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June 18, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View


Paul Krugman: That ’30s Feeling

Posted: 18 Jun 2010 12:42 AM PDT

Paul Krugman, writing from Berlin, notes that economic logic and actual data do not support the arguments made by Austerians who are demanding that governments reduce debt levels. So what is their real motivation?:

That '30s Feeling, by Paul Krugman, Commentary, NY Times: Suddenly, creating jobs is out, inflicting pain is in. Condemning deficits and refusing to help a still-struggling economy has become the new fashion everywhere, including the United States, where 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s.
Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.'s premature attempt to balance the budget helped plunge a recovering economy back into severe recession. ...
But despite these warnings, the deficit hawks are prevailing in most places — nowhere more than here, where the government has pledged 80 billion euros, almost $100 billion, in tax increases and spending cuts even though the economy continues to operate far below capacity.
What's the economic logic behind the government's moves? The answer, as far as I can tell, is that there isn't any. ... Here's roughly how the typical conversation goes...:
German hawk: "We must cut deficits immediately, because we have to deal with the fiscal burden of an aging population."
Ugly American: "But that doesn't make sense. Even if you manage to save 80 billion euros — which you won't, because the budget cuts will hurt your economy and reduce revenues — the interest payments ... would be less than a tenth of a percent of your G.D.P. So the austerity ... will threaten economic recovery while doing next to nothing to improve your long-run budget position."
German hawk: "I won't try to argue the arithmetic. You have to take into account the market reaction."
Ugly American: "But ... why should the market be moved by policies that have almost no impact on the long-run fiscal position?"
German hawk: "You just don't understand our situation."
The key point is that while the advocates of austerity pose as hardheaded realists, doing what has to be done,... the numbers do not ... support their position. ... So the real motivations for their obsession with austerity lie somewhere else.
In America, many self-described deficit hawks are hypocrites, pure and simple: ...concerns about red ink vanish when it comes to tax breaks for the wealthy. Thus, Senator Ben Nelson, who sanctimoniously declared that we can't afford $77 billion in aid to the unemployed, was instrumental in passing the first Bush tax cut, which cost a cool $1.3 trillion.
German deficit hawkery seems more sincere. But it still has nothing to do with fiscal realism. Instead, it's about moralizing and posturing. Germans tend to think of running deficits as being morally wrong, while balancing budgets is considered virtuous, never mind the ... economic logic. "The last few hours were a singular show of strength," declared Angela Merkel ... after a special cabinet meeting agreed on the austerity plan. And showing strength — or what is perceived as strength — is what it's all about.
There will, of course, be a price for this posturing. Only part of that price will fall on Germany: German austerity will worsen the crisis in the euro area... Europe's troubles are also leading to a weak euro, which perversely helps German manufacturing, but also exports the consequences of German austerity to the rest of the world, including the United States.
But German politicians seem determined to prove their strength by imposing suffering — and politicians around the world are following their lead.
How bad will it be? Will it really be 1937 all over again? I don't know. What I do know is that economic policy around the world has taken a major wrong turn, and that the odds of a prolonged slump are rising by the day.

"A Crime Puzzle"

Posted: 18 Jun 2010 12:33 AM PDT

The story about crime and immigration may be different than you've been led to believe:

A crime puzzle: Violent crime declines in America, by Claude Fischer: Violent crime went down in America again last year. According to preliminary statistics from the FBI, the number of violent crimes dropped by about 5 percent from 2008 to 2009. Given population growth, that means that the rate of violent crime dropped even more. (So did property crime.)

This is a puzzle because (a) violent crime is more common among the poor; (b) the percentage of Americans who are poor has been trending up since about 2000; and (c) the economy tanked last year. One would have expected a rise, not a fall, in violent crime.

But this head-scratcher is just part of a larger puzzle – understanding long-term trends in America's criminal violence.

The most reliable measure of violent crime is the homicide rate. ...

This graph shows the American homicide rate over the last century-plus. ... We see a cyclical pattern, a high plateau in the 1920s and early '30s; a rapid drop of more than half to a low point in the late 1950s; then, a sharp rise, more than doubling, by 1980 and 1990; and then what will probably be a drop of nearly half by 2009. These are huge swings. ...

We can put this story into yet greater perspective with the graph below. The line in that graph represents my rough estimate of fluctuations in the U.S. rate of homicide over many more generations... The overall story is that homicide rates declined substantially (as did rates of interpersonal violence of all sorts). ... The graph also shows that progress was hardly uniform, as there were many upswings of violence. ...

Scholars have offered several explanations for the centuries'-long decline of violence in the West. ... How might ... this explain the latest — the post-1990 — downswing in homicide and in criminal violence more generally? The rates are now approaching the level of the least violent era in American history, the late 1950s.

Researchers point to some similar factors, although they disagree about their relative importance. Some stress government authority, namely that longer criminal sentences and the prison-building boom kept many more "bad actors" off the streets longer. Others point to the economic boom of the 1990s, when unemployment, even in poor communities, sunk to low levels. And others argue — although it is difficult to confirm with "hard data" – that a cultural shift occurred, that increasing revulsion toward violence eventually spread into even the most violent communities and corners of the United States.

Recently, scholars have added yet another explanation: Immigration. Cities and neighborhoods that have received the largest influx of immigrants (including Mexican immigrants) have had — despite popular stereotypes to the contrary — the largest drops in criminal violence. (See, e.g., here and here.) Thus, increased immigration may explain part of the crime drop since 1990.

In a wider view, perhaps the more puzzling part of the story is the rapid upswing in violence from around 1960 to 1990 (see first graph above). Two generations of scholars have yet (it appears to me) to satisfactorily explain why that happened. Some of the upswing in crime can be attributed to the baby boom: Put a lot more 15-to-25-year-old males into a society and you will get an upsurge of violence. Some of it has to do with what happened in the black ghettos of the North: The population grew rapidly just when the well-paying blue-collar jobs for men were disappearing. Some of it involved the growing drug trade. And perhaps some of the upswing reflected a short-term cultural shift — maybe the baby boom generation's rejection of authority — that encouraged violence.

Whatever the reason, the latest news — that violent crime in the U.S., although still high by first-world standards, is trending downward — seems consistent with our longer history. It is the upsurge of violent crime starting in the early 1960s and now ending that remains the larger puzzle.

"The Obama Plot for a Carbon Tax"

Posted: 18 Jun 2010 12:24 AM PDT

Robert Reich:

The Obama Plot for a Carbon Tax, by Robert Reich: ...Tuesday night, President Obama did not call for a tax on carbon. He didn't even ask the Senate to pass the cap-and-trade legislation that emerged from the House. Instead, he said there were lots of good ideas out there and he's willing to consider any of them — which seemed more like a way of declaring cap-and-trade dead.
But maybe the President has a more subtle strategy in mind. Here's what New York Magazine's John Heilemann thinks may be going on:
Lacking the 60 votes necessary for cap-and-trade, the administration plans to get behind a more modest conservation measure in the Senate, then push for a carbon pricing mechanism during the conference committee merger with the House bill — and do so during a lame-duck session after the midterms, when victorious Democrats will find it easier to make a tough vote and losing ones will be freed of political constraints.
It's plausible. ... But if that's his strategy it's a curious one considering Obama's great gift ... to stir the nation and mobilize it behind him. ... Closed-door conference committees, back-room deals, and lame-duck sessions keep the public out. And when the public is shut out, the big guys have even more clout.
Yet hard-boiled Washington hands I talk with disagree. They point to the $80 billion back-room deal that bought off Big Pharma for health care. They claim there's no other way to do business in Washington now because public opinion is too easily manipulated. They say ... deal-making behind closed doors ain't pretty but the ... only way to get close to a carbon tax or anything else that's good for America is to buy the bums off.
Maybe. But when the bums are paid off the public gets stuck with the tab. We'll be paying far more for our drugs under the new health care law than otherwise because of the deal with Big Pharma. Remember the back-room deal that bailed out Wall Street? ...

Call me old fashioned but I still think democracy is better than corporatist negotiation. And when we have a president as articulate and thoughtful as the one we now have — more capable than almost any occupant of the Oval Office in modern times to educate the public about real challenges and real solutions — he and his advisors do a disservice to the American people when they make the important deals in secret.

I thought the problems in the gulf might make passage of greenhouse gas legislation easier -- for one, those who argue that technology can always solve human induced environmental problems before they do much damage ought to be reexamining that belief -- but that doesn't seem to have happened. If anything, the chances of passing meaningful legislation have fallen recently. We may get some action from Congress, enough to allow them to claim in election ads that they did something. But I think it will take a clear signal that the world is warming up, some consequence that is obvious to everyone, before there is significant change.

"How 'Protectionist' Became An Insult"

Posted: 18 Jun 2010 12:15 AM PDT

Following up on Paul Krugman's belief that the recent "turn to austerity as a huge mistake," a belief I share, it's worth noting that bad thinking about economic policy can be very costly:

How 'Protectionist' Became An Insult, by Douglas Irwin, Commentary, WSJ: Eighty years ago, on June 17, 1930, President Herbert Hoover signed the infamous Smoot-Hawley tariff, significantly raising the duties on imported goods. Hoover and his congressional allies thought that reducing imports would strengthen the economy. Instead, it contributed to a collapse in world trade and the spread of protectionism around the globe. ...
The Smoot-Hawley tariff, conceived as a Republican ploy to gain the farm vote in the 1928 election, was a bad idea from the start. A tariff could not help farmers ... because most of them depended on exports. The nation sold one-half of its cotton, one-third of its tobacco, and one-fifth of its wheat and flour abroad. ... The farmers who did compete against imports—sugar and wool—were already protected with high duties. ...
More than a thousand American economists signed a petition against the tariff bill. ... No matter. Proponents such as New York Republican Congressman Frank Crowther pooh-poohed fears of reprisals and claimed the tariff would "raise the standard of American labor and American wages."
While most economists do not hold the Smoot-Hawley tariff responsible for the Great Depression itself, it contributed to a sharp decline in world trade. ... Even worse, it spawned protectionism abroad. ... The tariff helped ruin Cuba's sugar economy, which led to the overthrow of Cuba's pro-American government.
The damage wrought by this tariff had only one silver lining. Ever since, the ghosts of Reed Smoot and Willis Hawley (a Republican congressman from Oregon) have stood in the way of anyone arguing for higher trade barriers. They almost singlehandedly made the term "protectionist" an insult rather than a compliment. ...

links for 2010-06-17

Posted: 17 Jun 2010 11:04 PM PDT

The Correlation Between Debt Levels and Worried Markets

Posted: 17 Jun 2010 03:51 PM PDT

Here's an interesting observation from the latest economic outlook from Bharat Trehan of the the SF Fed:

looking only at current and projected debt levels, it becomes hard to distinguish the countries that markets are worried about from the countries markets are not worried about.

So the message for the debt-heads is that it's not just debt levels that matter. What else matters?:

History may matter as well ..., countries of most concern are those that have defaulted more frequently in the past. (See Carmen M. Reinhart and Kenneth Rogoff, This Time is Different...) None of those defaults are recent, but there were defaults that occurred during the Great Depression. That is relevant to the present because the financial shocks of the past few years are among the biggest that have happened since that time.

When was the last time the US defaulted?

Finally:

While there is some risk that Europe's sovereign debt crisis could get much worse, the most likely outcome is that it will not. In that case, its effects on the U.S. economy are likely to be small.

Weekly Claims for Unemployment Insurance Increase

Posted: 17 Jun 2010 11:17 AM PDT

We're moving sideways:

Initial1-6-17 

And a closer look (the red line is initial claims, the black line is the 4 week average):

Initial2-6-17

Unemployment Insurance weekly Claims Report: In the week ending June 12, the advance figure for seasonally adjusted initial claims was 472,000, an increase of 12,000 from the previous week's revised figure of 460,000. The 4-week moving average was 463,500, a decrease of 500 from the previous week's revised average of 464,000.

I'd make the usual plea that labor markets need more help, but what good would it do? Congress is not going to do anything substantial to try to help with the employment problem. Brad DeLong is equally frustrated:

I tell you. Writing the history of this episode is going to be next to impossible. "But why didn't they see?!?" is what the students are all going to ask. And I have no answer...

The austerians are winning, but at what cost? How does a stubbornly high unemployment rate increase business and market confidence?

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