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October 30, 2009

Economist's View - 6 new articles

Where Did the Bush Tax Cuts Go?

[click on figure to enlarge, via, story]

Paul Krugman: The Defining Moment

Centrists have a choice to make:

The Defining Moment, by Paul Krugman, Commentary, NY Times: O.K., folks, this is it. It's the defining moment for health care reform. ...[L]egislation ... will almost surely pass. It's not a perfect bill, by a long shot, but it's a much stronger bill than almost anyone expected... And it would lead to near-universal coverage.
As a result,... politicians, people in the news media,... whoever is in a position to influence the final stage of this legislative marathon — now has to make a choice. The seemingly impossible dream of fundamental health reform is just a few steps away..., and each player has to decide whether ... to help it across the finish line or stand in its way.
For conservatives, of course, it's an easy decision: They don't want Americans to have universal coverage, and they don't want President Obama to succeed.
For progressives, it's a slightly more difficult decision: They want universal care, and they want the president to succeed — but the proposed legislation falls far short of their ideal. There are still some reform advocates who won't accept anything short of ... Medicare for all... And even those who have reconciled themselves to the political realities are disappointed that the bill doesn't include a "strong" public option, with payment rates linked to those set by Medicare.
But the bill does include a "medium-strength" public option, in which the public plan would negotiate payment rates... It also includes more generous subsidies than expected, making it easier for lower-income families to afford coverage. And according to Congressional Budget Office estimates,... 96 percent of legal residents too young to receive Medicare ... would get health insurance.
So should progressives get behind this plan? Yes. And they probably will. The people who really have to make up their minds, then, are ... the self-proclaimed centrists.
The odd thing about this group is that while its members are clearly uncomfortable with the idea of passing health care reform, they're having a hard time explaining exactly what their problem is. Or to be more precise and less polite, they have been attacking proposed legislation for doing things it doesn't and for not doing things it does.
Thus, Senator Joseph Lieberman ... says, "I want to be able to vote for a health bill, but my top concern is the deficit." That would be a serious objection to the proposals ... if they would, in fact, increase the deficit. But they wouldn't, at least according to the Congressional Budget Office...
Or consider the remarkable exchange that took place this week between Peter Orszag, the White House budget director, and Fred Hiatt, The Washington Post's opinion editor. Mr. Hiatt had criticized Congress for not taking what he considers the necessary steps to control health-care costs — namely, taxing high-cost insurance plans and establishing an independent Medicare commission. ... Mr. Orszag pointed out, not too gently, that the Senate Finance Committee's bill actually includes both of the allegedly missing measures.
I won't try to psychoanalyze the "naysayers"... I'd just urge them to take a good hard look in the mirror. If they really want to align themselves with the hard-line conservatives, if they just want to kill health reform, so be it. But they shouldn't hide behind claims that they really, truly would support health care reform if only it were better designed.
For this is the moment of truth. The political environment is as favorable for reform as it's likely to get. The legislation on the table isn't perfect, but it's as good as anyone could reasonably have expected. History is about to be made — and everyone has to decide which side they're on.

Fed Watch: Sustainable Growth?

Tim Duy:

Sustainable Growth?, by Tim Duy: October is becoming my lost month. Between the beginning of Fall term and my annual conference in Portland, the month is a blur, and time to blog becomes a luxury. Now, however, I can see the light at the end of the tunnel. And we can also see the light at the end of the tunnel after this long recession, with a GDP report that confirms what everyone thought - the economy turned the corner in the third quarter of this year. Policymakers undoubtedly breathed a sigh of relief, and rightly so. That said, it is far too early for complacency; I found the underlying details less than comforting, especially in comparison to Wall Street's ebullient reaction to the data.
That the recession would end was never in doubt. Indeed, the timing is almost exactly what one would expected given the steep declines in spending in the first half of 2008 that triggered the flood of job losses later in the year. Spending, consumer spending most importantly, would not fall indefinitely, especially with the benefit of significantly lower energy costs beginning in the second half of last year. Moreover, as the Wall Street Journal notes, rebuilding household balance sheets is not accomplished by just increased savings; a default can do the job much more quickly, quickly adding to household cash flow. Indeed, I admit to being surprised that strategic defaults are not much higher.
The more important question is what will be the durability and sustainability of the recovery in the years ahead? The GDP report raises some significant red flags when considering this question. The consumer spending number was clearly goosed by the Cash for Clunker program and a much slower pace of inventory depletion than expected, which combined to add almost 2 percentage points to the headline figure. But auto sales have slipped back under the 10 million mark in September when the Clunkers program ended, with only a slight gain expected in October. And the slower inventory depletion suggests that firms are further along than expected in realigning stockpiles with demand, and that future improvement will need to stem from more significant improvements in underlying demand (see James Hamilton for a more positive interpretation).
Growth was further boosted by a jump in residential construction, but, as Calculated Risk points out, this sector's future contributions are likely to remain under pressure from high home and rental vacancy rate. Moreover, the impact of fiscal stimulus will fade as we move through next year, and there appears to be little political will to offer up additional stimulus.
Finally, note that net exports subtracted 0.53 percentage points of growth as import growth exceeded import growth. A balanced, sustainable recovery requires, in my opinion, that net exports contribute to growth. This showing reminds us of the ongoing dependence of US consumption on overseas production - stimulating consumption spending flows in part right out of the economy via imports. Recall also Federal Reserve Chairman Ben Bernanke's recent warning:
Another set of lessons that Asian economies took from the crisis of the 1990s may be more problematic. Because strong export markets helped Asia recover from that crisis, and because many countries in the region were badly hurt by sharp reversals in capital flows, the crisis strengthened Asia's commitment to export-led growth, backed up with large current account surpluses and mounting foreign exchange reserves….To achieve more balanced and durable economic growth and to reduce the risks of financial instability, we must avoid ever-increasing and unsustainable imbalances in trade and capital flows. External imbalances have already narrowed substantially as a consequence of the crisis...As the global economy recovers and trade volumes rebound, however, global imbalances may reassert themselves. As national leaders have emphasized in recent meetings of the G-20, policymakers around the world must guard against such an outcome.
Couple this with a Wall Street Journal story earlier this week:
For more than a year, China has kept the yuan largely unchanged against the dollar. So, like the dollar, the yuan has been falling steadily against the currencies of China's neighbors, including the Malaysian ringgit, the Indonesian rupiah and the South Korean won. That makes goods produced in those countries more expensive compared with China's.
"If you have one large economy in Asia lock itself against the U.S. dollar, everyone feels pressure," says Frederic Neumann, Asia economist for HSBC in Hong Kong. "Even 5% in this context feels painful."
The countries that compete with China are at a critical juncture. To stem the rise of their currencies against the yuan (and the dollar), central banks around Asia have in recent months been purchasing gobs of greenbacks and building their foreign reserves. And now those reserves are back up to precrisis levels.
At the same time, Asian economies are under pressure eventually to allow their currencies to rise and reduce their emphasis on exports to fuel growth. Some economists and international policy makers fear continued intervention in currency markets would reflect an unwillingness to break old habits of export growth driven by policies that kept currencies undervalued. Intervention can also raise the risks of domestic inflation.
Note also that the Europeans are growing frustrated with recent currency movements. From Market News International (no link):
European central bankers, worried that the soaring euro could squelch a nascent economic recovery, are increasingly pressuring U.S. authorities to put some bite into their bark(ing) about a strong dollar, well-placed monetary sources told Market News International.
European monetary officials need the active support of U.S. and Chinese authorities to help restrain the euro and stem the greenback's slide, these sources said. Some noted that with the financial system awash in cash, it would be hard to mount an effective intervention in global currency markets.
The international political dynamics on this issue bear careful attention; it is not clear that the US and Europe will be able to tolerate Chinese currency policy indefinitely. But do they have a choice?
Add in another concern - the jobless (or perhaps job-loss) recovery. The underlying rate of economic growth (firms look through the Clunkers boost) remains well below rates sufficient to generate job growth. Indeed, as David Altig notes, the jobless recovery is almost certainly upon us once again, and if anything will prod the Administration to initiate a second stimulus package, it will be the prospect of sustained double-digit unemployment - an outcome that will only be aggravated if Chinese policy is to take advantage of the recession to consolidate more productive capacity behind its borders. Perhaps then we develop a new dependency, with Chinese saving redirected to US consumers via the US government rather than the housing market.
All of which boils down to a simply question: Can the US and global economies rebalance to a sustained, healthy pattern of growth without the cooperation of Chinese policymakers? In other words, can a Dollar depreciation against the Euro alone sustain a rebalancing? I think not, which implies that global economic stability is being supported on a very vulnerable base at the moment.
How will the Fed view these numbers? They will be relieved, but have much of the same skepticism regarding the sustainability of these numbers. Policymakers know the economy is being push along by a wave of federal stimulus, and are uncertain of how much momentum would be left in that absence of that stimulus. At the same time, however, the solid GDP showing will support already heightened worries that while interest rates need to be sustained at very low levels, officials may be late to the game when it comes to reversing the expansion of the balance sheet. Note St. Louis Federal Reserve President James Bullard:
"It is a little disappointing that private-sector economists are thinking so much about when we are going to move our fed funds rate up," he said. "We are at zero. We are going to be there awhile. The focus should be more on" the Fed's asset purchase program.
Given high unemployment and ongoing disinflation, there will be no rush to raise rates. What will comes first is the contraction in the balance sheet - and positive GDP numbers will push the discussion further in that direction.
Bottom Line: The GDP report is confirmation that the recession has come to an end. But I am not ready to breath easy - too many potentially unsustainable factors drove the boost, and too much remains dependent on federal stimulus. Until the economy can stand on its own, it remains vulnerable to unsustainable, unbalanced patterns of growth. And the negative contribution of trade to growth, especially coupled with growing tension over currency movements, is a warning sign that trade and capital flows are at risk of falling back into old and unehlpful patterns.

"Are Those $250 Social Security Checks Just Pandering to Seniors?"

Some pushback against a recent article that questions the value of giving people on Social Security a $250 check to stimulate the economy and denounces President Obama for pandering to the elderly:

Are Those $250 Social Security Checks Just Pandering to Seniors?, by pgl: David Leonhardt tries to make this case... But why did Mr. Leonhardt start his discussion by talking about the depressed economy and who would be most likely to consume any checks that the government may wish to extend?
If you wanted to help the economy and you had $14 billion to bestow on any group of people, which group would you choose: a) Teenagers and young adults, who have an 18 percent unemployment rate. b) All the middle-age long-term jobless who, for various reasons, are not eligible for unemployment benefits. c) The taxpayers of the future (by using the $14 billion to pay down the deficit). d) The group that has survived the Great Recession probably better than any other, with stronger income growth, fewer job cuts and little loss of health insurance. The Obama administration has chosen option d — people in their 60s and beyond.
Let's think about the macroeconomic impact of a $14 billion one-time transfer payment in terms of a life-cycle model of consumption. This would be equivalent to a one-time increase in household wealth with the impact effect on consumption being equal to the increase in wealth divided by the number of remaining years of life for the individual receiving the check. If a young person were given $250, he would likely save most of it. If the $250 were given to the elderly instead, then more of the transfer payment would be consumed. Mr. Leonhardt seems to be unhappy with the President's proposal but his reasoning here seems to be very confused.
Dean Baker:
David Leonhardt's Age-Based Politics, by Dean Baker: David Leonhardt is upset that people on Social Security will get a $250 check from the government next year and denounces President Obama for pandering to the elderly. There is a lot of serious confusion in this piece.
First, he argues that the elderly have suffered less from the downturn from other groups be comparing declines in income and employment. This is actually a much tougher question that Leonhardt implies. The elderly have accumulated assets over their working lifetime. These assets plunged in value with the collapse of the housing bubble and the plunge in stock prices. This plunge has hit the elderly far more than other groups... So, if we took a wealth-based measure of impact, we would find that the wealthy were hit hardest by the downturn. ...
Second, in terms of government assistance, the making work pay tax credit is giving money to the vast majority of the under 65 population. The $250 boost to Social Security beneficiaries can be seen as an effort to provide comparable help to those who are no longer working. It's not obvious how this creates an injustice.
The third point is that Leonhardt seems to misunderstand the point of stimulus. We need people to spend money. Given the enormous idle capacity in the economy, we would benefit from handing checks to anyone who will agree to spend it. (Contrary to Leonhadt's assertion, this does not create a burden on children and grandchildren -- if anything the growth created by the stimulus is likely to mean we hand them a wealthier country.) The elderly will spend a high share of their checks, which makes this a good form of stimulus.
In fact, we really need larger deficits at this point to boost the economy, but politically this is not acceptable. We should thank the elderly for making some additional stimulus politically acceptable. ...
Lastly, we get a line about protecting Medicare benefiting the elderly at the expense of our grandchildren. Actually, we could substantially reduce costs for Medicare and fully protect the quality of care. However, this would require attacking the interests of the health care industry. This is an interest group that the politicians (and the media) really pander to.

The "Silver Spoon" in Ancient Societies

The intergenerational transfer of wealth and advantage is nothing new, but what causes it?:

Inequality, 'silver spoon' effect found in ancient societies, EurekAlert: The so-called "silver spoon" effect -- in which wealth is passed down from one generation to another -- is well established in some of the world's most ancient economies, according to an international study coordinated by a UC Davis anthropologist.
The study, to be reported in the Oct. 30 issue of Science, expands economists' conventional focus on material riches, and looks at various kinds of wealth, such as hunting success, food sharing partners, and kinship networks.
The team found that some kinds of wealth, like material possessions, are much more easily passed on than social networks or foraging abilities. Societies where material wealth is most valued are therefore the most unequal, said Monique Borgerhoff Mulder, the UC Davis anthropology professor who coordinated the study with economist Samuel Bowles of the Santa Fe Institute.
The researchers also showed that levels of inequality are influenced both by the types of wealth important to a society and the governing rules and regulations.
The study may offer some insight into the not-too-distant future.
"An interesting implication of this is that the Internet Age will not necessarily assure equality, despite the fact that its knowledge-based capital is quite difficult to restrict and less readily transmitted only from parents to offspring," Borgerhoff Mulder said.
"Whether the greater importance of networks and knowledge, together with the lesser importance of material wealth, will weaken the link between parental and next-generation wealth, and thus provide opportunities for a more egalitarian society, will depend on the institutions and norms prevailing in a society," she said.
For years, studies of economic inequality have been limited by a lack of data on all but contemporary, market-based societies. To broaden the scope of that knowledge, Borgerhoff Mulder, Bowles and 24 other anthropologists, economists and statisticians from more than a dozen institutions analyzed patterns of inherited wealth and economic inequality around the world.
The team included three others from UC Davis - economics professor Gregory Clark, anthropology professor Richard McElreath and Adrian Bell, a doctoral candidate in the Graduate Group in Ecology.
They focused not on nations, but on types of societies - hunter gatherers such as those found in Africa and South America; horticulturalists, or small, low-tech slash-and-burn farming communities typical of South America, Africa and Asia; pastoralists, the herders of East Africa and Central Asia; and land-owning farmers and peasants who use ploughs and were studied in India, pre-modern Europe and parts of Africa.

links for 2009-10-29

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