he launched into another:
Only the Congress of the United States can now save us from fiscal perdition. The Federal Reserve cannot. The Federal Reserve has been carrying the ball for the fiscal authorities by holding down interest rates in an attempt to stoke the recovery while the fiscal authorities wrestle themselves off the mat. But there are limits to what a monetary authority can do. For the central bank also plays a fiduciary role for the American people and, given our franchise as the globe’s premier reserve currency, the world. We dare not become the central bank counterpart to Congress by adopting a Buzz Lightyear approach of “To infinity and beyond!” by endlessly purchasing U.S. Treasuries and agency debt so as to encumber future generations of central bankers with Hobson’s choices when it comes to undoing what seems contemporarily appropriate.
Fisher appears to be under the delusion that the economy is suffering from the effects of large deficits (which require "fiscal authorities to wrestle themselves off the mat"), and the Federal Reserve is the sole support of those deficits. He continues to look at the world as if the US economy was operating well above potential, and that only the Fed stands in the way of 10% interest rates. Of course, if this were true, unemployment would not by near 8%, wage growth would not be scraping the floor, and inflation would not be hovering below the Fed's 2% target. Fisher is not dissuaded by these little facts.
And, by the way, despite Fisher's argument to the contrary, being the counterpart to Congress is exactly what the Fed will do as long as the economy is unable to exit the zero bound in the absence of fiscal stimulus.
Why are Greenspan and Fisher so horribly wrong? Because they belong to a group that has worried incessantly that large deficits would bring economically ruinous high interest rates and, unless held at bay by the Federal Reserve, runaway inflation. Such worries have been repeatedly proved unfounded, but Greenspan and Fisher have no other intellectual framework to fall back on. When you only have a hammer, everything is a nail. For them, any question of fiscal policy always needs to be twisted into their version of the world, even when the opposite is so completely obvious to just about everyone else at this point.
Finally, despite the ongoing evidence that fiscal austerity has failed and now pushed the Eurozone back into recession, we get this from European Central Bank President Mario Draghi (via FT Alphaville):
In my joint work with the Presidents of the European Council, the European Commission and the Eurogroup, we have identified four pillars on which to build a stable and prosperous Europe: a banking union with a single supervisor; a fiscal union that can effectively prevent and correct unsustainable budgets; an economic union that can guarantee sufficient competitiveness to sustain high employment; and a political union that can deeply engage euro area citizens.
Sounds good, right? But pay close attention to his definition of a fiscal union. It remains nothing more than an austerity union, a mechanism to control deficit spending. But a fiscal union is so much more. It transfers resources across regions. It serves as an insurer for all regions. And it frees the central bank from having to be the lender of last resort to individual regions. For Draghi, however, a fiscal union is just a mechanism to control spending. And controlling spending has done little more than push the Eurozone deeper into recession. Draghi might have prevented financial collapse, but the price he extracted ensures ongoing recession nonetheless.
Bottom Line: We need to find a cure for the crazy that some fall into whenever the topic is fiscal policy.
Posted by Mark Thoma on Monday, November 19, 2012 at 12:21 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Monday, November 19, 2012 at 12:06 AM in Economics, Links |
Not sure how much good it will do, but I wish this too:
Why We Should Stop Obsessing About The Federal Budget Deficit, by Robert Reich:
I wish President Obama and the Democrats would explain to the nation that the
federal budget deficit isn’t the nation’s major economic problem and deficit
reduction shouldn’t be our major goal. Our problem is lack of good jobs and
sufficient growth, and our goal must be to revive both. ...
Why don’t our politicians and media get this? Because an entire deficit-cutting
political industry has grown up in recent years – starting with Ross Perot’s
third party in the 1992 election, extending through Peter Peterson’s Institute
and other think-tanks funded by Wall Street and big business, embracing the
eat-your-spinach deficit hawk crowd in the Democratic Party, and culminating in
the Simpson-Bowles Commission that President Obama created in order to appease
the hawks but which only legitimized them further.
Most of the media have bought into the narrative that our economic problems stem
from an out-of-control budget deficit. They’re repeating this hokum even now,
when we’re staring at a fiscal cliff that illustrates just how dangerous deficit
reduction can be. ...
In fact, if there was ever a time for America to borrow more in order to put our
people back to work repairing our crumbling infrastructure and rebuilding our
schools, it’s now.
Public investments ... are
justifiable as long as the return on those investments – a more educated and
productive workforce, and a more efficient infrastructure, both generating more
and better goods and services with fewer scarce resources – is higher than the
cost of those investments. In fact, we’d be nuts not to make these investments
under these circumstances. ...
Finally, the biggest driver of future deficits is overstated — rising
health-care costs that underlie projections for Medicare and Medicaid spending.
The rate of growth of health-care costs is slowing because of the Affordable
Care Act and increasing pressures on health providers to hold down costs. Yet
projections of future budget deficits haven’t yet factored in this slowdown.
So can we please stop obsessing about future budget deficits? They’re
distracting our attention from what we should be obsessing about — jobs and
Posted by Mark Thoma on Sunday, November 18, 2012 at 12:42 PM in Budget Deficit, Economics, Politics |
America’s Fiscal Cliff Dwellers, by Simon Johnson, Commentary, Project Syndicate:
In early 2012, Federal Reserve Chairman Ben Bernanke used the term “fiscal
cliff” to grab the attention of lawmakers and the broader public. Bernanke’s
point was that Americans should worry about the combination of federal tax
increases and spending cuts that are currently scheduled to begin at the end of
But there is not really any kind of “cliff” in the sense that if you stepped
over the edge, you would fall fast, land on something hard, and not get up for a
long time. In the modern US economy, the scheduled changes constitute more of a
fiscal “slope” – meaning that the full effect of the tax increases would not be
felt immediately (income withholding takes time to adjust), while the spending
cuts would also be phased in (the government has some discretion regarding
implementation). This slope offers President Barack Obama a real opportunity to
restore the federal government’s revenue base to what it was in the mid-1990’s.
The choice of words to describe America’s fiscal situation matters, given the
hysteria that has been whipped up in recent months, primarily by people who want
to make big cuts in the country’s two main entitlement programs, Social Security
and Medicare. Their logic is that if we are about to rush off a cliff, we need
to take extreme measures. And cutting pensions and health care for the elderly
certainly qualifies as extreme – as well as completely inappropriate and
If, instead, the US faces a fiscal slope, then people who refuse to consider
raising taxes – namely, Republicans in the US Congress’s House of
Representatives – have a very weak hand indeed. ...[more]...
Posted by Mark Thoma on Sunday, November 18, 2012 at 09:18 AM in Budget Deficit, Economics, Social Insurance |
Posted by Mark Thoma on Sunday, November 18, 2012 at 12:06 AM in Economics, Links |
In case you haven't heard, the geeks won:
Applause for the Numbers Machine, by Richard Thaler, Commentary, NY Times:
The biggest winners on Election Day weren’t politicians; they were numbers
folks. Computer scientists, behavioral scientists, statisticians and everyone who works
with data should be proud. They told us who was going to win, but they also
helped to make many of those victories happen.
Three groups of geeks deserve the love they rarely receive: people who run
political polls, those who analyze the polls and those who figure out how to
help campaigns connect with voters. ...
Pundits making forecasts, some of whom had mocked the poll analysts, didn’t fare
as well, and many failed miserably. ... Smart pundits should consider either
abandoning this activity, or consulting with the geeks before rendering their
There should be something reassuring about this Obama campaign efficiency to all
Americans, even those who supported Mr. Romney based on his success in business.
When it came to the business of running a campaign, it was the former professor
and community organizer who had the more technologically savvy organization and
made more effective use of its resources, including geek power.
Posted by Mark Thoma on Saturday, November 17, 2012 at 11:58 AM in Economics, Politics |
Via Boing Boing:
House Republicans release watershed copyright reform paper, by Cory Doctorow:
Three Myths about Copyright Law and Where to Start to Fix it (PDF) is a
position paper just released by House Republicans, advocating for a raft of
eminently sensible reforms to copyright law, including expanding and clarifying
fair use; reaffirming that copyright's purpose is to serve the public interest
(not to enrich investors); to limit statutory damages for copyright
infringement; to punish false copyright claims; and to limit copyright terms.
This is pretty close to the full raft of reforms that progressive types on both
sides of the US political spectrum have been pushing for. It'll be interesting
to see whether the Dems (who have a much closer relationship to Hollywood and
rely on it for funding) are able to muster any support for this. ...
[Update: See also Radicals for Capitalism at Crooked Timber.]
[Update: Rajiv Sethi tweets: Amazing. The RSC policy brief on copyright law has been disavowed and taken down. I've posted a copy here.]
Posted by Mark Thoma on Saturday, November 17, 2012 at 11:34 AM in Economics, Market Failure |
Firms that are large, highly interconnected with other firms, and in
concentrated industries -- large financial firms fit this description, but there are firms like this in other industries too -- have a
surprisingly large effect on aggregate fluctuations (note also that
average firm size is growing, and notably for the discussion below, "at the
very top end of the scale, the world’s biggest firms keep on getting bigger").
There are lots of reasons to worry about the presence of large, dominant firms
in an industry, excessive economic and political power for one (in my view there
is too little attention to this issue outside of the financial sector), and this
extends the list:
role of firms in aggregate fluctuations, by Julian di Giovanni, Andrei
Levchenko, Isabelle Méjean, Vox EU: Practical discussions of
macroeconomic fluctuations are often couched in terms of the impact of
individual firms on aggregate GDP. For instance, according to JPMorgan, sales of
Apple’s iPhone 5 could add as much as half a percentage point to US 4th quarter
GDP growth this year (CNBC 2012). In France, the recent poor performance of
Renault and Peugeot is expected to induce a domino effect across the production
chain. Since it is believed that each job lost in Renault leads to the
disappearance of two or three suppliers of automobile parts, an adverse shock to
this car manufacturer could drag down aggregate growth in the French economy (Le
Point 2012). These two examples pertain to very large economies, but in smaller
countries the contribution of individual large firms to aggregate fluctuations
is likely to be even more noticeable (di Giovanni and Levchenko 2012).
The role of firms in the business cycle
By contrast, the role of
firms in the business cycle has received comparatively less attention in the
literature; the majority of research in macroeconomics relies on aggregate
(economy-wide) shocks as a driver of aggregate fluctuations. A prominent
exception is a recent contribution by Gabaix (2011), which argues that because
the firm size distribution is extremely fat-tailed – the economy is ‘granular’.
This means that idiosyncratic shocks to individual (and large) firms will not
average out and instead lead to aggregate fluctuations. Acemoglu et al. (2012)
have developed a network model in which idiosyncratic shocks to a single firm or
sector can have sizeable aggregate effects if it is strongly interconnected with
other firms/sectors in the economy, regardless of the size distribution.
However, there is currently little empirical evidence to complement these
In our research, we provide
a forensic account of the contribution of individual firms to aggregate
fluctuations using a novel database covering the universe of French firms’
domestic sales and destination-specific exports for the period 1990–2007 (di
Giovanni, Levchenko, and Méjean 2012). We develop an empirical strategy that
decomposes the growth of a firm’s rate of sales of to a single destination
- A macroeconomic shock,
defined as the component common to all firms
- A sectoral shock,
defined as the component common to all firms in a particular sector
- A firm-level shock
The procedure yields
estimates of the time series of the macroeconomic, sectoral, and firm-specific
shocks for each destination served by each firm. We then decompose aggregate
volatility in the economy into the contributions of macroeconomic/sectoral and
firm-specific shocks, and use our estimates to assess whether microeconomic
shocks have an impact on aggregate volatility.
Our main finding is that
firm-specific components do contribute substantially to aggregate fluctuations.
Their contribution is roughly similar in magnitude to the combined effect of all
sectoral and macroeconomic shocks. We then evaluate two explanations for the
positive overall contribution of firm-specific shocks. The first – from Gabaix
(2011) – is that firm-specific idiosyncratic volatility does not average out
because of the presence of very large firms. We refer to this as the
‘granularity’ hypothesis. The second – from Acemoglu et al. (2012) – is that
idiosyncratic shocks contribute to aggregate fluctuations because input-output
linkages generate comvement between firms. We refer to this as the “linkages”
hypothesis. The overall contribution of firm-specific shocks to aggregate
volatility can be decomposed additively into two terms that capture these two
mechanisms. Though both channels matter quantitatively, about two-thirds of the
contribution of firm-specific shocks to the aggregate variance is accounted for
by the 'linkages' effect – the covariances of the firm-specific components of
the growth rate of sales.
Explaining ‘granularity’ and ‘linkages’
We then exploit cross-sectoral
heterogeneity to provide further evidence on the ‘granularity’ and ‘linkages’
mechanisms. We compare the covariances of the firm-specific shocks aggregated at
the sector level to a measure of sectoral linkages taken from the Input-Output
Tables. As shown in Figure 1, sectors with stronger input-output linkages tend
to exhibit significantly greater correlation of firm-specific shocks. This is
direct evidence for the linkages hypothesis. We also relate each sector’s
contribution to aggregate volatility to the ‘granularity’ of the sector.
Figure 1. Sectoral
input-output linkages and covariance of firm-specific shocks
Gabaix (2011) shows that
granular fluctuations in the economy will be more pronounced the larger is the
Herfindahl index of firm sales – a common measure of concentration. Confirming
this result, Figure 2 shows that industries that are more concentrated than the
average sector contribute more significantly to aggregate volatility, whereas
the contribution of less concentrated sectors is comparatively smaller. In
summary, we find direct corroboration in the data for the mechanisms behind both
the ‘granularity’ and the ‘linkages’ hypotheses. Sectors that are populated by
firms that are more interconnected with the rest of the economy; and more
concentrated contribute a disproportionate share of aggregate volatility
relative to what we would expect in a ‘symmetric’ economy.
Sector’s concentration (Herfindahl Index) and sector’s contribution to aggregate
The rising importance of large firms
Looking forward, both the
recent theoretical contributions and our findings are informative given the
significant and rising importance of large firms in overall economic activity.
Trade integration has the potential to make the largest firms even larger (di
Giovanni and Levchenko, 2012). Likewise, consolidation across industries -- for
instance via mergers and acquisitions -- also leads to a fatter tail in the
firm-size distribution. These two structural changes amplify granular
fluctuations, making business cycles more sensitive to individual firms’ shocks.
At the same time, the boundaries of the firm are changing and production
processes are becoming more fragmented. Some activities that used to be internal
to the firm are now outsourced. This fragmentation takes place both within and
across borders, and within and across sectors, adding further scope for shocks
to individual firms to propagate throughout the economy as well as across
Finally, one only needs to
look at the most recent global crisis to note the importance of the transmission
of shocks between sectors and firms. A shock that started in the financial
sector spread rapidly to the rest of the economy. The dramatic fall in
international trade highlighted how the international fragmentation of
production processes was a powerful amplification mechanism of shocks.
Acemoglu, Daron, Vasco M
Carvalho, Asuman Ozdaglar, and Alireza Tahbaz-Salehi (2012), “The Network
Origins of Aggregate Fluctuations”, forthcoming, Econometrica, May.
Carvalho, Vasco M and Xavier
Gabaix (2010), “The Great Diversification and its Undoing”, mimeo, CREi,
Universitat Pompeu Fabra and NYU, October.
CNBC.com (2012), “Apple's
iPhone 5 Sales Could Add Half a Point to GDP”, 10 September.
di Giovanni, Julian and
Andrei A Levchenko (2012), “Country Size, International Trade, and Aggregate
Fluctuations in Granular Economies”, forthcoming, Journal of Political
di Giovanni, Julian, Andrei
A Levchenko, and Isabelle Méjean (2012), “Firms, Destinations, and Aggregate
Fluctuations”, 2012, CEPR Discussion Paper, 9168.
Dupor, Bill (1999),
“Aggregation and Irrelevance in Multi-sector Models”, Journal of Monetary
Economics, 43(2), 391–409.
Foerster, Andrew T,
Pierre-Daniel G Sarte, and Mark W Watson (2011), “Sectoral vs. Aggregate Shocks:
A Structural Factor Analysis of Industrial Production”, Journal of Political
Economy, 119 (1), 1–38.
Gabaix, Xavier (2011), “The
Granular Origins of Aggregate Fluctuations,” Econometrica, 79 (3),
Horvath, Michael (1998),
“Cyclicality and Sectoral Linkages: Aggregate Fluctuations from Independent
Sectoral Shocks,” Review of Economic Dynamics, 1(4), 781–808.
Horvath, Michael (2000), “Sectoral
Shocks and Aggregate Fluctuations,” Journal of Monetary Economics,
Le Point (2012), “Équipementiers
et automobile: les comptes ne sont pas bons”, 23 July.
Stockman, Alan C (1988) “Sectoral
and National Aggregate Disturbances to Industrial Output in Seven European
Countries”, Journal of Monetary Economics, 21, 387–409.
1 A closely related and
older tradition in macroeconomics, starting with the seminal work of Long and
Plosser (1983), explores the role of sectoral shocks in generating aggregate
fluctuations (cf. Stockman 1988, Horvath 1998, 2000, Dupor 1999, Foerster et al.
2011, Carvalho and Gabaix 2010).
Posted by Mark Thoma on Saturday, November 17, 2012 at 09:40 AM in Economics, Market Failure |
Posted by Mark Thoma on Saturday, November 17, 2012 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Friday, November 16, 2012 at 06:27 PM in Economics, Financial System, Video |
William Dudley, President of the NY Fed, on too big to fail (this is just a small
part of his much longer, detailed discussion):
Solving the Too Big to Fail Problem, by William C. Dudley, President and Chief
Executive Officer, FRBNY: ...I am going to focus my remarks today on what is popularly known as the “too
big to fail” (TBTF) problem. In particular, should society tolerate a financial
system in which certain financial institutions are deemed to be too big to fail?
And, if not, then what should we do about it?
The answer to the first question is clearly “no.” We cannot tolerate a
financial system in which some firms are too big to fail—at least not ones that
operate in any form other than that of a very tightly regulated utility.
The second question is the more interesting one. Is the current approach of
the official sector to ending TBTF the right one? I’d characterize this approach
as reducing the incentives for firms to operate with a large systemic footprint,
reducing the likelihood of them failing, and lowering the cost to society when
they do fail. Or would it be better to take the more direct, but less nuanced
approach advocated by some and simply break up the most systemically important
firms into smaller or simpler pieces in the hope that what emerges is no longer
systemic and too big to fail?1
As I will explain tonight, I believe we should continue to press forward on
the first path. But, if we fail to reach our destination by this route, then a
blunter approach may yet prove necessary. ...
Critics of our approach believe it would be better to just break up firms
deemed TBTF now—perhaps through legislation requiring the separation of retail
banking and capital markets activities or by imposing size restrictions that
require firms to shrink dramatically from their current scale. My own view is
that while this could yet prove necessary, it is premature to give up on the
current approach: changing the incentives facing large and complex firms,
forcing them to become more resilient, and making the financial system more
robust to their failure.
In my opinion, there are shortcomings to reimposing Glass-Steagall-type
activity restrictions or strict size limits. With respect to Glass-Steagall, it
is not obvious to me that the pairing of securities and banking businesses was
an important causal element behind the crisis. In fact, independent investment
banks were much more vulnerable during 2008 than the universal banking firms
which conducted both banking and securities activities. More important is to
address the well-known sources of instability in wholesale funding markets and
give careful consideration to whether there should be a more robust lender of
last resort regime for securities activities.
With respect to size limitations, it is important to recognize that a new and
much reduced size threshold could sacrifice socially useful economies of scale
and scope benefits. And it could do this without actually solving the problem of
system risk externalities that aren’t related to balance sheet size.
Evaluating the socially optimal size, scope and organizational structure of
financial firms is a complicated business, and so is establishing a viable
transition path to a system of much smaller firms. It would be helpful in this
regard if advocates of break-up solutions would put a bit more flesh on the
bones and develop detailed proposals that address essential questions of how
such downsizing or functional separation would be accomplished, and what
benefits and costs could be expected.
Such an analysis should answer several questions: How would you force
divestiture (in good times and bad)? Should firms be split up by activity or
reduced pro-rata in size? How much would they have to be shrunk in order for the
externalities of failure to no longer create TBTF problems? How would global
trading and investment banking services and network-type activities be
supported? Should some activities be retained in natural monopoly form, but
subject to utility type regulation? How costly would it be to replicate support
services or to manage liquidity and capital locally? Are there ways of designing
size limits that cannot be arbitraged by banks via off-balance-sheet structures
and other forms of financial innovation? So far, advocacy for the break-up path
has been strong, but without the detail to assess whether this is indeed
superior to the course we are currently following. But, I’m open-minded.
It is important to recognize that any credible approach to addressing the
TBTF problem, including the one we are pursuing today, necessarily implies
changes to the structure and business mix of financial firms and financial
markets. Moreover, it is important to stress that not all of these adjustments
will be in the private interests of these firms, and some will result in changes
to the price and volume of certain financial services. These are intended
consequences, not unintended consequences.
Too big to fail is an unacceptable regime. The good news is there are many
efforts underway to address this problem. The bad news is that some of these
efforts are just in their nascent stages. It is important that as the crisis
recedes in memory, that these efforts not flag—this is a project that needs to
be seen to a successful conclusion and then sustained on a permanent basis.
One thing we really need to understand better is the minimum efficient scale
for various financial activities. Whenever the topic of breaking banks into
smaller pieces is raised, we hear that a "much reduced size threshold could
sacrifice socially useful economies of scale and scope benefits." The key word is "could." As far as
I can tell, the evidence on this point is very shaky -- we just don't know for
sure what size is necessary to exploit efficiencies. My own view is that it is
likely smaller than many firms today, and hence there would be no harm in
reducing firms size. This may not help much with stability, but there are still perhaps many benefits (e.g. reduced
political and economic power) from reducing firm size and increasing the number
of institutions engaged in important financial activities.
Posted by Mark Thoma on Friday, November 16, 2012 at 01:18 PM in Economics, Financial System, Market Failure, Regulation |
Raising the eligibility age for Social Security and Medicare is *not* the answer:
Life, Death and Deficits, by Paul Krugman, Commentary, NY Times: America’s
political landscape is infested with many zombie ideas... And right now the most
dangerous zombie is probably the claim that rising life expectancy justifies a
rise in both the Social Security retirement age and the age of eligibility for
Medicare... — and we shouldn’t let it eat our brains. ...
Now, life expectancy at age 65 has risen... But the rise has been very
uneven..., any further rise in the retirement age would be a harsh blow to
Americans in the bottom half of the income distribution, who aren’t living much
longer, and who, in many cases, have jobs requiring physical effort that’s
difficult even for healthy seniors. And these are precisely the people who
depend most on Social Security. ...
While the United States does have a long-run budget problem, Social Security is
not a major factor... Medicare, on the other hand, is a big budget problem. But
raising the eligibility age, which means forcing seniors to seek private
insurance, is no way to deal with that problem. ...
What would happen if we raised the Medicare eligibility age? The federal
government would save only a small amount of money, because younger seniors are
relatively healthy... Meanwhile, however, those seniors would face sharply
higher out-of-pocket costs. How could this trade-off be considered good policy?
The bottom line is that raising the age of eligibility for either Social
Security benefits or Medicare would be destructive, making Americans’ lives
worse without contributing in any significant way to deficit reduction.
Democrats ... who even consider either alternative need to ask themselves what
on earth they think they’re doing.
But what, ask the deficit scolds, do people like me propose doing about rising
spending? The answer is to do what every other advanced country does, and make a
serious effort to rein in health care costs. Give Medicare the ability to
bargain over drug prices. Let the Independent Payment Advisory Board, created as
part of Obamacare to help Medicare control costs, do its job instead of crying
“death panels.” (And isn’t it odd that the same people who demagogue attempts to
help Medicare save money are eager to throw millions of people out of the
program altogether?) ...
What we know for sure is that there is no good case for denying older Americans
access to the programs they count on. This should be a red line in any budget
negotiations, and we can only hope that Mr. Obama doesn’t betray his supporters
by crossing it.
Posted by Mark Thoma on Friday, November 16, 2012 at 12:33 AM in Budget Deficit, Economics, Health Care, Social Insurance, Social Security |
Posted by Mark Thoma on Friday, November 16, 2012 at 12:06 AM in Economics, Links |
Busy day, so another quick one. This is Paul Volcker:
What the New President Should Consider, by Paul Volcker, NYRB: [The
following is drawn from a lecture given at the Cooper Union for the Advancement
of Science and Art in New York City earlier this year. Written before the
current election, it addresses in part the winner, whoever he may be.]
... My point here is that we should look ahead. Where is the solid ground upon
which to build, to restore some clear sense of national interest and national
purpose, to restore confidence in the political process and in government
We don’t simply have a financial problem, a problem of economic balance and
structure: we have a more fundamental problem of effective governance.
Virtually every day we read of polls about the president’s popularity, or the
ups and downs of the Republican contenders during the recent election. The poll
that concerns me is different, and much more challenging.
“Do you trust your government to do the right thing most of the time?” That
question has been asked regularly for decades by experienced pollsters. These
days only 20 percent or even less say yes. In other words, four out of five
Americans don’t instinctively trust our own government to do the “right thing”
even half of the time. That’s not a platform upon which a great democracy can be
I know we have been witnessing a large ideological debate. Much of that is
beyond the concerns of financial or economic policy. But I also know that the
political divide is too often put as “big government” versus “small government.”
That particular argument may be—probably should be—endless. After all, it
started back at the beginning of the republic, Jefferson against Hamilton, on
and on. But can we not agree on some basic points of departure?
Government is, after all, necessary. What we want is effective government,
worthy of instinctive trust. I have long been concerned that our particular
governments—large or small, federal, state, and local—are not consistently
administered and managed as well as they should be, and can be. ...
Posted by Mark Thoma on Thursday, November 15, 2012 at 11:45 AM in Economics, Politics |
Ezra Klein, then Paul Krugman:
From the 47% to ‘gifts’: Mitt Romney’s ugly vision of politics, by Ezra Klein:
During the campaign, Mitt Romney repeatedly promised seniors that he’d restore
President Obama’s $716 billion in Medicare cuts. He promised them that, unlike
Obama, he wouldn’t permit a single change to Medicare or Social Security for 10
years. ... While the rest of
the country was trying to pay down the deficit and prioritize spending, they’d
be safe. He also promised the rich that they’d see a lower overall tax rate... Oh, and let’s not forget his
oft-stated intention to roll back the Dodd-Frank financial reforms and replace
Keep all that in mind when you hear Romney
blaming his loss on “the gifts” that Obama reportedly handed out to “the
African-American community, the Hispanic community and young people.” Romney was
free with the gifts, too, and his promises to seniors and to the rich carried a
far higher price tag than any policies Obama promised minorities or the young. But
to Romney, and perhaps to the donors he was speaking to, those policies didn’t
count as “gifts.”...
Romney really does appear to believe that
there’s a significant portion of the electorate that’s basically comprised of
moochers. That’s Romney’s political cosmology: The Democrats bribe the moochers with
health care and green cards. ...
When Romney thinks he’s behind closed doors and he’s just telling other people
like him how politics really works, the picture he paints is so ugly as to be
bordering on dystopic. It’s not just about class, but about worth, and
legitimacy. His voters are worth something to the economy — they’re producers —
and they respond to legitimate appeals about how to best manage the country. The
Democrats’ voters are drags on the economy — moochers — and they respond to
Romney doesn’t voice these opinions in public. He knows better. But so did the
The Moocher Majority, by Paul Krugman: Lots of people having fun with Mitt
post-election diagnosis, which is that President Obama played dirty: he won
peoples’ votes by — horrors — actually making their lives better...
Gosh. People who will have health insurance under Obama but would have lost
it under Romney voted for Obama. What’s wrong with those people?
But as many commentators have pointed out, Romney was just encapsulating the
prevalent worldview on the right. Some of us see an increasingly, radically
unequal America, with rising inequality actually reinforced by public policy,
with tax rates on the rich lower than they have been in many decades and the
overall redistributive effect of government
down substantially since the
1970s. But the right sees an
entitlement epidemic, in which the big problem is that too many people are
getting free stuff.
It’s important to understand the roots of this stuff. It began as a
deliberate appeal to racism, with explicit condemnation of Those People as
welfare moochers. Then it became more coded...
What Mitt Romney is now complaining about is the horrifying reality that ... anti-government rhetoric is turning into a way to lose elections
rather than win them.
And I don’t think the Republican party as currently constituted can change
this: after 45 years of the Southern strategy, this stuff is what defines the
How will the GOP respond to Romney's loss? With soul-searching or entrenchment? I think the Republican Party will change with time, it has to, and there are younger voices ready to lead the Party to new ground. But the old guard will argue it was the abandonment of traditional principles that caused the loss, and resist the suggestion that the maker-taker, welfare moochers type rhetoric was harmful. The old guard still holds most of the power, and it is not yet ready to step aside.
Posted by Mark Thoma on Thursday, November 15, 2012 at 11:09 AM in Economics, Income Distribution, Politics, Social Insurance |
Is James Kwak
...if you take the long view, there’s no reason for conservatives to back away
from their absolutist anti-tax stance. So they lose an election or two. What
happens? When it comes to taxes, Democratic majorities at best hold the line
against further tax cuts. After their sweep in 2008, President Obama and his
congressional allies passed a couple of modest tax increases to pay for
Obamacare (and one of those, the excise tax on Cadillac plans, is one that
conservative economists profess to like), but also extended the Bush tax cuts
and added a few more tax cuts of their own; now Obama wants to make more than 80
percent of the Bush tax cuts permanent, and last summer he offered up his own
entitlement cuts. When the Republicans return to power, as they inevitably
will, they can just pick up where they left off..., for the last eighteen years,
the hardline anti-tax position has been a huge winner for Republicans. Given
that Democrats have shown exactly zero ability to punish them for it, I can’t
see any reason why they should change their ways now.
If there is some sort of compromise in the next couple of months, it’s going to
be one that Republicans can frame as a tax cut, not an out-and-out violation of
the Grover pledge; one scenario is that the year ends with no deal, tax rates go
up, and then Obama and the Republicans agree to cut them. ...
Republicans may object to tax rate increases, and no doubt will, but for once I'm not sure they'll prevail.
Posted by Mark Thoma on Thursday, November 15, 2012 at 12:33 AM in Economics, Politics, Taxes |
Fetish for making things ignores real work, by John Kay, Commentary, Financial
Times: ...The ... iPhone ... sells, in the absence of carrier subsidy, for
about $700. Purchased components ... may account for as much as $200 of this.
... “Assembled in China” costs about $20. The balance represents the return to
“designed in California”, which is why Apple is such a profitable company.
Manufacturing fetishism – the idea that manufacturing is the central economic
activity and everything else is somehow subordinate – is deeply ingrained in
human thinking..., probably formed in the days when economic activity was the
constant search for food, fuel and shelter. ...
Most of what you pay reflects the style of the suit, the design of the iPhone,...
the painstaking pharmaceutical research... Physical labor incorporated in
manufactured goods is a cheap commodity in a globalised world. ...
Manufacturing was once a principal source of low-skilled employment but this can
no longer be true in advanced economies. Most unskilled jobs in developed
countries are necessarily in personal services. Workers in China can assemble
your iPhone but they cannot serve you lunch, collect your refuse or bathe your
grandmother. Anyone who thinks these are not “real jobs” does not understand the
labor they involve. ...
Where will exports come from, they ask? From exporting “designed in California”
or “tailored in Savile Row.” Ask Apple, or your tailor, how they derive their
Posted by Mark Thoma on Thursday, November 15, 2012 at 12:24 AM in Economics, International Trade |
Posted by Mark Thoma on Thursday, November 15, 2012 at 12:06 AM in Economics, Links |
I am hearing a lot lately about using a carbon tax to fill the budget gap.
I'm all for a carbon tax, internalizing externalities so that these markets work
better is a good idea if we can somehow get through the political barriers, but
we shouldn't be overly optimistic about how much revenue such a tax will bring.
In order to get support for such a tax and to implement it equitably, some
groups will need to be compensated for the higher energy costs they will face.
For example, these proposals often come with a proposal to return some of the
tax as a lump-sum payment to lower income households (the
microeconomics of a tax on carbon combined with lump-sum payments can be found
here). Presumably, the higher the threshold for "low income," the easier it
will be to get support for a carbon tax proposal, so there will be pressure for
the compensation to extend, perhaps on a sliding scale, to middle class
And, at least in the initial years, there are other groups that will likely
need to be compensated (okay, bought off) in order to garner the necessary
All of these attempts to insulate various groups from the consequences of the
tax (through fancy schemes that retain te incentive to save energy) will eat
into potential revenue, and the fact that the response to the tax will be
greater as more time passes -- for example as people switch to more efficient
cars and appliances -- will also reduce revenue (this is not a problem in a
larger sense, such substitutions are the whole point of the tax, but it does
reduce the revenue).
Overall, the point is a simple one: don't overestimate the revenue from a
Posted by Mark Thoma on Wednesday, November 14, 2012 at 01:47 PM in Budget Deficit, Economics, Market Failure, Oil, Taxes |
The proposal to raise the retirement age for Social Security (as opposed to,
say, raising the payroll cap) is sure to come up during budget negotiations. It
always does, and already has. Here's a very old
post (from 2005, with a few minor changes) on that topic:
A recent article claims that raising the retirement age is the most obvious
solution to solvency problems for Social Security. While I don’t agree with the
doomsayers on the solvency issue, it is still worthwhile to look at the costs
and benefits of such a proposal. ...
Is raising the retirement the most obvious solution? There are two benefits with
respect to solvency. Because people work longer, raising the retirement age
increases revenues coming into the Social Security system. Second, because
people retire later, the payout to retirees falls.
But what are the costs?
1. An increase in life expectancy does not necessarily imply that people are
healthier at age 65 or 70 than before. Suppose, for example, that medical
advances are discovered that extend the end of life by several years, but have
no effect on health prior to the last few years of life. In such a case there
would be an increase in life expectancy, but no increase in the health of
workers at the age of retirement. If people aren’t healthier, then increasing
the retirement age imposes a hardship over and above that faced by current
2. It’s already difficult for elderly workers to find employment, and when they
do they are often underemployed relative to their skill levels. Raising the
retirement age will make this worse.
3. What about workers employed in physically demanding occupations? Is it
reasonable to ask them to work until, say, age 72? If not, how equitable is it
to have some workers work until 72, and others allowed to retire at a younger
age depending on their occupation?
4. Will this distort occupational choice decisions? Will workers, especially
those who are seeking work in the years close to retirement, choose strenuous
jobs in order to be allowed to retire earlier? How will we decide when a worker
is unable to work due to reasons associated with age?
5. The life expectancy of some groups of workers is lower than for others. If
poorer workers die younger than richer workers on average, and they do, then
raising the retirement age will have a larger impact on low income workers and
thus, in essence, be regressive.
Do the benefits exceed the costs? I don't think so. ...
A comparison of the costs and benefits or raising the payroll cap -- which mostly affects the well-off (hence their continued push of other alternatives that shift the costs elsewhere) -- leads to a different conclusion, at least for me.
[Update: I don't get it either when looking just at the numbers, but looking at it through an ideological lens explains the desire to make people believe that Social Security is in serious trouble, and hence in need of serious cuts. Starve the Beast through tax cuts or deception, it doesn't matter, the point is to reduce the government's provision of social insurance by whatever means gets the job done.]
Posted by Mark Thoma on Wednesday, November 14, 2012 at 11:49 AM in Economics, Social Insurance, Social Security |
Dylan Mathews on the Census Bureau's "supplementary poverty measure," which
is intended to overcome some of the shortcomings of the traditional measure of poverty:
The new poverty measure is out, and it’s grim, by Dylan Matthews: ...In
recent years the Census Bureau has begun developing a “supplemental poverty
measure”... Today, it
released the supplemental figure for 2011. Overall, it’s higher than the
official measure, at 16.1 percent, but for some groups, such as children under
18 and blacks, it’s actually lower. By contrast, it’s much higher for the
elderly (15.1 percent in the supplemental measure, 8.7 percent in the official
Perhaps the most interesting part of the report is the Census’ measurement of
how much various government programs and categories of expenses reduce or
increase the supplemental poverty rate, which unlike the official rate, the
supplemental measure takes into account. Medical expenses are the main expense
contributor to poverty, followed by expenses related to work (such as
transportation, supplies, etc.), while Social Security is far and away the most
important program for reducing poverty, followed by tax credits like the Earned
Income Tax Credit (EITC) or the child tax credit (CTC):
...the Social Security
number is especially notable given how much higher the supplemental measure is
than the official one for the elderly. It suggests that even with that
substantial safety net, the poverty problem among the elderly is much bigger
than we thought.
Posted by Mark Thoma on Wednesday, November 14, 2012 at 11:32 AM in Economics, Income Distribution, Social Insurance |
The Democracy in America blog at The Economist responds to recent posturing on
taxes by Glenn Hubbard and John Boehner:
Elections have consequences, redux, by M.S.: We are told that in the
aftermath of Barack Obama's re-election, both he and the Republican leadership
in Congress are signaling a willingness to compromise in order to avoid going
over the dread fiscal cliff. " ... In terms of Republican conciliation, they are
referring to statements like this one by John Boehner, the speaker of the House,
and articles like this one by Glenn Hubbard, formerly Mitt Romney's chief
Do these, in fact, represent proposals for compromise? ... It seems to me that Mr Hubbard has a fundamental and difficult realization ...
to make, to wit, that the candidate he supported lost the presidential election.
The proposals he embraces here, like those outlined by Mr Boehner, were advanced
by Mr Romney during the presidential campaign. Mr Romney argued that any
increases in revenues ought to come from the elimination of tax exemptions,
rather than from hikes in the top marginal tax rate. And like Mr Boehner, he
wanted plans for reducing the deficit to somehow lead to tax rates that are
lower, rather than higher. Neither Mr Boehner nor Mr Hubbard has signaled any
willingness to accept higher revenues from any source...
Barack Obama won the presidential election running on an explicit platform of
hiking the top marginal income-tax rate... Americans want the wealthy to pay a
higher tax rate. ... Republicans appear to think that by merely stating that
they are not in principle opposed to the federal government getting more
revenue, they are entitled to be congratulated for their conciliatory approach,
despite the fact that they continue to make the same basic tax proposals they
made before the election, which they lost...
What we're seeing here, in sum, isn't compromise; it's posturing. Republicans
are trying to define the press and public's view of what counts as a compromise,
by reiterating their existing positions as if they constituted concessions. ...
But the idea that Democrats will accept the implementation by Barack Obama of
Mitt Romney's economic philosophy is ridiculous. ...
I hope it's "ridiculous" to think Obama will acquiesce to these demands as part of a compromise, but I wouldn't be posting so much on this topic if I was sure.
Posted by Mark Thoma on Wednesday, November 14, 2012 at 09:58 AM in Budget Deficit, Economics, Politics, Taxes |
The Difference Between “Broadening the Tax Base” and Raising Taxes on the Rich,
by Robert Reich: The President says he wants $1.6 trillion in tax hikes.
Republicans say they won’t raise tax rates but might be willing to close some
loopholes and limit some deductions and tax credits. Is compromise in the air?
Not a chance. True enough, such “base broadening,” as Republicans like to call
it, could conceivably generate $1.6 trillion in additional tax revenues over the
But, wait. Didn’t the President just win a second term? The major issue decided
in last week’s election was that the rich should pay more. So, presumably, that
$1.6 trillion should come out of the pockets of the wealthiest Americans.
“Broadening the base” has nothing whatever to do with the rich paying more.
That’s because a lot of tax credits and deductions help the middle class and the
If Republicans won’t budge on raising tax rates but insist on broadening the
base, Democrats should take aim at the biggest tax loophole of all for America’s
wealthy: the preference for capital gains.
Capital gains are now taxed at only 15 percent (the major reason Mitt Romney
pays a rate of under 14 percent on over $20 million of annual income). Capital
gains should be taxed the same as ordinary income. That way, under a progressive
tax system, the wealthy would pay far more — on the way to $1.6 trillion.
Posted by Mark Thoma on Wednesday, November 14, 2012 at 09:03 AM in Budget Deficit, Economics, Taxes |
Posted by Mark Thoma on Wednesday, November 14, 2012 at 12:06 AM in Economics, Links |
Yellen Supports Explicit Guideposts, by Tim Duy: Today Federal Reserve Vice Chair Janet Yellen discussed the evolution of policy communications. As might be expected from Yellen, there was a dovish tone to the speech. She provides a very nice overview of the Fed's changing communication strategy before shifting to her preferred path for the future. Along the way, she reiterates her estimated optimal path for monetary policy:
The notable feature of the optimal path is that inflation glides to its long-run target from above while unemployment does the opposite. These path are achieved by holding down interest rates longer than the level implied by a Taylor-type rule. Yellen explains that it is challenging to communicate such a rule, particularly in the current circumstances:
The fact that simple rules aren't as useful in current circumstances as they would be for the FOMC at other times poses a significant challenge for FOMC communications, especially since private-sector Fed watchers have frequently relied on such rules to understand and predict the Committee's decisions on the federal funds rate...
...Now, however, the federal funds rate may well diverge for a number of years from the prescriptions of simple rules. Moreover, the FOMC announced an open-ended asset purchase program in September, and there is no historical record for the public to use in forming expectations on how the FOMC is likely to use this tool. Thus, the current situation makes it very important that the FOMC provide private-sector forecasters with the information they need to predict how the likely path of policy will change in response to changes in the outlook...
How can the Fed augment the current communication strategy of an expected time frame for exceptionally low rates coupled with broad economic objectives to be met prior to changing policy? First, more explicit forecasts:
One logical possibility would be for the Committee to publish forecasts akin to those I've presented in figure 1. That is, the Committee could provide the public with its projections for inflation and the unemployment rate together with what it views as appropriate paths both for the federal funds rate and its asset holdings, conditional on its current outlook for the economy.
Yellen notes, however, that the Fed's institutional structure relies on 19 forecasts, which is challenging to synthesize into a single forecast. Research in this area is ongoing. She then supports the basic approach advocated by Chicago Federal Reserve President Charles Evans and Minneapolis Federal Reserve President Narayana Kocherlakota:
Another alternative that deserves serious consideration would be for the Committee to provide an explanation of how the calendar date guidance included in the statement--currently mid-2015--relates to the outlook for the economy, which can and surely will change over time. Going further, the Committee might eliminate the calendar date entirely and replace it with guidance on the economic conditions that would need to prevail before liftoff of the federal funds rate might be judged appropriate. Several of my FOMC colleagues have advocated such an approach, and I am also strongly supportive. The idea is to define a zone of combinations of the unemployment rate and inflation within which the FOMC would continue to hold the federal funds rate in its current, near-zero range.
While I like explicit targets in theory, I have been concerned that monetary policy is too complex to summarize in two numbers, thus making it a communications nightmare rather than a dream. Perhaps I am too pessimistic. Yellen offers a response:
Under such an approach, liftoff would not be automatic once a threshold is reached; that decision would require further Committee deliberation and judgment.
Not a fixed target that requires action, just consideration of action. Whether the rest of the FOMC follows suit with this approach is another question, but the winds are definitely blowing in that direction. On average then, this is relatively dovish. The Fed is heading toward a policy direction that would explicitly allow for inflation somewhat above target and unemployment below target as long as inflation expectations remained anchored. One would think this should put upward pressure on near term inflation. But Ryan Avent notes the opposite is occuring:
But since mid-October, there has been an unmistakable reversal in the inflation-expectations trend. Based on 5-year breakevens, all of the September spurt has been erased. And 2-year breakevens are back at July levels. Given my optimism over the Fed's September moves and the apparent strength of underlying fundamentals in the economy, I would like to disregard this trend, but one should be very reluctant to abandon guideposts that have served one well just because they've moved in an inconvenient way.
Avent has a point here (with the caveat that TIPS-based inflation expectations might be less than perfect). He also expressed concern about a broader array of assets:
Other proxies for demand—equity prices, bond yields, and the level of the dollar—have also moved, albeit modestly, in worrying ways. The S&P 500 is down a bit over 5% from its September high, the 10-year Treasury yield has fallen more than 20 basis points since October, and the trade-weighted dollar, which plunged after the Fed's September meeting, has been strengthening since the middle of last month.
I would add that Yellen's speech did not even generate a knee-jerk response in the stock market today. I remember a time not long ago when any hint of dovishness was good for a 1% rally. Which, combined with Avent's thoughts, leaves me wondering if open-ended QE is the last of the Fed's monetary tools. We now know the Fed will continuously exchange cash for Treasury or mortgage bonds until the Fed's economic objectives are met. Uncertainty about the course of monetary policy as been largely eliminated. There is not likely to be a premature policy reversal. What if the pace of the economy does not accelerate, sustaining a large, persistent output gap and a low inflation environment? The Fed could increase the pace of purchases, but would this really change expectations? Can we get more "open-ended?"
Bottom Line: Yellen delivers a dovish speech, siding with Evans and Kocherlakota who had previously advocated explicit inflation and unemployment guidelines for policy change. The Fed is moving in this direction, promising to further lock-in a program of aggressive large scale asset purchases. But is this the end of the road for policy? "Open-ended" sounds much like "unlimited." And unlimited sounds like the end of the road. If the economy stumbles, will the Fed pull a new trick out of its policy bag, or is that bag finally empty? And if that bag is empty, then we will need to turn to fiscal policy if the economy stumbles. This is worrisome given the expected path of fiscal policy - tighter, just degrees of tighter. Which means for the moment we just cross our fingers and hope the economy gains traction on the back of housing and accelerates as 2013 progresses.
Posted by Mark Thoma on Tuesday, November 13, 2012 at 06:15 PM in Economics, Fed Watch, Monetary Policy |
Via email from Mohan Kompella, an MBA student at Northwestern University:
I read your "Republicans Should Embrace Competition" post with interest.
What the GOP really needs to do, is stop confusing Product with Marketing.
In the business world (apt, since the GOP thinks of itself as the "Party of
Business"), if a company spent $1 Billion on selling something and failed
(actually $3 Billion, if you include the company’s “partner” ecosystem),
numerous heads would roll.
It would then call for a brutally honest and thorough review of what went wrong
with its front-end marketing, its back-end marketing, its competitive strategy
and most importantly, its products. The problem though is that the GOP punditry
class keeps talking about marketing problems only and no one wants to talk about
More at http://www.bminusc.com/2012/11/11/product-vs-marketing-the-gops-long-road-to-recovery/
Posted by Mark Thoma on Tuesday, November 13, 2012 at 02:34 PM in Economics, Politics |
Robert Reich has a recommendation for an opening bid on deficit reduction:
The President’s Opening Bid on a Grand Bargain: Aim High, by Robert Reich: I
hope the President starts negotiations over a “grand bargain” for deficit
reduction by aiming high. After all,... if the past four years has proven
anything it’s that the White House should not begin with a compromise.
Assuming the goal is $4 trillion of deficit reduction over the next decade
(that’s the consensus...), here’s what the President should propose:
First, raise taxes on the rich... Why not go back sixty years when Americans
earning over $1 million in today’s dollars paid 55.2 percent of it in income
taxes, after taking all deductions and credits? If they were taxed at that rate
now, they’d ... reduce the budget deficit by about $1 trillion over the next
decade. That’s a quarter of the $4 trillion in deficit reduction right there.
A 2% surtax on the wealth of the richest one-half of 1 percent would bring in
another $750 billion over the decade. A one-half of 1 percent tax on financial
transactions would bring in an additional $250 billion.
Add this up and we get $2 trillion over ten years — half of the
Raise the capital gains rate to match the rate on ordinary income and cap the
mortgage interest deduction at $12,000 a year, and ... we’re up to $3 trillion
in additional revenue.
Eliminate special tax preferences for oil and gas, price supports for big
agriculture, tax breaks and research subsidies for Big Pharma, unnecessary
weapons systems for military contractors, and indirect subsidies to the biggest
banks on Wall Street, and we’re nearly there.
End the Bush tax cuts on incomes between $250,000 and $1 million, and — bingo —
we made it: $4 trillion over 10 years.
And we haven’t had to raise taxes on America’s beleaguered middle class, cut
Social Security or Medicare and Medicaid, reduce spending on education or
infrastructure, or cut programs for the poor. ...
Obama should at least reverse the Republican pre-election mantra and insist: raise taxes first, then we'll talk spending cuts.
Posted by Mark Thoma on Tuesday, November 13, 2012 at 12:07 PM in Budget Deficit, Economics, Politics, Taxes |
Since the topic of the day so far seems to be the benefits of competition:
Republicans Should Embrace Competition, by Sandeep Baliga, Cheap Talk: I
associate the Republican Party with competition. The Party promotes free
market ideals – even in education where it promotes charter schools and vouchers
so that traditional public schools will have to improve if they want to
successfully compete for students.
So why doesn’t the Republican Party embrace these ideals of fully?
Republicans won reelection to the House in large part thanks to
This makes the GOP weaker in the long run because it protects out of touch
politicians from competition and from reality. Gerrymandering means that
Republican Representatives can be oblivious to long-term demographic changes
that are reshaping the electorate while Democratic Representatives in safe
“districts” must disproportionately confront them. The lack of competition
makes the Republican Party weaker and less responsive to demographic change.
Only watching Fox News probably isn’t helping either.
The ramifications of this uncompetitive behavior likely ... made it harder for Romney to win. Mitt Romney
embraced positions associated with the far right of the Republican Party in
order to win the primary nomination. Many of his opponents who forced this
shift in Romney’s positions were elected to the House from uncompetitive
If the Republican Party wants its next generation of leaders to be able to win
state and national elections, it should embrace competition and renounce
gerrymandering. It should create House Congressional Districts that
reflect demographic trends. ...
Posted by Mark Thoma on Tuesday, November 13, 2012 at 10:31 AM
I don't have any problem at all with the call for more competition in the
financial industry, especially measures such as reducing bank size to the
minimum efficient scale to reduce their systemic importance and political power.
I do have a problem, however, with the idea that competition can substitute for
regulation, i.e. that these markets can be left alone to self-regulate:
Is Finance Too Competitive?, by Raghuram Rajan,Commentary, Project Syndicate:
Many economists are advocating for regulation that would make banking “boring”
and uncompetitive once again. After a crisis, it is not uncommon to hear calls
to limit competition. ...
The overwhelming evidence, though, is that financial competition promotes
innovation. Much of the innovation in finance in the US and Europe came after it
was deregulated in the 1980’s – that is, after it stopped being boring.
The critics of finance, however, believe that innovation has been the problem.
Instead of Schumpeter’s “creative destruction,” bankers have engaged in
destructive creation in order to gouge customers at every opportunity while
shielding themselves behind a veil of complexity from the prying eyes of
regulators (and even top management). ... Hence, the critics are calling for
limits on competition to discourage innovation.
Of course, the critics are right to argue that not all innovations in finance
have been useful, and that some have been downright destructive. By and large,
however, innovations such as interest-rate swaps and junk bonds have been
immensely beneficial... Even mortgage-backed securities, which were at the
center of the financial crisis that erupted in 2008, have important uses... The
problem was not with the innovation, but with how it was used – that is, with
And competition does play a role here. Competition makes it harder to make
money, and thus depletes the future rents (and stock prices) of the incompetent.
In an ordinary industry, incompetent firms (and their employees) would be forced
to exit. In the financial sector, the incompetent take on more risk, hoping to
hit the jackpot, even while the regulator protects them by deeming them too
systemically important to fail.
Instead of abandoning competition and giving banks protected monopolies once
again, the public would be better served by making it easier to close banks when
they get into trouble. Instead of making banking boring, let us make it a normal
industry, susceptible to destruction in the face of creativity.
This seems to imply that breaking banks into smaller pieces makes the system
immune to taking on too much risk and the problems that come with it, but we had
banking problems in eras where most banks are small -- cascading bank failures
in response to a large shock are still possible -- so making markets as
competitive as we can, including breaking firms into smaller pieces and allowing
easy failure, is no guarantee that financial meltdowns will be avoided (it may,
in fact, be harder to step in and save the system when you have to fix many,
many small banks instead of a few big ones). I think more competition in this
industry is a good idea, but we shouldn't be fooled into thinking that means we
can stop worrying about the stability of the system. The focus of the article is innovation, but that is not where the main vulnerability lies. Market failures that allow the equivalent of bank runs on the shadow banking system are a much bigger problem, and this problem cannot be solved by simply reducing firm-size. Regulation to reduce the
chances of cascading failure will still be needed.
Posted by Mark Thoma on Tuesday, November 13, 2012 at 09:53 AM in Economics, Financial System, Market Failure, Regulation |
Posted by Mark Thoma on Tuesday, November 13, 2012 at 12:06 AM in Economics, Links |
Are Republicans changing their tune on taxes?:
Republicans shift stance on taxing wealthy, by James Politi, FT: The US
Congress should agree to higher taxes on the wealthy to avoid the fiscal cliff,
a top Republican economist has conceded in a sign of the rapidly shifting
political climate in Washington before negotiations to avert the looming budget
Writing for the
Financial Times, Glenn Hubbard, who advised Barack Obama’s rival Mitt Romney
on his losing presidential bid, is the latest prominent conservative to suggest
Republicans should change tack and accept the president’s structure for
impending budget talks.
“The first step is to raise average (not marginal) tax rates on upper-income
taxpayers,” he wrote. “Revenues should come first from these individuals.” The growing debate among Republicans over how to generate more revenue
highlights the change in the political mood since Mr Obama’s victory...
It doesn't seem that this is much different than the
base-broadening talk we heard from conservatives before the election. So while there does seem to be
resignation on the right that some sort of tax increase is coming, I'm not so
sure this is as big of a shift as it's being made out to be (e.g., from the article, "Mr
Hubbard said a deal could be achieved by eliminating tax loopholes and
capping popular deductions – such as those for mortgage interest,
charitable giving and employer-provided health plans – rather than
allowing Bush-era tax rates for the rich to expire this year, as
Democrats are demanding," or, today from Cato, "The Proper Post-Election Agenda: Cut Spending, Then Taxes" which promotes the usual supply-side justifications for low taxes on the wealthy). However, the stories the press tells seem to
matter, and if this creates momentum toward the self-fulfilling expectation that Republicans are
capitulating on taxes, that works for me.
Update: Grover Norquist:
President Barack Obama did not win re-election because of his promise
to raise taxes on the wealthy, but it was because attack ads made
voters thing that Mitt Romney was a "poopy-head."
During a Monday interview on CBS, Norquist suggested that Republicans
had a mandate not to raise taxes, even it meant going off the so-called
Posted by Mark Thoma on Monday, November 12, 2012 at 01:09 PM in Economics, Politics, Taxes |
Using deficit fears to shred the social safety net:
Hawks and Hypocrites, by Paul Krugman, Commentary, NY Times: Back in 2010,
self-styled deficit hawks ... took over much of our political discourse. At a
time of mass unemployment and record-low borrowing costs, a time when economic
theory said we needed more, not less, deficit spending, the scolds convinced
most of our political class that deficits rather than jobs should be our top
economic priority. And now that the election is over, they’re trying to pick up
where they left off.
They should be told to go away. ...
Recent events have ... demonstrated clearly what was already apparent to careful
observers: the deficit-scold movement was never really about the deficit.
Instead, it was about using deficit fears to shred the social safety net. And
letting that happen wouldn’t just be bad policy; it would be a betrayal of the
Americans who just re-elected a health-reformer president and voted in some of
the most progressive senators ever.
About the hypocrisy of the hawks: as I said, it has been evident for years.
Consider the early-2011 award for “fiscal responsibility” that three of the
leading deficit-scold organizations gave to none other than Paul Ryan. ...Mr.
Ryan’s alleged plans to reduce the deficit were obvious flimflam... But in the
eyes of the deficit scolds, his plan to dismantle Medicare and his savage cuts
to Medicaid apparently qualified him as a fiscal icon. ...
And then there’s the matter of the “fiscal cliff.”
Contrary to the way it’s often portrayed, the looming prospect of spending cuts
and tax increases isn’t a fiscal crisis. It is, instead, a political crisis
brought on by the G.O.P.’s attempt to take the economy hostage. ...
I don’t know how seriously to take the buzz about appointing Erskine Bowles to
replace Timothy Geithner. But ... let’s recall his record. Mr. Bowles ... has
indulged in scare tactics, warning of an imminent fiscal crisis that keeps not
coming. Meanwhile, the report he co-wrote was supposed to be focused on deficit
reduction — yet, true to form, it called for lower rather than higher tax rates,
and as a “guiding principle” no less. Appointing him, or anyone like him, would
be both a bad idea and a slap in the face to the people who returned President
Obama to office.
Look, we should be having a serious discussion about America’s fiscal future.
But a serious discussion is exactly what we haven’t been having these past
couple years — because the discourse was hijacked by the wrong people, with the
wrong agenda. Let’s show them the door.
Posted by Mark Thoma on Monday, November 12, 2012 at 12:24 AM in Budget Deficit, Economics, Politics |
Posted by Mark Thoma on Monday, November 12, 2012 at 12:06 AM in Economics, Links |
Squirming Hawks, by Paul Krugman: The fiscal cliff poses an interesting
problem for self-styled deficit hawks. They’ve been going on and on about how
the deficit is a terrible thing; now they’re confronted with the possibility of
a large reduction in the deficit, and have to find a way to say that this is a
And so what you see, in reports like
this one from the Committee for a Responsible Federal Budget — is a lot of
squirming..., making a mostly incoherent case: it’s too abrupt (why?), it’s the
wrong kind of deficit reduction (???), and then this:
a better approach would be to focus spending cuts on low-priority spending
and on changes which can help to encourage growth and generate new revenue
through comprehensive tax reform which broadens the base – ideally by enough to
also lower tax rates.
Low-priority spending? I think that means spending on poor people and the
middle class. And isn’t it amazing how people who claim to be horrified,
horrified about deficits can’t stop talking about cutting tax rates?...
I guess Paul Krugman hasn't heard about the magic of tax cuts and supply-side economics.
Cato-at-Liberty has, and it's ticked at the CBO because "it assumes higher
tax rates generate more money" when making budget projections. That's right,
despite all the evidence against the claim that tax cuts actually increased
revenue -- it's a myth that won't die because people who know better, or ought
to, still promote it -- we should discredit the CBO for making the claim that
higher tax rates would help with the budget problem.
And that's not all. The CBO should be further discredited because it says the
stimulus package helped to ease the recession:
The CBO repeatedly claimed that Obama’s faux stimulus would boost growth. Heck,
CBO even claimed Obama’s spending binge was successful after the fact, even
though it was followed by record levels of unemployment.
I'll pass over the "record levels of unemployment' claim (but note that
peaked at 10.0% in October 2009, but was 10.8% at the end of 1982, at best
this is playing games with the word "levels" and ignoring population growth -- and if duration is the argument, as Reinhart and Rogoff recently noted, conditional on the type of recession this recovery is actually a bit better than most). On
the main claim about fiscal policy, there's plenty of emerging evidence supporting the contention that fiscal policy helped to ease the recession (and remember how
much of the stimulus package was tax cuts -- it's amusing to listen to
conservatives tell us how useless the tax cuts they fought for as part of the
stimulus package turned out to be, especially when in the next breath they argue
for more tax cuts). The CBO is dealing in actual evidence, the claims made by
Cato-at-Liberty are backed by nothing more than the Republican noise machine
that is so good at misleading followers.
Republicans just can't help themselves from attacking anyone and anything
that is inconvenient to their goals, and actual evidence has little to do with
it. Apparently, they learned nothing from the election. This is part of a larger
effort to discredit the CBO because it doesn't agree with Republican views on
the magic of tax cuts, and for other results the non-partisan agency has come up
with that Republicans don't want to hear (so they basically cover their ears and
The effort is successfully discrediting someone, but it's not the
Posted by Mark Thoma on Sunday, November 11, 2012 at 11:54 AM in Budget Deficit, Economics, Politics, Taxes |
I can't figure out what the point of this column from Robert Shiller is. Is
it nothing more than an attempt to promote Gene Sperling and his (seven year
old) book? I guess the point is that Sperling is a practical guy
(unlike the academics he names earlier in the column ), and we practical people that in Washington and the administration:
Sperling is fundamentally different from the typical academic economist, who
tends to concentrate on advancing economic theory and statistics.
I believe he's a lawyer, not an economist, so one hopes he'd be different. Anyway:
He concentrates on legislation – that is, practical things that might be
accomplished to lift the economy. ...
At one point in his book, Sperling jokes that maybe the US needs a third
political party, called the “Humility Party.” Its members would admit that there
are no miraculous solutions to America’s economic problems, and they would focus
on the “practical options” that are actually available to make things a little
Americans do not need a new political party: with Obama’s reelection, voters
have endorsed precisely that credo of pragmatic idealism.
There are plenty of people who support Sperling, and he has been a
defender of programs like Social Security so I suppose I should be more
"practical" and support him as well. But I've always been wary. Somehow this embrace of
practical choices sounds like it's heading toward typical centrist, Very Serious
People type change. Compromise to get things done, and don't pay too much attention to the core
principles that ought to be defended.
After all, the
reason he was brought in, or one of them anyway, was to support one of
Obama's biggest mistakes during his first term, the shift to deficit reduction when job creation should have been the first priority:
With Republicans holding more power in Congress, Mr. Obama wanted someone to
help him engage them on issues like deficit reduction
Yes, that seemed practical. But the academic economists that Shiller is so
down on, you know, the types who "concentrate on advancing economic theory and
statistics" -- the people who use the theory and numbers stuff that failed so
badly in the election (not) -- were warning against debt reduction. But the
practical types from the Clinton administration were having none of this "the
economy needs more help, not budget cuts" kind of talk. Flying by the seat of their practicality and their political instincts, they knew better. What a big mistake that
turned out to be. Practical is fine, and it's good to get things done, but it
needs to be the right things, not just what is possible.
Posted by Mark Thoma on Sunday, November 11, 2012 at 09:53 AM in Economics, Politics |
Posted by Mark Thoma on Sunday, November 11, 2012 at 12:11 AM in Economics, Links |
No matter how many times this point is made, it seems to get lost in budget
discussions. Our budget problem is about
health care costs, and it's a problem the private sector shares (so privatizing
health care doesn't solve the problem unless you believe, contrary to the
evidence, that this would reduce cost growth):
The single best graph on what’s driving our deficits, by Ezra Klein: From
the Congressional Budget Office’s hot new white paper, “Options
for Deficit Reduction“:
That’s all of the federal government’s spending in three graphs. The top
graph is health care, including Medicare, Medicaid and the Affordable Care Act.
The middle graph is Social Security. And then there’s literally everything else:
Defense, education, infrastructure, food safety, R&D, farm subsidies, the FBI,
What these three charts tell you is simple: It’s all about health care. Spending
on Social Security is expected to rise, but not particularly quickly. Spending
on everything else is actually falling. It’s health care that contains most all
of our future deficit problems. And the situation is even worse than it looks on
this graph: Private health spending is racing upwards even faster than public
health spending ...
Posted by Mark Thoma on Saturday, November 10, 2012 at 10:54 AM in Budget Deficit, Economics, Health Care |
A Romney win would have provided fertile ground for econ blogging -- there were
so many polices that I passionately disagree with. But even though it makes the
job here a little tougher, and not quite as fun, I'll take the outcome we got.
There will still be plenty to complain about in a second Obama administration,
and the top priority for me is protecting social insurance programs from
the cuts that the Republicans and misguided, centrist, grand bargain types on
the left would like to make.
The other thing I would like to push even though it is pretty much hopeless to expect much change is our approach to fiscal policy. In deep recessions, we need it to buttress our monetary policy efforts with fiscal policy, but as it stands discretionary fiscal policy is largely dysfunctional due to the inability of Congress to agree on how to proceed (that would be easier to understand if it was simply an honest disagreement over the underlying economics, but politics -- winning the next election -- gets in the way and obstructs the ability of fiscal policymakers to respond to economic downturns).
But while discretionary policy is generally difficult to implement, and usually suboptimal when it is, another type of policy, what are known as automatic stabilizers, did much better (much of the increase in spending during the recessions was due to social programs expanding as conditions worsened). To the extent that we can shift policy from discretionary to automatic -- spending and tax cuts that kick in automatically when economic conditions deteriorate, and reverse themselves when things improve -- we would be better off.
We will worry a lot about improving the equivalent of automatic stabilizers for natural disasters in light of events like Sandy and Katrina. For example, Michael Spence could be writing about automatic versus discretionary fiscal
policy instead of preparedness for national disasters:
Underinvesting in Resilience, by Michael Spence, Commentary, Project Syndicate:
... There are two distinct and crucial components of
disaster recession preparedness. The one that understandably gets the
most attention is the capacity to mount a rapid and effective response. Such a
capacity will always be necessary, and few doubt its importance. When it is
absent or deficient, the loss of ... livelihoods can be horrific...
The second component comprises investments [in automatic stabilizers] that
minimize the expected damage to the economy. This aspect of preparedness
typically receives far less attention. ...
Recessions like we have just been through are costly in both personal and economic terms, and we need to worry just as much about fixing fiscal policy -- both our preparedness to ease damage with automatic stabilizers and our ability to respond rapidly with additional fiscal policy measures -- as we do about preparing for hurricanes. We will likely think hard about ways to improve hurricane preparedness, but, unfortunately, there are few signs that politicians even understand what a disaster fiscal policy has been -- how much blame they should shoulder for the continuing unemployment problem for example. Since the first step in fixing a problem is recognizing you have one, I have little hope that any effort will be devoted to improving our ability to use fiscal policy to respond in deep recessions (there are ideological barriers as well, and while the mounting evidence that fiscal policy works ought to break those barriers down, that hasn't happened).
[See also: Putting Fiscal Policy on Autopilot, a column I wrote on this in late 2010.]
Posted by Mark Thoma on Saturday, November 10, 2012 at 10:06 AM in Economics, Fiscal Policy, Politics, Weblogs |
Posted by Mark Thoma on Saturday, November 10, 2012 at 12:06 AM in Economics, Links |
Consumer Sentiment Back on Track, by Tim Duy: The preliminary
Reuters/University of Michigan consumer sentiment number for November rose to
its highest level since 2007. Does this foreshadow a faster pace of consumer
spending? I think it is too early make such predictions. Remember, sentiment
has been rising since the middle of 2011, but consumer spending has sagged. So
far this year, consumer sentiment has mostly played a game of catch-up.
In the middle of 2010, real household spending diverged from consumer
sentiment. This year, the two series re-converged:
Consumer sentiment so far has simply returned to levels consistent with the pace
of spending. Further gains, however, would be consistent with faster spending.
Something to keep an eye on as an upside risk in 2013.
Posted by Mark Thoma on Friday, November 9, 2012 at 12:17 PM in Economics, Fed Watch, Monetary Policy |
Via Amir Sufi on Twitter (@profsufi):
Net Wealth Shock in US, by Net Worth Percentile
[click on figure to enlarge]
- For poor and median households, Great Recession wipes wipes out 20 years
of net worth accumulation
- For the rich, only small decline
Posted by Mark Thoma on Friday, November 9, 2012 at 11:00 AM in Economics, Income Distribution |
Just say no to "economic blackmail":
Let’s Not Make a Deal, by Paul Krugman, Commentary, NY Times: To say the
obvious: Democrats won an amazing victory. Not only did they hold the White
House despite a still-troubled economy, in a year when their Senate majority was
supposed to be doomed, they actually added seats.
Nor was that all: They scored major gains in the states. ... But one goal eluded
the victors..., the G.O.P. retains solid control of the House... And
Representative John Boehner, the speaker of the House, wasted no time in
declaring that his party remains as intransigent as ever...
So President Obama has to make a decision, almost immediately, about how to deal
with continuing Republican obstruction. How far should he go in accommodating
the G.O.P.’s demands?
My answer is, not far at all. Mr. Obama should ... hold his ground even at the
cost of letting his opponents inflict damage on a still-shaky economy. And this
is definitely no time to negotiate a “grand bargain” on the budget that snatches
defeat from the jaws of victory. ...
Why? Because Republicans are trying, for the third time since he took office, to
use economic blackmail to achieve a goal they lack the votes to achieve through
the normal legislative process. In particular, they want to extend the Bush tax
cuts for the wealthy... So they are, in effect, threatening to tank the economy
unless their demands are met. ...
Well, this has to stop — unless we want hostage-taking, the threat of making the
nation ungovernable, to become a standard part of our political process.
So what should he do? Just say no, and go over the cliff if necessary.
It’s worth pointing out that the fiscal cliff isn’t really a cliff..., nothing
very bad will happen to the economy if agreement isn’t reached until a few weeks
or even a few months into 2013. So there’s time to bargain.
More important, however, is the point that a stalemate would hurt Republican
backers, corporate donors in particular, every bit as much as it hurt the rest
of the country. As the risk of severe economic damage grew, Republicans would
face intense pressure to cut a deal after all.
Meanwhile, the president is in a far stronger position than in previous
confrontations. ... Most of all, standing up to hostage-taking is the right
thing to do for the health of America’s political system.
So stand your ground, Mr. President, and don’t give in to threats. No deal is
better than a bad deal.
Posted by Mark Thoma on Friday, November 9, 2012 at 12:24 AM in Budget Deficit, Economics, Politics |
Missing the Bigger Picture in Greece, by Tim Duy: The FT has
an update on the Greek bailout:
Eurozone leaders face a new round of brinkmanship over Greece’s €174bn
bailout after international lenders failed to bridge differences on how to
reduce Athens’ burgeoning debt levels, pushing the country perilously close to
defaulting on a €5bn debt payment due next week.
The sticking point:
The IMF remains more pessimistic about Greece’s ability to return to economic
growth, the amount it will collect in its €50bn privatisation programme, and how
much money is needed to recapitalise the country’s teetering banking system.
As a result, Brussels and Washington are 5-10 percentage points apart on
where Greece’s debt will stand by 2020, the target date in the rescue programme
for returning Athens to sustainable debt levels.
Further complicating negotiations, officials said the IMF is insisting Greek
debt levels are reduced to 120 per cent of gross domestic product by 2020, while
the European Commission is urging an easing of the target to about 125 per cent
If past experience is any guide, the IMF is correct to be skeptical. But the
bigger picture here is that the Troika has repeatedly failed to hit this target
of 120 percent, and this time will be no different. 120, 125, or 135 percent is
more about political posturing than economic reality. With any of these
targets, the ongoing waves of austerity are doing nothing more than pushing
Greece deeper into a death spiral.
Five years of recession and counting. Unemployment above 25%. Still too
many sticks, not enough carrots. And remember, the 120 percent target itself
does not guarantee safety. It is largely an artifact of wanting to justify the
level of Italian debt. From
The 120 percent figure was fixed on because Italy had debts of 120 percent of
GDP at the time and was managing okay. But Italy is a very
different case to Greece, with high domestic ownership of its debt, and its
situation is now less stable.
I understand this is considered political dynamite in Europe, but I still
think it will be virtually impossible to fix Greece without a direct transfer of
resources. A large, official debt forgiveness program. I suspect the
alternative - a failed state on Europe's borders - will be more costly in the
Posted by Mark Thoma on Friday, November 9, 2012 at 12:12 AM in Economics, Fed Watch, Financial System, Monetary Policy |
Posted by Mark Thoma on Friday, November 9, 2012 at 12:06 AM in Economics, Links |
The last comment I can find from anne is 2:46 pm (11:46 am EST) on October 29. That's the day Hurricane Sandy hit.
It seems like she's been here longer than I have. Hope to hear from her again soon.
Posted by Mark Thoma on Thursday, November 8, 2012 at 07:58 PM in Economics, Weblogs |
Euroskeptic Tim Duy:
Europe Back In The Spotlight, by Tim Duy: Europe faded from the news
over the summer. European Central Bank President Mario Draghi's shift to
allowing his institution to serve as a lender of last resort calmed nerves and
took the worst case scenario of imminent breakup off the table even though the
program has yet to be implemented. With crisis again averted, market
participants shifted their focus to the Federal Reserve and the US elections.
In the meantime, economic conditions in Europe continued to slowly
deteriorate. We are now looking at another year of dismal growth in the
Eurozone. This crisis seems to have no end in sight.
To be sure, a little relief today as the Greek parliament pushed through the latest
austerity package, throwing the bailout back to the Troika. But the relief
was short-lived. Interestingly, the Greeks were rewarded with news that the
next tranche of aid is not a done deal. From Bloomberg:
Euro-area finance ministers may not make a decision on unlocking funds
for Greece until late November as they await a full report on the country’s
compliance with the terms of its bailout, a European Union official said.
Finance chiefs won’t make the call to release 31.5 billion euros ($40.1
billion) of aid for Greece that has been frozen since June when they meet in
Brussels on Nov. 12, the official said today on condition of anonymity because
the deliberations are private...
...The EU official said Nov. 26 is a possible date for euro- area finance
ministers to sign off on the next disbursement of rescue aid to Greece.
I think I would have kept this under my hat until Greece votes on its budget
this Sunday. Still, I understand the hesitation. I am guessing that the Troika
increasingly sees no way out for the Greek economy, at least under the current
policy path. Does anyone really expect this to be anything more than just
another effort to kick the can down the road? Everything to date as simply
intensified what Ambrose
Evans-Pritchard described as the "Greek death spiral." Highlighting that
outcome was today's news that Greece's unemployment rate in August rose yet
The rate rose to 25.4 percent from a revised 24.8 percent in July, the
Athens-based Hellenic Statistical Authority said in an e-mailed statement today.
That’s the highest since the agency began publishing monthly data in 2004...
...A breakdown of today’s release showed the female jobless rate was 29
percent, while the rate for Greeks aged 15 to 24 was 58 percent. That’s more
than double the youth unemployment rate of 24.3 percent in August 2009, before
the extent of Greece’s deficit became known, sparking the debt crisis.
At some point, the austerity will become too much - and the rise of Golden
Dawn, the neo-Nazi group in Greece, raises concerns about the ugliness that
will ensue if Greece finally breaks. At this rate, Europe is setting itself up
to have a failed state on its borders.
Likewise, Spain too is an ongoing disaster. Unemployment is currently
expected to peak at
26.6 percent next year, and this I suspect remains too optimistic. Yet the
austerity continues. Moreover, the pain is clearly expanding deeper and deeper
throughout the Eurozone. From Reuters:
The European Union's executive Commission said the 17 countries sharing the
euro would grow only 0.1 percent in 2013 after a bigger than previously forecast
0.4 percent contraction this year as a result of the sovereign debt crisis.
But don't worry, the future is bright:
Growth is predicted to rebound to 1.4 percent in 2014 as structural reforms
now under way start bearing fruit.
Still the seemingly endless hope in the structural reform fairies.
Meanwhile, it is clearer by the day that Germany is the next to fall. Also
Recent data from Germany, Europe's growth locomotive and paymaster, has been
largely disappointing, with business sentiment worsening, the private sector
contracting, joblessness rising and industrial orders falling at their sharpest
rate in a year, though consumer morale has held up and exports have leapt...
...While Germany's economy long fended off the single currency bloc's
troubles, expanding by 4.2 percent in 2010 and 3 percent last year, growth
slowed to 0.3 percent in the second quarter of this year from 0.5 percent in the
first and some economists expect a contraction in the fourth quarter.
For their part, the ECB stood pat on rates today, as expected. From
“We are ready to undertake” Outright Monetary Transactions, “which will help
to avoid extreme scenarios,” Draghi said at a press conference in Frankfurt
today after policy makers left the benchmark
interest rate at a historic low of 0.75 percent. “The risks surrounding the
economic outlook remain on the downside” and underlying inflation pressures
“should remain moderate,” he said.
Really, 25%+ unemployment in Greece and Spain is not already an "extreme
scenario"? From my perspective, that's pretty extreme. Like Great Depression
extreme. Draghi also implied he is done helping Greece:
Draghi sought to end a debate on whether the central bank will do more to
ease the debt burden of Greece, where Prime Minister Antonis Samaras yesterday
gathered the support of enough lawmakers to pass austerity measures needed to
unlock the next tranche of European funds.
The ECB can’t take losses on the Greek bonds it holds and has already
distributed any profits made on them to governments, Draghi said.
“It’s up to the governments to decide whether they want to use these profits
he said. “The governments actually committed themselves to do so. So, the ECB is
by and large done.”
No more OSI for you. Meanwhile, the ECB and Spain continue their game of
Spanish Prime Minister Mariano
Rajoy said on Nov. 6 he needs to know how much the ECB would push down
Spain’s borrowing costs before his government applies for aid and signs up to
the conditions attached.
“It’s entirely up to Spain and the Spanish government to take the decision,”
Draghi said. “The ECB can’t give any assurances ex ante. The Governing Council
will take the decision in total independence. There isn’t any automatic quid pro
Given the path of Greece, it is reasonable for Spain to ask what exactly they
would get out of the deal. Because at least right now, you can make an argument
that the ECB has no incentive to actually buy bonds if just by saying they are
willing to buys bonds eliminates convertibility risk. In that case, Rajoy gets
nothing more from the ECB for his efforts. It seems that the OMT will only be
activated after sufficient crisis to push a nation into the loving arms of the
Troika. By that time, of course, it will be too late to prevent another round
of economic deterioration. With that in mind, see
FT Alphaville for the latest on Spain's financing problems and unrealistic
Bottom Line: Yes, I remain a Euroskeptic. Maybe it is just in my blood.
Europe still looks ugly, and will continue to be so for the next year at least
(I tend to think wave after wave of austerity will push the Eurozone into a
multi-year malaise, but let's just take it one year at a time for now). I
expect European troubles will continue to cloud the global outlook and vex the
earning plans of large multinationals for the time being.
Posted by Mark Thoma on Thursday, November 8, 2012 at 12:38 PM in Economics, Fed Watch, Monetary Policy |
The Importance of Elizabeth Warren: One of the most important results on
Tuesday was the election of Elizabeth Warren as United States senator from
Massachusetts. ... Hopefully, Ms. Warren will get a seat on the Senate Banking
Committee, where at least one Democratic slot is open.
President Obama should now listen to her advice. ... If President Obama wants to
have impact with his second term, he needs to stand up to the too-big-to-fail
banks on Wall Street.
The consensus among policy makers has shifted since 2010, becoming much more
concerned about the dangers posed by global megabanks. ...
Senator Warren is well placed, not just to play a role in strengthening
Congressional oversight but also in terms of helping her colleagues think
through what we really need to make our financial system more stable.
We need a new approach to regulation more generally – and not just for banking.
We should aim to simplify and to make matters more transparent, exactly along
Senator Warren’s general lines.
We should confront excessive market power, irrespective of the form that it
takes. We need a new trust-busting moment. And this requires elected officials
willing and able to stand up to concentrated and powerful corporate interests.
I'm glad to see Simon Johnson at least hinting that this criticism goes
beyond just banks. Growing economic power is not limited to the financial
sector, and attempts to "stand up to concentrated and powerful corporate
interests" must be broadened beyond "too big to fail" financial institutions:
The economics of enormity, The Economist: How big is too big?
America's firms are growing in size and while there have been huge firms
stretching back to Standard Oil the fact that so many firms are so big is a new
phenomenon. This week's Free exchange print article—Land
of the corporate giants—takes a look at the implications of the megafirm
era. As many of the names towards the top of the list (Exon Mobil,
ConocoPhillips) suggest, lots of the growth at the very top is due to mergers.
In some cases this is a good thing because bigger firms can be more efficient
when they exploit economies of scale. But evidence suggests that scale economies
are starting to wear thin. That's a concern given that many mergers are
justified on the basis of cost efficiencies (see
Waddling forward, also in this week's newspaper, for example). Even more
other studies suggest that some companies are bulking up for entirely the
wrong reasons. Bigger isn’t always better. Read the article
Monopoly power distorts both economic activity -- you pay more, and less is produced -- and the distribution of income. And if you are big enough, it also gives you political power and influence. We should do more, much more, to eliminate excessive economic power.
Posted by Mark Thoma on Thursday, November 8, 2012 at 10:41 AM in Economics, Market Failure, Regulation |
A few thoughts on economic policy during Obama's second term. I'm a
bit worried that unemployment is going to remain a persistent problem:
Economic Policy during President Obama's Second Term, CBS MoneyWatch
[There were a few edits I wouldn't have made, e.g. the phrase "Now that we know it will be Obama on the economic tiller," but nothing substantive.]
Posted by Mark Thoma on Thursday, November 8, 2012 at 09:09 AM in Economics, MoneyWatch, Politics |
More post-election comments that appeared elsewhere: I've talked about this before. If Bernanke is replaced when his term ends on January 31st, 2014 (which is far from certain):
Will a Woman Lead the Federal Reserve?
Or, failing that, how about the Treasury?
Posted by Mark Thoma on Thursday, November 8, 2012 at 09:00 AM in Economics, Financial System, Monetary Policy, Politics |