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May 24, 2010

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Paul Krugman: The Old Enemies

Posted: 24 May 2010 01:18 AM PDT

It's time for President Obama to earn his "badge of honor":

The Old Enemies, by Paul Krugman, Commentary, NY Times: So here's how it is: They're as mad as hell, and they're not going to take this anymore. Am I talking about the Tea Partiers? No, I'm talking about the corporations.
Much reporting on opposition to the Obama administration portrays it as a sort of populist uprising. Yet the antics of the socialism-and-death-panels crowd are only part of the story of anti-Obamaism, and arguably the less important part. If you really want to know what's going on, watch the corporations.
How can you do that? Follow the money — donations by corporate political action committees. ... So far this year, according to The Washington Post, 63 percent of spending by banks' corporate PACs has gone to Republicans, up from 53 percent last year. Securities and investment firms, traditionally Democratic-leaning, are now giving more money to Republicans. And oil and gas companies, always Republican-leaning, have gone all out, bestowing 76 percent of their largesse on the G.O.P.
These are extraordinary numbers given the normal tendency of corporate money to flow to the party in power. Corporate America, however, really, truly hates the current administration. ... What's going on?
One answer is taxes... The Obama administration plans to raise tax rates on upper brackets back to Clinton-era levels. Furthermore, health reform will in part be paid for with surtaxes on high-income individuals. All this will amount to a significant financial hit to C.E.O.'s, investment bankers and other masters of the universe.
Now, don't cry for these people: they'll still be doing extremely well, and by and large they'll be paying little more as a percentage of their income than they did in the 1990s. Yet the fact that the tax increases they're facing are reasonable doesn't stop them from being very, very angry.
Nor are taxes the whole story.
Many Obama supporters have been disappointed by what they see as the administration's mildness on regulatory issues — its embrace of limited financial reform that doesn't break up the biggest banks, its support for offshore drilling, and so on. Yet corporate interests are balking at even modest changes from the permissiveness of the Bush era. ...
So what President Obama and his party now face isn't just, or even mainly, an opposition grounded in right-wing populism. For grass-roots anger is being channeled and exploited by corporate interests, which will be the big winners if the G.O.P. does well in November.
If this sounds familiar, it should: it's the same formula the right has been using for a generation. Use identity politics to whip up the base; then, when the election is over, give priority to the concerns of your corporate donors. ...
But won't the grass-roots rebel at being used? Don't count on it. Last week Rand Paul, the Tea Party darling who is now the Republican nominee for senator from Kentucky, declared that the president's criticism of BP over the disastrous oil spill in the gulf is "un-American," that "sometimes accidents happen." The mood on the right may be populist, but it's a kind of populism that's remarkably sympathetic to big corporations.
So where does that leave the president and his party? Mr. Obama wanted to transcend partisanship. Instead, however, he finds himself very much in the position Franklin Roosevelt described in a famous 1936 speech, struggling with "the old enemies of peace — business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering."
And that's not necessarily a bad thing. Roosevelt turned corporate opposition into a badge of honor: "I welcome their hatred," he declared. It's time for President Obama to find his inner F.D.R., and do the same.

Modern Macroeconomic Theory and Fiscal Policy

Posted: 24 May 2010 01:17 AM PDT

I suppose I should respond to this. After getting home from Beijing, a process that involved a 12 hour flight followed by a 6 hour layover in SF, then a 3 and 1/2 hour delay, a flight cancellation, a last minute flight from SF to Portland, renting a car since there were no more flights to Eugene, then driving to Eugene for 2 hours, finally arriving after 28 hours with only the sleep one grabs here and there on planes, I did manage to catch a few hours sleep. But not enough. I then got up, tired and crabby, read this post, found myself a bit annoyed and did something I don't usually do, I left a comment at another blog.

Let me explain. It wasn't the overwhelming evidence of Krugman/DeLong derangement syndrome that got to me in my tired and crabby state. It was this part:
Where is the evidence that Paul Krugman has ever thought deeply about the theoretical foundations of Keynesian theory? (Maybe there is some and I have just missed it). As far as I can tell, his "deep" understanding goes no further than an elementary Keynesian cross (OK, OK, maybe he knows a bit more than this).

So, what do I take away from all this? Well, I conclude that it should be clear enough that this dynamic duo are primarily interested in pushing their own pet political agendas; they have no interest in pushing the frontier of economic theory... Nothing wrong with this... Nothing wrong, that is, except when they label these activities as "fair and balanced" or as "rooted in rigorous theory." That's just plain dishonest.

It's the suggestion that the policy advice Krugman and DeLong have been giving is not "rooted in rigorous theory" that annoyed me the most. The suggestion that Krugman's policy advice was based upon an understanding of the models no deeper than the Keynesian cross contributed as well.

So let's get something absolutely clear. The fiscal policy intervention that Krugman, DeLong, and others have been advocating can be analyzed and supported using the New Keynesian model. See Woodford and Eggertsson's work in particular, or see this work by my colleague George Evans along with his coauthors. For the most part, these models support the types of policies the administration has put into place. (Generally, demand side policies are the solution when the economy is stuck at the zero bound. Supply side polices such as a capital gains tax cut actually make things worse. The reason is that an increase in supply when demand as already insufficient causes prices to fall, and the fall in the price level raises the real interest rate. At the zero bound, the rise in the real interest rate cannot be offset by the Fed. Away from the zero bound, the Fed can stabilize the real rate and the policy has positive effects, but it depends critically on the Fed's ability to offset increases in the real rate and the nature of the reaction).

There has been an attempt to discredit fiscal policy intervention by suggesting it is based upon old fashioned Keynesian cross models. My reaction to the original post was because it read like another contribution to those pushing this idea. If David wants to back away from that, and it seems he does from his latest post (the part where he pats himself on the back for being so open minded), great. Because the attack along these lines is, to echo a term, "plain dishonest." There's no doubt whatsoever in my mind about Krugman and DeLong's knowledge of modern theory, but that's not my main concern. It's the suggestion that the people advocating fiscal policy cannot possibly understand what modern models say, that they must be relying on old-fashioned, out of date theory, that brought the reaction. There's nothing at all inconsistent with advocating fiscal policy when the economy is stuck at the zero bound and what modern macro has to say on the topic. Those who suggest otherwise either explicitly or implicitly are the ones pushing an agenda rather than helping to illuminate what modern models have to say on this topic.

links for 2010-05-23

Posted: 23 May 2010 11:02 PM PDT

"Gulfs in our Energy Security"

Posted: 23 May 2010 05:49 PM PDT

Jeff Frankel argues that energy security does not mean minimizing imports of oil and maximizing domestic production of energy. Instead, it means insuring ourselves against future variations in supply that might damage the economy or interfere with our national defense needs. When approached in this manner, it's important to have large domestic deposits available under some scenarios that lead to long-term reductions in the available supply of oil. Since the economic and strategic damage could be large if one of these scenarios were to occur, it's also important to give them substantial weight when thinking about insuring ourselves against the risk of long-term reductions in our access to outside sources of energy. What this means is that current thinking on energy security -- termed "Drain America First" below -- is not the optimal energy security policy. It extracts rather than preserves the domestic oil reserves that would be needed if one of the scenarios actually occurred:

Gulfs in our Energy Security, and the Louisiana Oil Blowout, by Jeff Frankel: In the wake of the April oil well blowout off the coast of Louisiana, policy-makers are rethinking the issue of off-shore drilling. Clearly the last decade's neglect of safety rules by federal regulators needs to come to an end. But what larger implications should we draw for domestic oil drilling? ...
Ever since September 11, 2001, "energy security" has received increased emphasis. ... Usually it is taken as self-evident that the energy security goal argues in the direction of increased exploitation of domestic oil resources: "Drill, Baby, Drill." But some of us have long thought that a more appropriate slogan for the policy of using domestic reserves as aggressively as possibly would be "Drain America First." A true understanding of energy security could tip the balance the other way instead, in the direction of conserving American energy resources. Oil wells such as the Deepwater Horizon site, once it is capped, should be saved, their future use to be made conditional on a true national emergency, such as a long-term cut-off of Persian Gulf oil...
Public debate is hampered by the lack of a working definition of energy security. A goal of ending US imports of oil would not be attainable, in the foreseeable future, given the gulf between domestic deposits and our consumption. ... A goal of ending imports from specific geographic regions such as the Mideast would not be relevant, because oil is mostly fungible. ...
What, then, should be the goal of energy security policy? Imagine that at some point in the coming half-century, there is a sudden cut-off in oil exports from the Persian Gulf...
The goal of policy now should be to take steps that would reduce the impact of such a shock in the future, creating non-military response options. The solution is to leave some domestic oil underground, or underwater, for use in such emergencies, and only in such emergencies. Reserves in the Gulf of Mexico are precisely the ones we should save. Think of it like the SPR, but without going to the trouble of bringing the oil above ground only to put it back underground.
The argument doesn't work as well in the case of oil reserves in the North Slope of Alaska. Experts say it would take more than a decade to start pumping... The continental shelf of the Gulf of Mexico may be the best location for designating certain deposits as reserves...
Even in the case of known oil deposits off Louisiana and Texas, there would be a certain lag between the date of a geopolitical crisis and the date when the oil would start flowing. But this is no reason to dismiss the idea. Oil shocks such as 1979 and 1990 led to immediate sharp increases in the world price of oil — and caused or at least contributed to US recessions – not because the supply of oil physically fell, but rather because everyone was afraid that it might; as a result, rational speculation increased holdings of oil in inventories, bid up the price, and had the same macroeconomic impact as if the supply cut-off had already gone into effect. The point is that, if there were to be a sudden new mideastern oil shock, the knowledge that some replacement supplies would come on-stream domestically within a few years and so the economy would not be left high and dry would help moderate the panic, and so even in the short term would allow lower inventories and lower prices than otherwise.

I am not claiming that my proposal, to conserve offshore Gulf oil deposits for an emergency, would solve all our energy problems. ... But, on the margin, a barrel of Gulf of Mexico oil would be far more valuable under crisis conditions than it is today.

"Closing Tax Loopholes For Billionaires"

Posted: 23 May 2010 02:26 PM PDT

What are the chances that the deficit hawks will come out in favor of this?:

The Challenge of Closing Tax Loopholes For Billionaires, by Robert Reich: Who could be opposed to closing a tax loophole that allows hedge-fund and private equity managers to treat their earnings as capital gains – and pay a rate of only 15 percent rather than the 35 percent applied to ordinary income?
Answer: Some of the nation's most prominent and wealthiest private asset managers, such as Paul Allen and Henry Kravis, who, along with hordes of lobbyists, are determined to keep the loophole wide open.
 
The House has already tried three times to close it only to have the Senate cave in because of campaign donations from these and other financiers who benefit from it.
 
But the measure will be brought up again in the next few weeks, and this time the result could be different. Few senators want to be overtly seen as favoring Wall Street. And tax revenues are needed to help pay for extensions of popular tax cuts, such as the college tax credit that reduces college costs for tens of thousands of poor and middle class families. Closing this particular loophole would net some $20 billion.
 
It's not as if these investment fund managers are worth a $20 billion subsidy. Nonetheless they argue that if they have to pay at the normal rate they'll be discouraged from investing in innovative companies and startups. But if such investments are worthwhile they shouldn't need to be subsidized. ...
Nor are these fund managers especially deserving, as compared to poor and middle-class families that need a tax break to send their kids to college. ...
Several of these private investment fund managers, by the way, have taken a lead in the national drive to cut the federal budget deficit. The senior chairman and co-founder of the Blackstone Group, one of the largest private equity funds, is Peter G. Peterson... Curiously, I have not heard Peterson advocate closing this tax loophole as one way to further the cause of fiscal responsibility. 
Closing tax loopholes for billionaires may seem like a no-brainer... But you can expect a huge fight.
There is also a moral issue here. Call me old fashioned but I just think it's wrong that a single hedge fund manager earns a billion dollars, when a billion dollars would pay the salaries of about 20,000 teachers.

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