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December 31, 2009

Economist's View - 2 new articles

"Is Our Tax System Helping Us Create Wealth?"

David Cay Johnston looks at changes in the tax burden for high income and lower income taxpayers since 1961. The bottom line: 90% of the population did not do well over this time period:

Is Our Tax System Helping Us Create Wealth?, by David Cay Johnston, Commentary, Tax Analysts: ...We have data on the 400 highest-income taxpayers only from 1992 to 2006, and then only thanks to Joel Slemrod of the University of Michigan and others who had these data analyzed, and the Obama administration, which overturned the George W. Bush policy of treating the data as a state secret.
[B]ecause of a quirk in the Statistics of Income report for [1961, it is] easy to compare those at the very top with the bottom 90 percent of Americans. ...[I]t turns out that in 1961, the top income category [had] 398 taxpayers... So by comparing the average income of the top 398, and the taxes they paid, with 2006 dollars, we can compare how people at the apex of the economy were doing 45 years apart. And then by looking at the bottom 90 percent of taxpayers in 1961 and 2006, we can compare the very top with the rest of taxpayers.
The vast majority of Americans saw their incomes rise only modestly in those 45 years. Measured in 2006 dollars, the average income of the bottom 90 percent grew from $22,366 in 1961 to $31,642 in 2006. That is a real increase of $9,276 in average income. But it was also after 45 years, longer than the careers of most workers. ...

For the vast majority, federal income taxes declined. In 1961 these people paid on average 9.6 percent of their income to the federal government. By 2006 this burden had been cut to 7.2 percent. That tax rate reduction saved each of these taxpayers about $760...

That tiny increase in pay does not represent a real increase in wages, only total income. That is because in the middle of that 45-year era, a profound transformation took place in America. In 1961 most families lived on one income, maybe supplemented by some part-time work by the wife... Now two-income households are the norm. ...

America grew and grew during this era. GDP, adjusted for inflation and increased population, was up 227 percent. But wages and fringe benefits did not grow with the economy. For most workers, they fell. Wages peaked way back in 1972-1973, were on a mostly flat trajectory for more than two decades, rose briefly in the late 1990s, and then fell sharply in the new century. ... Millions are out of work, and the jobs they once held are ... not coming back. And even if the Great Recession is coming to an end, we face years of jobs growing more slowly than the working-age population, which could radically transform America's culture, work ethic, and sense of progress.
In 2006 families worked on average about 900 more hours than families did in the 1960s and early 1970s. That is a roughly 45 percent increase in hours worked... For many, the reality is that two jobs produce the same or a smaller after-tax income than just one job did three and four decades ago. ...
During the 45 years starting in 1961, payroll taxes have gone from a minor levy to almost a sixth of wages for the bottom 90 percent of American households. This $760 in income tax savings that the average taxpayer enjoyed in 2006 was taken back, and more, by the increased tax rates for Social Security and Medicare. Those rates rose from 3 percent withheld from pay in 1961 to 7.65 percent in 2006. Not all income is from wages, of course, but those higher payroll taxes wiped out the seeming reduction in the income tax and more. ...
And at the top? Now, that's a different story. The average income for the top 400 taxpayers rose over the 45 years from $13.7 million to $263.3 million. That is 19.3 times more.
The income tax bill went up too, but only 7.8 times as much because tax rates plunged. Income tax rates at the top fell 60 percent, three times the percentage rate drop for the vast majority. And at the top, the savings were not offset by higher payroll taxes, which are insignificant to top taxpayers. ...

[Click on table for larger version]

This combination of explosive growth in income and a 60 percent cut in effective tax rates meant that average after-tax income rose to $210 million in 2006, compared with $7.9 million in 1961. ..

Without a doubt, the much lower tax rates at the top encouraged people to realize more income in the tax system. And if the only measure is that some people made more, then this would be a good. But let's ask the question that the classical economists would have asked back when they were known as moral philosophers and their leaders spoke of policies that benefited the majority. Let's go back to a time before Vilfredo Pareto's observations began what is the overwhelmingly dominant orthodoxy today, neoclassical economics with its focus on gain.
What is the social utility of creating a society whose rules generate a doubling of output per person but provide those at the top with 37 times the gain of the vast majority? ...
Is a ratio of gain of 37 to 1 from the top to the vast majority beneficial? Is it optimal? Does it provide the development, support, and initiative to maximize the nation's gain? Are we to think that the gains of the top 398 or 400 taxpayers are proportionate to their economic contributions? Does anyone really think that heavily leveraged, offshore hedge fund investments are creating wealth, rather than just exploiting rules to concentrate wealth, while shifting risks to everyone else?
Under the overwhelmingly dominant economic theory of today, this is all good. Pareto argued that if no one was harmed, then all gain was good. Carried to an extreme, neoclassical economics would say that if the bottom 99.9999997 percent had the same income in 1961 and 2006, and all of the gain went to the one other person in America, that would be a good. ...
Is our tax system helping us create wealth and build a stable society? Or is it breeding deep problems by redistributing benefits to the top while maintaining burdens for the rest of Americans?

Think about that in terms of this stunning fact teased from the latest Federal Reserve data by Barry Bosworth and Rosanna Smart for the Brookings Institution: The average net worth of middle-income families with children whose head is age 50 or younger, is smaller today than it was in 1983.

[Note: Tax Notes is a weekly 100-or-so page publication with no ads that is entirely supported by subscribers, as are State Tax Notes and Tax Notes International. It is put out by nonprofit Tax Analysts, to whom we owe a great deal for fighting for almost 40 years to strip away the secrecy behind taxes. David Cay Johnston's column appears every other Monday.]

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Posted: 30 Dec 2009 11:01 PM PST

Will Economists Ever Learn?

Posted: 30 Dec 2009 11:43 AM PST

Will the crisis teach economists not to be overconfident about their abilities?

My answer is here.

''Virtual Immigration'' Continues to Rise

Posted: 30 Dec 2009 11:34 AM PST

Sudeep Reddy summarizes a report from the Dallas Fed on "Labor Market Globalization in the Recession and Beyond":

'Virtual' Immigration Continued Rising During Recession, by Sudeep Reddy, Real Time Economics: The global economic downturn spurred declines in physical immigration — the movement of people across borders — in 2008 and 2009. But a new Federal Reserve Bank of Dallas report says "virtual" immigration — moving the work rather than the workers — continued to grow.
"Most likely, the difference stems from the jobs the two types of immigrants typically do," authors Michael Cox, Richard Alm and Justyna Dymerska write in the Dallas Fed's Economic Letter. "Physical immigrants work in construction and other highly cyclical industries. Virtual immigrants are more likely to work in the services economy. It has traditionally been less sensitive than goods to cyclical fluctuations, largely because services aren't subject to the kind of inventory bulges that make goods production unstable."
Still, virtual immigration increased at a slower pace during the downturn. ... For instance, India's exports in software and IT services are forecast to continue expanding. But the projected growth rate of 17% for 2009 is less than half the pace of the prior four years. ...

Here are some charts from the report (click on figures for larger versions):





December 30, 2009

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Posted: 29 Dec 2009 11:01 PM PST

Christina Romer on Job Creation

Posted: 29 Dec 2009 07:47 PM PST

It's looking as though the recovery of labor markets will follow the pattern of the last two recessions and lag significantly behind the recovery of output. Additional fiscal policy measures could be used to help employment markets recover faster, so this statement from Christina Romer about the administration's plans to create jobs is good to see. But how much of a priority will job creation be for the administration given that it has other things it would like to accomplish? The amount of political capital that the administration is willing to use to push an expanded version of this legislation forward will say a lot about its true commitment to job creation:

Making job creation a priority, by Christina Romer, Commentary, President Obama has laid out a series of steps that should be at the heart of our continuing efforts to accelerate job growth, rebuild our economy for the long term, and bring American families relief during these difficult times. ...
Our nation faces double-digit unemployment. Far too many Americans still are struggling to make ends meet. But to understand where we need to go, it's important to look back at where we started. On the first days after the president was elected, our economy was rolling toward the edge of a cliff with ever-increasing momentum.President Obama instructed his economic team to take swift action to stem the tide of crisis. And we did..., we took unprecedented - and often unpopular - action to stave off a total economic collapse.
We worked with Congress to pass the American Recovery and Reinvestment Act, which has already provided tax relief to millions of small businesses and families, saved more than a million jobs and begun to lay the foundation for lasting recovery. ... Today, our economy is growing for the first time in more than a year. Last month, employment was nearly stable and the unemployment rate dropped slightly.
But we understand that talking about what we've accomplished may mean little to someone who is still out of a job. That's why President Obama outlined plans earlier this month to accelerate private-sector job creation in three key areas.
First, because small businesses are the No. 1 driver of job growth in America, the president's plan encourages investment by ... proposing a one-year elimination of the tax on capital gains from new investments in small businesses.
We're also calling for the extension of Recovery Act provisions to give small businesses tax incentives to invest in new equipment and other types of capital goods. We will work with Congress to create a tax cut for small businesses that hire new workers. And we will eliminate fees and increase loan guarantees for small businesses that borrow through the Small Business Administration.
Second, because smart, targeted investments in energy efficiency can help create jobs, we will create new incentives for consumers who invest in energy-efficient retrofits to their homes. And we will expand Recovery Act programs to leverage private investment in energy efficiency and create clean-energy manufacturing jobs.
Finally, the president is calling for investments in a wide range of infrastructure, designed to get out the door as quickly as possible while continuing a sustained effort at creating jobs and improving America's long-run productivity. The infrastructure projects include highway, transit, rail aviation and water projects. ...
These are important steps, but there is still so much work that remains. President Obama ... will not rest until every American who wants a job has one.

State and local governments also need more help, and this could do a lot to save existing jobs, so I'd like to see that on the list as well.

"The Fairness of Financial Rescue"

Posted: 29 Dec 2009 12:07 PM PST

Brad DeLong says the undesirable act of bailing out those who helped to cause the financial crisis is justified by the greater good that came from this policy, but the public does not see it that way:

The Fairness of Financial Rescue, by J. Bradford DeLong, Commentary, Project Syndicate: Perhaps the best way to view a financial crisis is to look at it as a collapse in the risk tolerance of investors in private financial markets. ... [W]hen the risk tolerance of the market crashes, so do prices of risky financial assets. ... This crash in prices of risky financial assets would not overly concern the rest of us were it not for the havoc that it has wrought on the price system... The price system is saying: shut down risky production activities and don't undertake any new activities that might be risky.
But there aren't enough safe, secure, and sound enterprises to absorb all the workers laid off from risky enterprises. ... Ever since 1825, central banks' standard response in such situations – except during the Great Depression of the 1930's – has been the same: raise and support the prices of risky financial assets, and prevent financial markets from sending a signal to the real economy to shut down risky enterprises and eschew risky investments.
This response is understandably controversial, because it rewards those who ... bear some responsibility for causing the crisis. But an effective rescue cannot be done any other way. A policy that leaves owners of risky financial assets impoverished is a policy that shuts down dynamism in the real economy.
The political problem can be finessed: as Don Kohn, a vice-chairman of the Federal Reserve, recently observed, teaching a few thousand feckless financiers not to over-speculate is much less important than securing the jobs of millions of Americans and tens of millions around the globe. Financial rescue operations that benefit even the unworthy can be accepted if they are seen as benefiting all – even if the unworthy gain more than their share of the benefits.
What cannot be accepted are financial rescue operations that benefit the unworthy and cause losses to other important groups – like taxpayers and wage earners. And that, unfortunately, is the perception held by many nowadays, particularly in the United States.
It is easy to see why.
When Vice Presidential candidate Jack Kemp attacked ... the Clinton administration's decision to bail out Mexico ... during the 1994-1995 financial crisis, Gore responded that America made $1.5 billion on the deal.
Similarly, Clinton's treasury secretary, Robert Rubin, and IMF Managing Director Michel Camdessus were attacked for committing public money to bail out New York banks that had loaned to feckless East Asians in 1997-1998. They responded that they had not rescued the truly bad speculative actor, Russia; that they had "bailed in," not bailed out, the New York banks, by requiring them to cough up additional money to support South Korea's economy; and that everyone had benefited massively, because a global recession was avoided.
Now, however, the US government can say none of these things. Officials cannot say that a global recession has been avoided; that they "bailed in" the banks; that – with the exception of Lehman Brothers and Bear Stearns – they forced the bad speculative actors into bankruptcy; or that the government made money on the deal.
It is still true that the banking-sector policies that were undertaken were good – or at least better than doing nothing. But the certainty that matters would have been much worse under a hands-off approach to the financial sector, à la Republican Treasury Secretary Andrew Mellon in 1930-1931, is not concrete enough to alter public perceptions. What is concrete enough are soaring bankers' bonuses and a real economy that continues to shed jobs.

December 29, 2009

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Fed Watch: Why Christmas Eve?

Posted: 28 Dec 2009 11:34 PM PST

Tim Duy:

Why Christmas Eve?, by Tim Duy: One would think that policymakers would treat the day before Christmas as sacrosanct, if not for the sake of their employees, but to avoid the endless conspiracy theories that naturally arise when you partake in activities that look like they are intended to fly under the radar. Has US Treasury Secretary Timothy Geithner learned nothing in his long tenure serving Goldman Sachs the people of the United States of America? Ignoring the wisdom of the ages, Geithner made what appears to be unlimited funds available to Freddie Mac and Fannie Mae on the day when most of the nation is more concerned about getting presents under the tree (myself personally content that I can squeeze yet another year of magic under the Santa Claus myth) than the policy machinations of Washington.
But do we really care? Is this really a new news, or just a matter of questionable timing? Would the same announcement today have raised the ire of the blogoshpere?
To get at this issue, we should back up to a New York Times article a few weeks back (hat tip to Dean Baker):
Fannie Mae and Freddie Mac, which buy and resell mortgages, have used $112 billion — including $15 billion for Fannie in November — of a total $400 billion pledge from the Treasury. Now, according to people close to the talks, officials are discussing the possibility of increasing that commitment, possibly to $400 billion for each company, by year-end, after which the Treasury would need Congressional approval to extend it. Company and government officials declined to comment.
Apparently this little item was lost in the Christmas rush - seriously, could this even compare to the endless fascination with the status of holiday sales? The point is that hanging in the background was the likelihood that Mae and Mac were expecting some very, very bad fourth quarter numbers. Indeed, despite the massive efforts to support the housing market, Fannie Mae reported today that serious delinquencies continue to climb at an alarming rate. So, at second glance, Treasury's Christmas Eve announcement looks somewhat less disconcerting. The timing questionable, but the outcome expected. But why the essentially unlimited access to funds? I think this is pretty straightforward - Geithner simply lifted illusion (delusion?) that the GSEs were anything less than backed by the full faith and credit of the Uncle Sam. Seriously, at this juncture who believes that GSE debt is any different than Treasury debt? Or that the US will not pump in any amount of dollars necessary to keep the GSEs afloat?
That said, the Treasury's press release was bereft of explanatory information, giving rise to a host of theories as chronicled by Calculated Risk. In my mind, the most appealing of these explanations (other than that stated above) is the supposed intention to use the GSEs to absorb dysfunctional mortgages in an effort to revive floundering modification programs. Why? Because, as structured, modifications just simply don't work in aggregate. I have thought this from day one of the modification story. And, frankly, I don't think I am particularly insightful on this point. Seems obvious. Suppose homeowner A is underwater on a mortgage costing $4,000 a month for a property that now has a rental equivalent of $2,000. How exactly does it help that homeowner to "modify" their mortgage to $3,000 a month? They are still underwater, and they will likely have to sacrifice any potential gains (10-20 years down the road!). The modification leaves you with the choice of being a virtual renter for $3,000 a month or an actual renter for $2,000 a month. Moreover, what truly is better for the economy? To free up $2,000 in the household's monthly budget via a balance sheet restructuring, or to weigh down the household balance sheet with an impossible debt burden?
The Wall Street Journal recently printed a front page article on this topic that I thought was spot on:
Analysts at Deutsche Bank Securities expect 21 million U.S. households to end up owing more on their mortgages than their homes are worth by the end of 2010. If one in five of those households defaults, the losses to banks and investors could exceed $400 billion. As a proportion of the economy, that's roughly equivalent to the losses suffered in the savings-and-loan debacle of the late 1980s and early 1990s.
The flip side of those losses, though, is massive debt relief that can help offset the pain of rising unemployment and put cash in consumers' pockets.
For the 4.8 million U.S. households that data provider LPS Applied Analytics estimates haven't paid their mortgages in at least three months, the added cash flow could amount to about $5 billion a month -- an injection that in the long term could be worth more than the tax breaks in the Obama administration's economic-stimulus package.
"It's a stealth stimulus," says Christopher Thornberg of Beacon Economics, a consulting firm specializing in real estate and the California economy. "The quicker these people shed their debts, the faster the economy is going to heal and move forward again."
As the stigma of abandoning a mortgage wanes, the Obama administration could face an uphill battle in its effort to keep people in their homes by pressuring banks to cut their mortgage payments. Some analysts argue that's not always the right approach, particularly if it prevents people from shedding onerous debts and starting afresh.
"The effect of these programs is often to lead homeowners to make decisions that are not in their economic best interests," says Brent White, a law professor at the University of Arizona who has studied mortgage defaults.
The sorry truth is that many households underwater on their mortgages are likely better off defaulting (this is not a suggestion to strategically default; consult your attorney when contemplating that option), and so likely is the economy as a whole, accepting a modification that does not involve a significant principle reduction. The only people who do not recognize this are, sadly, policymakers, who have trouble comprehending the possibility of a bubble that led to prices far above ability to pay. Such a delusion extended to the highest levels of the Fed. Arguably, the push for modifications is simply more evidence that Washington is more concerned with the interests of Wall Street than Main Street.
That is why the Treasury's blanket coverage of the GSEs leads to speculation that the Administration intends to more aggressively use their portfolios to push for principle reductions. Such reductions, obviously, actually help households, but at a cost to the taxpayers that leaves mortgage asset holders nearly whole. Such reductions would also wipe away any remaining delusion that the trouble in housing is a liquidity issue rather than a insolvency issue. To be sure, I would indeed not be surprised to see an enhanced modification effort via the GSEs that pushes greater costs onto the taxpayer, especially with respect to the mortgages still held by Mae and Mac. But to dig deeper into the issue, I think the GSEs would need to aggressively purchase privately held mortgages with the potential for liquidation. And here this paragraph in the Treasury release sticks out:
Treasury remains committed to the principle of reducing the retained portfolios. To meet this goal, Treasury does not expect Fannie Mae and Freddie Mac to be active buyers to increase the size of their retained mortgage portfolios, but neither is it expected that active selling will be necessary to meet the required targets. FHFA will continue to monitor and oversee the retained portfolio activities in a manner consistent with the FHFA's responsibility as conservator and the requirements of the PSPAs.
So Mae and Mac are not required to sell part of their portfolio into a declining market (which would exacerbate the loss to taxpayers), but nor would they be expected or really allowed to expand their portfolio to ease the process of modifications on the back of the taxpayer. Moreover, even an effort to expand modifications does not appear to be within the FHFA's conservator responsibilities. Which would, if I am reading this right, suggest that while there are plenty of reasons to believe that the modification program is fundamentally a failure, Treasury's Christmas Eve announcement is not a backdoor effort to expand the socialization of mortgage losses. Yet.
In short, there are plenty of ulterior motives for Treasury's expansion of the Mae and Mac bailouts. My favorite is the desire to expand the ability of the GSEs to absorb principle reductions for housing modifications. But the simplest explanation is likely the correct one - the financial damage to the GSEs continues virtually unabated, and the Treasury simply needs to make explicit what was implicit: Mae and Mac are backed by the US government's full faith and credit, regardless of the level of losses in those institutions. I don't think this is really an expansion of the bailout; more just a confirmation of my prior beliefs.

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Posted: 28 Dec 2009 11:02 PM PST

A ''Turning Point in U.S. Society''?

Posted: 28 Dec 2009 04:23 PM PST

Did Enron change everything?:

Might Krugman's polemic prediction about Enron vs. 9-11 ever come true?, by Michael Roberts: I look at our financial and economic system in dumbfounded awe as to how it all works.  We shovel trillions of dollars into banks, stocks and mutual funds, rarely knowing the first thing about how well the underlying companies are managed or how profitable they are or what they are truly doing with our money.  While I think I'm more informed than the average investor, I couldn't tell you which 10 CEOs are most responsible for my investments.  I couldn't even tell you the top 10 companies! ...
The fact that I do invest shows I have remarkable confidence in our financial system.  That confidence is based on history, the fact that firms and CEOs have been honest and transparent enough in their accounting and that, over the long run, the stock market has performed extremely well.  The long sweep of history says I'm crazy not to invest.
But then I look at recent history and I wonder how the long history came to be.  Honest and transparent are not adjectives that come easily to mind when looking at our modern financial system and events over the last decade.
This issue is in fact the lynch pin to modern capitalism.  At a fundamental level what makes it all work is to having institutions that deal effectively with asymmetric information (the econ jargon).  If one cannot see exactly what they are buying with their investment money, little investment will take place, and economies don't grow.  So modern capitalism requires rock solid institutions that reduce information asymmetries and allow dollars to flow toward investments with the greatest potential returns.
This is why, back in 2002, Paul Krugman made what I think was his most polemic prediction ever:
I predict that in the years ahead Enron, not Sept. 11, will come to be seen as the greater turning point in U.S. society.
Many, including me, thought this was a bit much, even if Krugman made some good points in that old column. His column today, a tribute the naughties, echos similarly to his 2002 prediction...
Krugman was worried about the collapse of our financial institutions and saw Enron as an omen. ... And here we are. Things didn't collapse completely but it wasn't pretty.  While we've begun to recover (barely) many problems still need fixing, particularly re-regulation of financial markets.
I still think Krugman overstepped when he made that prediction in 2002, not just because the Enron fallout blew over relatively quickly, but because the sweeping fallout of 9/11 has been so great. But today I do think there is a chance ... that Krugman's prediction might eventually turn out to be right after all. ...

What's disappointing is that after Enron, and after what just happened, things might not change, at least not by very much. As Krugman notes, we seem unwilling to learn from our mistakes:

Even as the dot-com bubble deflated, credulous bankers and investors began inflating a new bubble in housing. Even after famous, admired companies like Enron and WorldCom were revealed to have been Potemkin corporations with facades built out of creative accounting, analysts and investors believed banks' claims about their own financial strength and bought into the hype about investments they didn't understand. Even after triggering a global economic collapse, and having to be rescued at taxpayers' expense, bankers wasted no time going right back to the culture of giant bonuses and excessive leverage.

Part of it is transparency, and more is certainly needed, and perhaps it is an inability to learn from mistakes, but a bigger problem is the distribution of economic and political power. Business interests are dominant in Washington, and these powerful interests will do what they can to resist constraints on their behavior no matter what lessons the rest of us may have learned from their actions in the past. It is not at all clear that the political will needed to overcome the opposition of business groups and make the needed regulatory and legislative changes is present. Unless and until the political will is there, and if this crisis doesn't do it I'm not sure what will, we'll be in danger of repeating the same mistakes yet again. Congress might surprise and take tough action if and when the financial reform process currently underway is complete, but I'm not expecting that to happen.

Google's Monopoly Power

Posted: 28 Dec 2009 02:18 PM PST

It is not illegal to have monopoly power, but there are limits on how that power can be used. Has Google crossed over the line?:

Search, but You May Not Find. by Adam Raff, Commentary, NY Times: ...Today, search engines like Google, Yahoo and Microsoft's new Bing have become the Internet's gatekeepers, and the crucial role they play in directing users to Web sites means they are now as essential a component of its infrastructure as the physical network itself. The F.C.C. needs to look [at]... "search neutrality": the principle that search engines should have no editorial policies other than that their results be comprehensive, impartial and based solely on relevance.
The need for search neutrality is particularly pressing because so much market power lies in the hands of one company: Google. With 71 percent of the United States search market (and 90 percent in Britain), Google's dominance of both search and search advertising gives it overwhelming control. ...
One way that Google exploits this control is by imposing covert "penalties" that can strike legitimate and useful Web sites, removing them entirely from its search results or placing them so far down the rankings that they will in all likelihood never be found. For three years, my company's vertical search and price-comparison site, Foundem, was effectively "disappeared" from the Internet in this way.
Another way that Google exploits its control is through preferential placement. With the introduction in 2007 of what it calls "universal search," Google began promoting its own services at or near the top of its search results... Google now favors its own price-comparison results..., its own map results..., its own news results..., and its own YouTube results for video queries. And Google's stated plans for universal search make it clear that this is only the beginning.
Because of its domination of the global search market and ability to penalize competitors while placing its own services at the top of its search results, Google has a virtually unassailable competitive advantage. And Google can deploy this advantage well beyond the confines of search to any service it chooses. Wherever it does so, incumbents are toppled, new entrants are suppressed and innovation is imperiled. ...
The preferential placement of Google Maps helped it unseat MapQuest from its position as America's leading online mapping service virtually overnight. ... Without search neutrality rules to constrain Google's competitive advantage, we may be heading toward a bleakly uniform world of Google Everything — Google Travel, Google Finance, Google Insurance, Google Real Estate, Google Telecoms and, of course, Google Books.
Some will argue that Google is itself so innovative that we needn't worry. But the company isn't as innovative as it is regularly given credit for. Google Maps, Google Earth, Google Groups, Google Docs, Google Analytics, Android and many other Google products are all based on technology that Google has acquired rather than invented. Even AdWords and AdSense ... are essentially borrowed inventions...
Google ... now faces a difficult choice. Will it embrace search neutrality...? Or will it try to argue that discriminatory market power is somehow ... harmless in the hands of an overwhelmingly dominant search engine? ...

December 28, 2009

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Paul Krugman: The Big Zero

Posted: 28 Dec 2009 12:51 AM PST

Will the beginning of a new decade bring an end to the Great Stagnation?:

The Big Zero, by Paul Krugman, Commentary, NY Times: Maybe we knew, at some unconscious, instinctive level, that it would be an era best forgotten. Whatever the reason, we got through the first decade of the new millennium without ever agreeing on what to call it. The aughts? The naughties? Whatever. ...
But from an economic point of view, I'd suggest that we call the decade past the Big Zero. It was a decade in which nothing good happened, and none of the optimistic things we were supposed to believe turned out to be true.
It was a decade with basically zero job creation..., private-sector employment has actually declined — the first decade on record in which that happened.
It was a decade with zero economic gains for the typical family. Actually, even at the height of the alleged "Bush boom," in 2007, median household income adjusted for inflation was lower than it had been in 1999. And you know what happened next.
It was a decade of zero gains for homeowners...: right now housing prices, adjusted for inflation, are roughly back to where they were at the beginning of the decade. ... Almost a quarter of all mortgages ... are underwater, with owners owing more than their houses are worth.
Last and least for most Americans — but a big deal for retirement accounts, not to mention the talking heads on financial TV — it was a decade of zero gains for stocks, even without taking inflation into account. Remember the excitement when the Dow first topped 10,000...? Well, that was back in 1999. Last week the market closed at 10,520.
So there was a whole lot of nothing going on in measures of economic progress or success. Funny how that happened.
For as the decade began, there was an overwhelming sense of economic triumphalism in America's business and political establishments, a belief that we — more than anyone else in the world — knew what we were doing. ...
Let me quote from a speech that Lawrence Summers, then deputy Treasury secretary..., gave in 1999. ... [quote] ... Mr. Summers — and ... just about everyone in a policy-making position at the time — believed ... America has honest corporate accounting; this lets investors make good decisions, and also forces management to behave responsibly; and the result is a stable, well-functioning financial system.
What percentage of all this turned out to be true? Zero.
What was truly impressive about the decade past, however, was our unwillingness, as a nation, to learn from our mistakes.
Even as the dot-com bubble deflated, credulous bankers and investors began inflating a new bubble in housing. Even after famous, admired companies like Enron and WorldCom were revealed to have been Potemkin corporations with facades built out of creative accounting, analysts and investors believed banks' claims about their own financial strength and bought into the hype about investments they didn't understand. Even after triggering a global economic collapse, and having to be rescued at taxpayers' expense, bankers wasted no time going right back to the culture of giant bonuses and excessive leverage.
Then there are the politicians. Even now, it's hard to get Democrats, President Obama included, to deliver a full-throated critique of the practices that got us into the mess we're in. And as for the Republicans: now that their policies of tax cuts and deregulation have led us into an economic quagmire, their prescription for recovery is — tax cuts and deregulation.
So let's bid a not at all fond farewell to the Big Zero — the decade in which we achieved nothing and learned nothing. Will the next decade be better? Stay tuned. Oh, and happy New Year.

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Posted: 27 Dec 2009 11:02 PM PST

'How Economics Managed to Make Amends'

Posted: 27 Dec 2009 06:03 PM PST

Arvind Subramanian defends economics:

How economics managed to make amends, by Arvind Subramanian, Commentary, Financial Times: In 2008, as the global financial crisis unfolded, the reputation of economics as a discipline and economists as useful policy practitioners seemed to be irredeemably sunk. Queen Elizabeth captured the mood when she asked pointedly why no one (in particular economists) had seen the crisis coming. There was no doubt that, notwithstanding the few Cassandras who correctly prophesied gloom and doom, the profession had failed colossally. ...
But crises will always happen and ... their timing, form and provenance will elude prognostication. Most crises, notably the big ones, creep up on us from unsuspected quarters. ... So, if the value of economics in preventing crises will always be limited (although hopefully not non-existent), perhaps a fairer and more realistic yardstick should be its value as a guide in responding to them. Here, one year on, we can say that economics stands vindicated.
How so? Recall that the recession of the late 1920s in the US became the Great Depression, owing to a combination of three factors: overly tight monetary policy; overly cautious fiscal policy...; and dramatic recourse to beggar-thy-neighbour policies, including competitive devaluations ... and increases in trade barriers. The impact of this global financial crisis has been significantly limited because on each of these scores, the policy mistakes of the past were strenuously and knowingly avoided. ...
What is striking about the influence of economics is that similar policy responses in the fiscal and monetary areas, and non-responses in relation to competitive devaluations and protectionism, were crafted across the globe. They were evident in emerging market economies and developing countries as much as in the industrial world; in red-blooded capitalist countries as well as in communist China and still-dirigiste India. If ever there was a Great Consensus, this was it.
If the Great Depression had not happened 80 years before,...  perhaps 2009 might have turned out differently. But... We were not condemned to repeat the mistakes of history because the economics profession had learnt and distilled the right lessons from that event.
For sure, we have not learnt all the lessons; we may even have learnt some wrong ones. It is also probable that we are setting the stage for future crises... So, economics is bound to fail again. But the avoidance of the Greatest Depression that could so easily have happened in 2009 is an outcome the world owes to economics; at the least, it is the discipline's atonement for allowing the crisis of 2008 to unfold.

A Dangerous Split

Posted: 27 Dec 2009 09:18 AM PST

The split developing within the Democratic Party is worrisome. Old fault lines that were on display in events like the WTO protests in Seattle are opening again. They were never really closed, just united against a common cause, that of defeating Republicans. But now that Democrats have power again, we are seeing the reemergence of the evil multinational corporations and the politicians they control as the focal point of anger for one side of the dispute. Health care reform and the bailout of the financial system, both of which are seen as serving the needs of corporations rather than the populace, have helped to stir things up.

The other side doesn't think corporations are evil per se, e.g. both globalization and financial innovation have their positive aspects. This side believes bailout of the financial system was necessary to save Main Street, it wasn't just a giveaway to the executives in mega-banks, and that health care reform makes real progress, it is not just a giveaway to insurance companies. Progress toward goals is important, even if political realities mean that some principles must compromised in order to move forward. The nature of those compromises, and the extent to which they are driven by money and power rather than the needs of the people politicians are supposed to represent, is part of the dispute.

With financial reform still to come, I'm not sure I want to tone down the anger just yet -- it could be useful in getting politicians to enact needed reform of the financial sector (though I worry they will go to far and do damage to institutions such as the Fed). This could also be useful when the deficit hawks turn their sights on programs such as Social Security. But more generally this is not a healthy state of affairs for Democrats, and it's a split that could easily be exploited by Republicans in coming elections.

I'm not sure I've fully captured or correctly characterized the source of the division, so let me turn it over to all of you. How would you characterize the split? Can the two sides be brought together?

December 27, 2009

Latest Posts from Economist's View

Latest Posts from Economist's View

links for 2009-12-26

Posted: 26 Dec 2009 11:01 PM PST

Shiller: A Way to Share in a Nation's Growth

Posted: 26 Dec 2009 03:24 PM PST

Robert Shiller wants people to be able to take stock in America:

A Way to Share in a Nation's Growth, by Robert J. Shiller, Commentary, NY Times: Corporations raise money by issuing both debt and equity, the latter giving investors an implicit share in future profits. Governments should do something like this, too, and not just rely on debt.

Borrowing a concept from corporate finance, governments could sell a new type of security that commits them to paying shares in national "profit," as measured by gross domestic product. ... Such securities might help assuage doubts that governments can sustain the deficit spending required to keep sagging economies stimulated... In a recent pair of papers, my Canadian colleague Mark Kamstra ... and I have proposed a solution. We'd like our countries to issue securities that we call "trills," short for trillionths. ...

Each trill would ... pay in perpetuity, and in domestic currency, a quarterly dividend equal to a trillionth of the nation's quarterly nominal G.D.P. If substantial markets could be established..., trills would be a major new source of government funding. Trills would be issued with the full faith and credit of the respective governments. ... The market price of trills would fluctuate, reflecting the changing prospects for future G.D.P. growth, just as the market price of stocks reflects the changing prospects for future earnings growth. There is no complexity here. It is all plain-vanilla financing, though unconventional by today's standards.

There are indications that officials in China are starting to worry about threats to their huge investment in United States debt from a possible outbreak of high inflation. The trills, tied to nominal G.D.P., would protect them. Right now TIPS, or Treasury Inflation-Protected Securities, are offering disappointingly low yields... Trills, even at an ultralow dividend yield, would seem more exciting as an inflation-protected prospect, because they represent a share in future economic growth.
The United States government is highly unlikely to default on its debt, but even this remote possibility would be virtually eliminated by trills, because the government's dividend burden would automatically decline in tough times, when G.D.P. declined. ...
In fact, issuing shares in G.D.P. might even be viewed as a policy that systematically rectifies a wide array of imbalances in capital flows. People who expect strong economic growth in a country would bid up the price of a claim on its G.D.P., creating a cheap source of funding for the issuing government. So a country with good investment prospects gets the resources at a low current cost. There would be no need for central bank machinations to try to correct global imbalances. ...
Someday, China might issue shares in its G.D.P..., and international investors who would love to participate in its economic miracle might put a very high price on them. That could help secure international financing of future growth without relying on the enormous government and enterprise saving that is now suppressing China's standard of living.
Proposals for securities like trills have been aired many times over the years. ... So far, these proposals have gone unheeded. But the current environment may be more suitable for them.

This shifts risk around a bit, etc., but I can't say I'm convinced this is some sort of magic means of financing government activities.