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August 4, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View

Galbraith: Expand Social Security and Medicare

Posted: 04 Aug 2010 12:42 AM PDT

Jamie Galbraith says the talk about cutting entitlements is all wrong. These programs should be expanded, not trimmed back:

James K. Galbraith Champions The Beast Manifesto, by James K. Galbraith: In the Great Crisis, the United States lost about eight million private jobs. ... Very few lost jobs have been replaced... Two million of the lost jobs are in construction, which faces a long slump. Three million were lost in manufacturing, which is down 40 percent since 2000, and those jobs likely won't ever return. Unemployment rates for Black, Asian, and Latino workers have all doubled. The average duration of unemployment has risen to an astonishing 35 weeks, with nearly half of all unemployed out of work for almost a year.
So: Jobs are Priority One. But very little is being done. And what little is done is hotly contested. Even extending unemployment insurance proved difficult—and UI, while necessary, is not a jobs program. ...
[E]conomists ... rightly argue... for stronger action—action that would increase public budget deficits now. ...[M]any argue that we must make cuts today, effective at a later time, to offset the "stimulus." Since the major programs which are authorized today for later effect are Social Security and Medicare, this translates to "cutting entitlements" in order to bring "long-term budget deficits under control." This is a pernicious idea...
So what are the real effects of cutting Social Security and Medicare?
Medicare pays doctors' bills for the old. It pays out at lower rates than does private insurance for working people. Cutting Medicare would mean two things: less health care for the elderly, and therefore more financial stress on their families. And more health care costs overall, as people substitute with private insurance for the public cuts. Both of these are very bad ideas.
Social Security pays to keep working people (and their dependents and survivors) out of poverty when they are old. It spreads its benefits to all who have worked, whether they have children who would otherwise support them or not. The payroll tax spreads the burden to all working people, whether they would otherwise be supporting elderly parents or not. Both of these transfers are fair, modest, and sustainable. Cutting Social Security would simply create more poor elderly—those who could not turn to their children—and more stressed working families—those with parents in need. Both of these are very also bad ideas.
In fact, the right response to the crisis is to expand, not cut, both Social Security and Medicare.
The reality is, we are never going to make up good new jobs for everyone who has been hit. (I'd love to be the next Harry-Hopkins-and-Harold-Ickes-combined, but I'm not going to get the job.) So let's face reality, and make some tough decisions about who we want to be jobless: the relatively old or the very young. Seen this way, it's an easy choice.
There are many older workers who've already worked hard jobs for many years. They would love to retire. But they don't, because early retirement on Social Security is very costly: you lose benefits every month over your entire future life, unless you hang on to the regular retirement age. We should give these people a break, and lower, not raise, the full-benefit Social Security retirement age—say, to 62 for the next three years. This would give millions a chance to get out, if they want to.
Similarly for Medicare. There are many older workers who have health needs, and who work on only because they can't afford to lose their employer-based insurance. Let them out! In the crisis, I proposed cutting the Medicare-eligibility age to 55 (and the Senate almost included this in the health care reform bill). It's still a good idea, but something more moderate, such as opening a three-year window for early exits, would be better than nothing.
Encouraging early retirements would mean that young people—just out of school, with fresh skills, good health, and high energy—would get the jobs they need now. They would not be stuck waiting, or spinning their wheels in school, for years and years. Meanwhile, the retirees, supported by Social Security and Medicare, would provide a continuing stable support to total demand, creating jobs for others as they get older.
This is the way the economy should work. When we have older people, we must care for them, and the best way to do that is to give them the resources to support themselves. There is no "burden problem" as our economy is plenty productive for the working population to support the elderly in modest comfort, particularly if we include some of our truly wealthy in the tax base.
Care for the elderly, energy, climate change, the Gulf of Mexico catastrophe, our decayed infrastructure, public health—these are real issues. Let's deal with them. The "long-term budget deficit" is a phony problem, ginned up by politicians, some economists, and the historic enemies of Social Security and Medicare on Wall Street. For God's sake, let's not sacrifice our most successful social programs to the hysteria we're hearing from them.

"As Long as They Don’t Have Children"

Posted: 04 Aug 2010 12:24 AM PDT

The gender pay gap has narrowed, but it hasn't been eliminated:

A Market Punishing to Mothers, by David Leonhardt, NY Times: ...Men and women are not identical, of course. Many more women take time off from work. Many more women work part time at some point in their careers. Many more women can't get to work early or stay late.
And our economy exacts a terribly steep price for any time away from work — in both pay and promotions. People often cannot just pick up where they have left off. Entire career paths are closed off. The hit to earnings is permanent.
The fact that the job market has evolved in this way is no accident. It's a result of policy choices. As Jane Waldfogel, a Columbia University professor who studies families and work, says, "American feminists made a conscious choice to emphasize equal rights and equal opportunities, but not to talk about policies that would address family responsibilities."
In many ways, the choice was shrewd. The feminist movement has been fabulously successful fighting for antidiscrimination laws that require men and women to be treated equally. These laws have not eliminated the blatant sexism of past decades — think "Mad Men" — but they have beaten back much of it.
As a result, outright sexism is no longer the main barrier to gender equality. The main barrier is the harsh price most workers pay for pursuing anything other than the old-fashioned career path.
"Women do almost as well as men today," Ms. Waldfogel said, "as long as they don't have children." ...

Are Inflation Expectations Stable?

Posted: 04 Aug 2010 12:15 AM PDT

David Beckworth:

Inflation Expectations Are Not Stable!, by David Beckworth: Many observers, including myself, have been puzzled by the Fed's lack of urgency in recent months over the apparent slowing down of aggregate demand. The one thing monetary policy is capable of doing is stabilizing total current dollar spending, but it isn't and this inaction effectively amounts to a tightening of monetary policy. There have been many reasons given for this seeming complacency by the Fed: internal divisions over policy, fear of political backlash, opportunistic disinflation, fear of awakening bond vigilettentes, and sheer exhaustion. Another potential reason is that the Fed simply doesn't see this aggregate demand slowdown in the data. I actually considered this possibility some time ago but never put too much weight on it since this is the Federal Reserve after all. It has far more resources than I do and surely sees what I see in the data. However, after Fed Chairman Ben Bernanke's speech yesterday I am beginning to wonder if the Fed is actually missing something in the data. In particular, I was stunned to read this sentence in the speech:

Meanwhile, measures of expected inflation generally have remained stable.

Uhm, unless I have been living in parallel universe and just got phased into a different one this statement is completely wrong. Inflation expectations, as I show below, have been persistently declining since the start of 2010. Not only that, but Bernanke's claim that inflation expectations are stable has huge policy implications. It is widely understood that expectations of future inflation are a key determinant of current aggregate demand. If expectations of inflation are stable as Bernanke claims then aggregate demand growth should also be relatively stable. On the other hand, if inflation expectations are falling and have been doing so for some time as I claim then it is likely that current aggregate demand growth also has been falling.*

If Bernanke really believes inflation expectations are stable then one must give him credit for implementing monetary policy in a manner consistent with that understanding. However, I simply cannot understand how he or anyone else at the Fed could hold such a view. The best indicators of inflation expectations have been screaming red alert for some time now. How the Fed could have missed this red alert is unfathomable to me, but on the off chance that they have and are reading this post I ask that they please take note of the following set of figures.

The first figure shows the term structure of expected inflation over the first half of 2010. The plotted curves in the figure show the average expected inflation rate at various yearly horizons for the first six months of 2010. The data comes from the Cleveland Fed. This figure makes clear that inflation expectations have been trending down across all horizons since the start of the year. Note that the 1-year horizon has seen inflation expectations drop by about 100 basis points. (Click on figure to enlarge)

Now to put this figure into perspective let's look at the term structure of inflation expectations the last time expected inflation fell rapidly and caused aggregate demand to tank. Yes, that would be the late 2008, early 2009 period. Here is the figure for this time. Notice any similarities? (Click on figure to enlarge.)

Here too we see a decline across all horizons with the 1-year having the sharpest decline. Now current inflation expectations have not fallen as much as these above but they are persistently falling. And we know from the late 2008, early 2009 experience what happens to aggregate demand when inflation expectations are allowed to continue to fall: you get the greatest decline in nominal spending since the Great Depression.

Now the dire picture painted by the Cleveland Fed data is wholly corroborated by the inflation expectations implied by the the difference between the nominal interest rates on regular treasury securities and the real interest rates on treasury inflation protected securities (TIPS). This measure of inflation expectations is graphed below using daily data on 5-year treasuries for the period January 4, 2010 - July 29, 2010: (Click on figure to enlarge.)

Here again there is a clear downward trend. Inflation expectations are falling and there is currently no end in sight. Given all of this evidence, how can Ben Bernanke assert that inflationary expectations are stable? I am truly bewildered by that claim. I hope Fed officials who have read this far are also bewildered and are now reconsidering their views. Let me be very clear what all of this implies: by failing to stabilize inflation expectations the Fed is effectively tightening monetary policy at a most inopportune time. I hope this is not how the Fed wants to be remembered.

links for 2010-08-03

Posted: 03 Aug 2010 11:03 PM PDT

"Bernanke Says Rising Wages Will Lift Spending"

Posted: 03 Aug 2010 10:08 AM PDT

When I saw this:

Federal Reserve Chairman Ben S. Bernanke said rising wages would probably spur household spending in the next few quarters, even as weak job gains dragged down consumer confidence.

I wondered what Bernanke was talking about. Dean Baker had the same reaction:

The NYT headline told readers that, "Bernanke Says Rising Wages Will Lift Spending." Real wages have been virtually unchanged over the last year. Let's hope that the NYT got the story wrong and that Bernanke knows this.

What do the latest data show?:

Personal incomes were ... flat in June as private wages and salaries fell.

There have been several instances lately where things Bernanke has said make me wonder how familiar he is with what recent data are telling us about the economy. Lately the Fed seems more interested justifying why it doesn't need to do anything more to boost the economy rather than grappling with actual data showing that the economy needs more help from the Fed. Maybe Bernanke is right and the next few quarters will show rising wages leading to higher spending and that will lead to a more robust recovery, but there's nothing in the current data to give me confidence that is going to happen and I don't think policy should be based upon this expectation.

Geithner's "Happy Talk"

Posted: 03 Aug 2010 08:55 AM PDT

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Timothy Geithner:

Welcome to the Recovery

Dean Baker:

The US economy is not yet on the road to recovery

I responded negatively the first time Geithner came out with his "happy talk." My response prompted Brad DeLong to say "I would put it much less politely: have Tim Geithner and Barack Obama lost their minds?" Paul Krugman makes the same point I made in response to Geithner's latest attempt to convince us that the administration has the economy on the path to recovery:

we clearly should be doing more; but obstructionism from Republicans is preventing action. ... So one way to play this politically would be to tell the truth, and try to place the onus on Republicans, accusing them of perpetuating high unemployment. Instead, however, the administration has decided to engage in happy talk, saying that it's all good. Do they really think this will work? ... I live in fairly rarefied circles..., and even so I know a number of people whose lives have become a living hell: men in their late 50s who fear they'll never work again, small business owners who have lost everything. Does the administration really believe that it can convince these people that it's all on the mend? I just don't get it.

I don't get it either. Robert Reich sees trouble ahead:

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Whatever the outcome of the upcoming midterm elections, the activist phase of the Obama administration has likely come to a close. The president may have a fight on his hands even to hold on to what he's already achieved because his legislative successes have been large enough to fuel strong opposition but not big enough to strengthen his support. The result could be disastrous for him and congressional Democrats. ...
A stimulus too small to significantly reduce unemployment, a TARP that didn't trickle down to Main Street, financial reform that doesn't fundamentally restructure Wall Street, and health-care reforms that don't promise to bring down health-care costs have all created an enthusiasm gap. They've fired up the right, demoralized the left, and generated unease among the general population. ...
And they are now patting themselves on the back for their accomplishments. Again, "Do they really think this will work?"

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