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Monday, November 19, 2012

Paul Krugman: The Twinkie Manifesto

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 sharply...
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 on Monday, November 19, 2012 at 12:24 AM in Economics, Income Distribution, Taxes, Unions | Permalink  Comments (131) 

    Fed Watch: Fiscal Madness

    Tim Duy:

    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:

    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.

    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.

    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 on Monday, November 19, 2012 at 12:21 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (69) 

      Links for 11-19-2012

        Posted by on Monday, November 19, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (49) 

        Sunday, November 18, 2012

        Stop Obsessing About The Federal Budget Deficit

        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 growth.

          Posted by on Sunday, November 18, 2012 at 12:42 PM in Budget Deficit, Economics, Politics | Permalink  Comments (61) 

          'America’s Fiscal Cliff Dwellers'

          Simon Johnson:

          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 this year.
          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 unnecessary.
          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 on Sunday, November 18, 2012 at 09:18 AM in Budget Deficit, Economics, Social Insurance | Permalink  Comments (15) 

            Links for 11-18-2012

              Posted by on Sunday, November 18, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (82) 

              Saturday, November 17, 2012

              The Ascent of Geekdom

              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 guesses. ...
              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 on Saturday, November 17, 2012 at 11:58 AM in Economics, Politics | Permalink  Comments (20) 

                'House Republicans Release Watershed Copyright Reform Paper'

                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 on Saturday, November 17, 2012 at 11:34 AM in Economics, Market Failure | Permalink  Comments (31) 

                  'The Role of Firms in Aggregate Fluctuations'

                  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:

                  The 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 theoretical studies1.

                  Empirical approach

                  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 market into

                  • 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.

                  Firm-specific contributions

                  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.

                  Figure 2. Sector’s concentration (Herfindahl Index) and sector’s contribution to aggregate volatility

                  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 countries.
                  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 Economy, October.
                  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), 733–772.
                  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, 45(1), 69–106.
                  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 on Saturday, November 17, 2012 at 09:40 AM in Economics, Market Failure | Permalink  Comments (5) 

                    Links for 11-17-2012

                      Posted by on Saturday, November 17, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (73) 

                      Friday, November 16, 2012

                      Banking in 1947


                        Posted by on Friday, November 16, 2012 at 06:27 PM in Economics, Financial System, Video | Permalink  Comments (6) 

                        Solving the Too Big to Fail Problem

                        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.

                        Thank you...

                        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 on Friday, November 16, 2012 at 01:18 PM in Economics, Financial System, Market Failure, Regulation | Permalink  Comments (20) 

                          Paul Krugman: Life, Death and Deficits

                           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 on Friday, November 16, 2012 at 12:33 AM in Budget Deficit, Economics, Health Care, Social Insurance, Social Security | Permalink  Comments (69) 

                            Links for 11-16-2012

                              Posted by on Friday, November 16, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (67) 

                              Thursday, November 15, 2012

                              Volcker: Our Biggest Problem is Effective Governance

                              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 itself?
                              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 sustained.
                              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 on Thursday, November 15, 2012 at 11:45 AM in Economics, Politics | Permalink  Comments (49) 

                                'Mitt Romney’s Ugly Vision of 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 them with…something.
                                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 crass pay-offs. 
                                Romney doesn’t voice these opinions in public. He knows better. But so did the voters. ...

                                Paul Krugman:

                                The Moocher Majority, by Paul Krugman: Lots of people having fun with Mitt Romney’s 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 party’s soul.

                                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 on Thursday, November 15, 2012 at 11:09 AM in Economics, Income Distribution, Politics, Social Insurance | Permalink  Comments (49) 

                                  'No Reason for Conservatives to Back Away from their Absolutist Anti-Tax Stance'

                                  Is James Kwak correct?:

                                  ...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 proposals for 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 on Thursday, November 15, 2012 at 12:33 AM in Economics, Politics, Taxes | Permalink  Comments (76) 

                                    'Manufacturing Fetishism'

                                    John Kay:

                                    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 earnings.

                                      Posted by on Thursday, November 15, 2012 at 12:24 AM in Economics, International Trade | Permalink  Comments (132) 

                                      Links for 11-15-2012

                                        Posted by on Thursday, November 15, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (45) 

                                        Wednesday, November 14, 2012

                                        Carbon Taxes and the National Debt

                                        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 households.

                                        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 political support.

                                        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 carbon tax.

                                          Posted by on Wednesday, November 14, 2012 at 01:47 PM in Budget Deficit, Economics, Market Failure, Oil, Taxes | Permalink  Comments (35) 

                                          The Costs and Benefits of Raising the Retirement Age

                                          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 retirees.
                                          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 on Wednesday, November 14, 2012 at 11:49 AM in Economics, Social Insurance, Social Security | Permalink  Comments (37) 

                                            'The New Poverty Measure is Out, and It’s Grim'

                                            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 one)...
                                            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 on Wednesday, November 14, 2012 at 11:32 AM in Economics, Income Distribution, Social Insurance | Permalink  Comments (4) 

                                              More on Broadening the Base versus Raising Tax Rates

                                              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 economic adviser...
                                              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 on Wednesday, November 14, 2012 at 09:58 AM in Budget Deficit, Economics, Politics, Taxes | Permalink  Comments (27) 

                                                Broadening the Base versus Raising Tax Rates

                                                Robert Reich:

                                                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 next decade.
                                                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 poor. ...
                                                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 on Wednesday, November 14, 2012 at 09:03 AM in Budget Deficit, Economics, Taxes | Permalink  Comments (45) 

                                                  Links for 11-14-2012

                                                    Posted by on Wednesday, November 14, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (52) 

                                                    Tuesday, November 13, 2012

                                                    Fed Watch: Yellen Supports Explicit Guideposts

                                                    Tim Duy:

                                                    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 on Tuesday, November 13, 2012 at 06:15 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (38) 

                                                      The GOP Needs to 'Stop Confusing Product with Marketing'

                                                      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 product.
                                                      More at http://www.bminusc.com/2012/11/11/product-vs-marketing-the-gops-long-road-to-recovery/

                                                        Posted by on Tuesday, November 13, 2012 at 02:34 PM in Economics, Politics | Permalink  Comments (37) 

                                                        'The President’s Opening Bid on a Grand Bargain'

                                                        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 deficit-reduction goal.
                                                        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 on Tuesday, November 13, 2012 at 12:07 PM in Budget Deficit, Economics, Politics, Taxes | Permalink  Comments (78) 

                                                          'Republicans Should Embrace Competition'

                                                          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 uncompetitive redistricting.
                                                          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 districts. ...

                                                          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 on Tuesday, November 13, 2012 at 10:31 AM Permalink  Comments (19) 

                                                            'Is Finance Too Competitive?'

                                                            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 financiers’ incentives.
                                                            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 on Tuesday, November 13, 2012 at 09:53 AM in Economics, Financial System, Market Failure, Regulation | Permalink  Comments (28) 

                                                              Links for 11-13-2012

                                                                Posted by on Tuesday, November 13, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (115) 

                                                                Monday, November 12, 2012

                                                                Republicans Shift Stance on Taxing Wealthy?

                                                                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 crisis.
                                                                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 "fiscal cliff."

                                                                  Posted by on Monday, November 12, 2012 at 01:09 PM in Economics, Politics, Taxes | Permalink  Comments (56) 

                                                                  Paul Krugman: Hawks and Hypocrites

                                                                  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 on Monday, November 12, 2012 at 12:24 AM in Budget Deficit, Economics, Politics | Permalink  Comments (96) 

                                                                    Links for 11-12-2012

                                                                      Posted by on Monday, November 12, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (44) 

                                                                      Sunday, November 11, 2012

                                                                      Hasn't Paul Krugman Heard about the Magic of Tax Cuts and Supply-Side Economics? No, and for Good Reason...

                                                                      Paul Krugman:

                                                                      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 bad thing.

                                                                      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. Well, 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 unemployment 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 ignore them).

                                                                      The effort is successfully discrediting someone, but it's not the CBO.

                                                                        Posted by on Sunday, November 11, 2012 at 11:54 AM in Budget Deficit, Economics, Politics, Taxes | Permalink  Comments (125) 

                                                                        What is Practical Is Not Always the Same as What is Best

                                                                        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 better.
                                                                        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 on Sunday, November 11, 2012 at 09:53 AM in Economics, Politics | Permalink  Comments (20) 

                                                                          Links for 11-11-2012

                                                                            Posted by on Sunday, November 11, 2012 at 12:11 AM in Economics, Links | Permalink  Comments (45) 

                                                                            Saturday, November 10, 2012

                                                                            'It’s All About Health Care'

                                                                            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, etc.
                                                                            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 on Saturday, November 10, 2012 at 10:54 AM in Budget Deficit, Economics, Health Care | Permalink  Comments (112) 

                                                                              Underinvesting in Resilience: The Role of Automatic Stabilizers

                                                                              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 on Saturday, November 10, 2012 at 10:06 AM in Economics, Fiscal Policy, Politics, Weblogs | Permalink  Comments (14) 

                                                                                Links for 11-10-2012

                                                                                  Posted by on Saturday, November 10, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (67) 

                                                                                  Friday, November 09, 2012

                                                                                  Fed Watch: Consumer Sentiment Back on Track

                                                                                  Tim Duy:

                                                                                  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 on Friday, November 9, 2012 at 12:17 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (17) 

                                                                                    Net Wealth Shock in US, by Net Worth Percentile

                                                                                    Via Amir Sufi on Twitter (@profsufi):

                                                                                    Net Wealth Shock in US, by Net Worth Percentile

                                                                                    Sufi[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 on Friday, November 9, 2012 at 11:00 AM in Economics, Income Distribution | Permalink  Comments (131) 

                                                                                      Paul Krugman: Let’s Not Make a Deal

                                                                                      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 on Friday, November 9, 2012 at 12:24 AM in Budget Deficit, Economics, Politics | Permalink  Comments (128) 

                                                                                        Fed Watch: Missing the Bigger Picture in Greece

                                                                                        Tim Duy:

                                                                                        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 by 2022.

                                                                                        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 Reuters:

                                                                                        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 long-run.

                                                                                          Posted by on Friday, November 9, 2012 at 12:12 AM in Economics, Fed Watch, Financial System, Monetary Policy | Permalink  Comments (15) 

                                                                                          Links for 11-09-2012

                                                                                            Posted by on Friday, November 9, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (24) 

                                                                                            Thursday, November 08, 2012

                                                                                            The Sound of Silence

                                                                                            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 on Thursday, November 8, 2012 at 07:58 PM in Economics, Weblogs | Permalink  Comments (19) 

                                                                                              Fed Watch: Europe Back In The Spotlight

                                                                                              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 again. From Bloomberg:

                                                                                              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 from Reuters:

                                                                                              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 Bloomberg:

                                                                                              “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 for Greece,” 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 chicken:

                                                                                              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 quo.”

                                                                                              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 deficit forecasts.

                                                                                              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 on Thursday, November 8, 2012 at 12:38 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (13) 

                                                                                                We Must 'Stand Up to Concentrated and Powerful Corporate Interests'

                                                                                                Simon Johnson:

                                                                                                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 worryingly, other studies suggest that some companies are bulking up for entirely the wrong reasons. Bigger isn’t always better. Read the article here.

                                                                                                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 on Thursday, November 8, 2012 at 10:41 AM in Economics, Market Failure, Regulation | Permalink  Comments (38) 

                                                                                                  Economic Policy During President Obama's Second Term

                                                                                                  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 on Thursday, November 8, 2012 at 09:09 AM in Economics, MoneyWatch, Politics | Permalink  Comments (14) 

                                                                                                    Will a Woman Lead the Federal Reserve?

                                                                                                    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 on Thursday, November 8, 2012 at 09:00 AM in Economics, Financial System, Monetary Policy, Politics | Permalink  Comments (5)