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August 9, 2010

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Latest Posts from Economist's View

Paul Krugman: America Goes Dark

Posted: 09 Aug 2010 12:42 AM PDT

The consequences of "three decades of antigovernment rhetoric" are evident:

America Goes Dark, by Paul Krugman, Commentary, NY Times: The lights are going out all over America — literally. Colorado Springs has made headlines with its desperate attempt to save money by turning off a third of its streetlights, but similar things are either happening or being contemplated across the nation, from Philadelphia to Fresno.
Meanwhile, a country that once amazed the world with its visionary investments in transportation, from the Erie Canal to the Interstate Highway System, is now in the process of unpaving itself: in a number of states, local governments are breaking up roads they can no longer afford to maintain, and returning them to gravel.
And a nation that once prized education ... is now cutting back. Teachers are being laid off; programs are being canceled... And all signs point to even more cuts ahead. ...
But Washington is providing only a trickle of help, and even that grudgingly. We must place priority on reducing the deficit, say Republicans and "centrist" Democrats. And then, virtually in the next breath, they declare that we must preserve tax cuts for the very affluent, at a budget cost of $700 billion over the next decade.
In effect, a large part of our political class is showing its priorities: given the choice between asking the richest 2 percent or so ... to go back to paying the tax rates they paid during the Clinton-era boom, or allowing the nation's foundations to crumble ... they're choosing the latter. It's a disastrous choice..., those state and local cutbacks are a major drag on the economy, perpetuating devastatingly high unemployment.
It's crucial to keep state and local government in mind when you hear people ranting about runaway government spending under President Obama. Yes, the federal government is spending more, although not as much as you might think. But state and local governments are cutting back..., if you look at government spending as a whole you see hardly any stimulus at all. And with federal spending now trailing off, while big state and local cutbacks continue, we're going into reverse.
But isn't keeping taxes for the affluent low also a form of stimulus? Not so you'd notice. When we save a schoolteacher's job, that unambiguously aids employment; when we give millionaires more money instead, there's a good chance that most of that money will just sit idle.
And what about the economy's future? Everything we know about economic growth says that a well-educated population and high-quality infrastructure are crucial. Emerging nations are making huge efforts to upgrade their roads, their ports and their schools. Yet in America we're going backward.
How did we get to this point? It's the logical consequence of three decades of antigovernment rhetoric, rhetoric that has convinced many voters that a dollar collected in taxes is always a dollar wasted, that the public sector can't do anything right.
The antigovernment campaign has always been phrased in terms of opposition to waste and fraud — to checks sent to welfare queens driving Cadillacs, to vast armies of bureaucrats uselessly pushing paper around. But those were myths, of course; there was never remotely as much waste and fraud as the right claimed. And now that the campaign has reached fruition, we're seeing what was actually in the firing line: services that everyone except the very rich need, services that government must provide or nobody will, like lighted streets, drivable roads and decent schooling for the public as a whole.
So the end result of the long campaign against government is that we've taken a disastrously wrong turn. America is now on the unlit, unpaved road to nowhere.

Fed Watch: Waiting for Nothing?

Posted: 09 Aug 2010 12:33 AM PDT

What is the Fed likely to do at its meeting this week?:

Waiting for Nothing?, by Tim Duy: Incoming data give the Fed a green light to ease further. There is frequent chatter from unnamed sources that the Fed can do more and will consider more at this Tuesday's FOMC meeting. The public stance of Fed officials in recent weeks has tended to downplay the necessity for action at this juncture. This combination leaves the outcome of this week's FOMC meeting in doubt. My baseline expectation is that the FOMC statement acknowledges the weakness in recent data, but leaves the current policy stance intact. There is a nontrivial possibility that the Fed either implicitly or explicitly ends the policy of passive balance sheet contraction. I believe it very unlikely that the Fed sets in motion an expansion of the balance sheet.

Much has already been written on the disappointing employment report. Excluding Census workers, the economy added a decidedly pathetic 12k employees. Private sector job growth came in at just 71k, while state and local governments shed 48k employees. While some commentators have highlighted the 630k private sector gain since the beginning of the year, the bulk of that gain - 399k - came in March and April. Since then, the private sector has added a scant 51k jobs a month. Enough jobs to be sustainable. Maybe, although this is even questionable given the decline in temporary help hiring, which may signal even softer numbers in the months ahead. But even if sustainable, certainly extremely vulnerable to negative shocks. And even if sustainable, the current rate is sure to decrease unemployment only if job seekers continue to exit the labor force.

Indeed, the labor force numbers turned south, sending the participation rate down as well. Although the technical recovery - at least as measured by GDP growth - has been in place for four quarters, participation rates still fall short of year ago levels. The gains of earlier this year appear to be as ephemeral as Census hiring. Indeed, it is likely that hiring, not any broader improvement in labor markets, drew people back into the labor force. Who says the government can't create jobs?

Not that below trend job growth should be any surprise given the trend in output growth. The math is easy on this one - the pace of growth has decelerated sharply since the end of 2009. Job growth is simply following this trend. Nor is their much hope for a substantial reacceleration. Factors that supported Q2 growth, especially inventory correction, residential investment, and government spending, are all expected to wane as the year progresses, while consumer spending growth is expected to remain lackluster. In that environment, it is even doubtful that the solid run of equipment and software gains can be sustained.

In reality, the story is effectively unchanged from four quarters ago. It has always been the case that meaningful labor market recovery required growth of real final sales of at least three times the numbers we have seen. That just is not going to happen without substantially more stimulus efforts.

Are such efforts forthcoming? I think that everyone has pretty much written off any possibility of fiscal stimulus coming to the rescue anytime soon. To be sure, there may be a few billion here, a few billion there that show up, but no one expects any serious effort to, for example, attempt to close the output gap. Administration efforts have shifted to trying to spin the data as a solid recovery. Along those lines, we saw US Treasury Secretary Timothy Giethner lift the "Mission Accomplished" move right out of the Bush II Administration's playbook with his NYT editorial, which can be summarized as "growth is positive, we did that, quit whining because you don't have a job." Simply put, if the Administration is content with the numbers we see, they are effectively content with a sustained, substantial output gap and the associated unemployment. They must be, as there is no urgency to do more. The pendulum has shifted. The Administration must feel it necessary to believe the recovery is sufficient and intact, otherwise they will be accepting the Republican claim that the stimulus package failed. Moreover, I think they genuinely believe that the deficit needs to be brought under control sooner than later. This, I think, is the problem of an Administration that is a reload of the Clinton Administration. They believe Rubinomics will work its magic again, rather than recognize that the today's economic challenges are very different than those of the mid-1990's.

With fiscal policy off the table, our last hope is monetary policy. It seems clear that persistent unemployment tilts the odds towards deflation, but the Fed appears to be like a deer stuck in the headlights. Like Geithner, Federal Reserve Chairman Ben Bernanke showed no urgency in his speech last week to accelerate the path to achieving the Fed's dual mandate. Moreover, leadership at the Fed may be as out of touch as that in the Administration. As Mark Thoma and Dean Baker note, Bernanke expects higher wages to support spending in the months ahead, despite the weak incoming wage data. Remember - Bernanke gave that speech after having the weekend to dissect the GDP report.

Presumably Bernanke is referring to data such as the following:


While Washington appears content with the numbers as long as they are trending in the right direction, I believe the focus should be the gap between where personal income less transfer payments would have been in absence of the recession, and the likely trajectory now. That trajectory, in my opinion, is clearly subpar. Enough so that it fills me with an increasing sense of urgency. This is lost income for Americans. Income that pays for food and shelter. Medical care and vacations. Retirement and college savings. The costs of failure are immense.

Did the July employment report shift the odds toward more easing? It should, but I believe the most likely scenario is that it merely confirms the Fed's priors - that the pace of labor market improvement will be glacially slow. They have never expected anything else. Indeed, to what extent is the data really that different from those expectations. It seems to me that what is most different is that the upside risk is essentially off the table - the V is not meant to be. Does the magnitude of the downside risk warrant additional action? Yes, with the V-shaped recovery off the table, so too are the "risks" of additional easing, notably the risk of higher inflation. Fed leadership, however, appears to view the downside risks as relatively limited giving the amount of stimulus (expansion of the balance sheet and low interest rates) already in place. Any more is a venture into the unknown, a trip that is still unwarranted in the absence of economic freefall.

That said, despite Fedspeak that appears resistant to further easing, the press has been fueling speculation that more easing - albeit largely symbolic - is imminent. From where does this chatter emanate, other that unnamed sources? Perhaps from high ranking staff. Word on the street is that Fed staff are increasingly frustrated with the lack of action from leadership. Why exactly is Bernanke showing such deference to the more hawkish elements such as Kansas City Federal Reserve President Thomas Hoenig, Dallas Federal Reserve President Richard Fischer, and Philadelphia Fed President Charles Plosser? If you seek more easing, you are not alone. Board staff are increasingly your allies.

Why the lack of additional action? A set of possible impediments:

  • As described above, incoming data is not sufficiently different from the Fed's forecast to justify additional action. This is my primary reason to expect little action from the Fed tomorrow.
  • Similarly, additional action requires nonconventional monetary policy, of which the impacts are unknown. I think one of the potential impacts of concern is possibility that additional easing fuels a new asset bubble, in addition to the specter of inflation.
  • Concern that additional easing will be interpreted as deficit monetization, and thereby unhinge inflation expectations.
  • Fears that additional easing will trigger a disorderly devaluation of the Dollar. Of course, this may be what exactly what we need.
  • Possibly that more action will be a repudiation of the Administration's claim that the economy in on the mend.

That said, the internal and external pressure suggests the possibility for a small change at tomorrow's meeting. From the Wall Street Journal:

At their policy meeting Tuesday, Fed officials plan to discuss whether to take the small but symbolically important step of reinvesting proceeds from its portfolio of mortgage-backed securities to maintain support for the economy. The weak jobs numbers add to the case for taking action, though officials must assess whether taking even a tiny step could create expectations for larger actions in coming months.

Note the final sentence - the concern that more now is essentially a guarantee for more later. If the Fed eases more now, with the data largely in line with there already weak forecast, how could officials argue against additional easing later when the data continues to support their forecast?

Bottom Line: The incoming data appears largely consistent with the Fed's priors - especially expectations of glacially slow improvement in the labor market. Yet the probability of any upside risk to the forecast have diminished markedly. The V-shaped recovery has not emerged. The elimination of that upside risk argues for additional easing, but the Fed appears hesitant to do more. Uncertainty about the effectiveness of additional easing argues against more action, especially given relatively quiescent financial markets and positive, albeit lackluster, growth. Moreover, any additional action now is essentially a promise to do more later, even if growth remains along its current trajectory. All of these points argue against additional easing tomorrow, and that remains my baseline scenario. The case becomes muddied by internal, staff level pressure to do more now, combined with rising expectations of imminent easing given the steady flow of leaks to the press. This opens the possibility of a small policy adjustment that eliminates that passive reduction of the balance sheet. Any more is off the table.

links for 2010-08-08

Posted: 08 Aug 2010 11:01 PM PDT

"The Myth of the Social Security Shortfall"

Posted: 08 Aug 2010 10:17 AM PDT

This is from Michael Hiltzik at the LA Times:

The myth of the Social Security system's financial shortfall, by Michael Hiltzik, Commentary, LA Times: The annual report of the Social Security Trustees ... has become an occasion for hand-wringing and crocodile tears over the (supposedly) parlous state of the system's finances. ... Within minutes of its release, some analysts were claiming that it projected a "shortfall" for Social Security this year of $41 billion.
Before we get to the bogus math behind that statement ... let's look at the encouraging findings... The trustees indicated that the program has made it through the worst economic downturn in its life span essentially unscathed. In fact, by at least one measure it's fiscally stronger than a year ago...
That brings us back to this supposed $41-billion "shortfall," which exists only if you decide not to count interest due of about $118 billion. And that, in turn, leads us to the convoluted subject of the trust fund, which for some two decades has been the prime target of the crowd trying to bamboozle Americans into thinking Social Security is insolvent, bankrupt, broke — pick any term you wish, because they're all wrong. ... Despite what Social Security's enemies love to claim, the trust fund is not a myth... It's real money, and it represents the savings of every worker paying into the system today. So I'm going to train a microscope on it. ...
The truth is that there are two separate tax programs at work here — the payroll tax and the income tax... The first pays for Social Security and the second for the rest of the federal budget. Most Americans pay more payroll tax than income tax. Not until you pull in $200,000 or more ... are you likely to pay more in income tax than payroll tax. ...
Since 1983, the money from all payroll taxpayers has been building up the Social Security surplus, swelling the trust fund. What's happened to the money? It's been borrowed by the federal government and spent on federal programs — housing, stimulus, war and a big income tax cut for the richest Americans, enacted under President George W. Bush in 2001. In other words, money from the taxpayers at the lower end of the income scale has been spent to help out those at the higher end. That transfer — that loan, to characterize it accurately — is represented by the Treasury bonds held by the trust fund.
The interest on those bonds, and the eventual redemption of the principal, should have to be paid for by income taxpayers, who reaped the direct benefits from borrowing the money. So all the whining you hear about how redeeming the trust fund will require a tax hike we can't afford is simply the sound of wealthy taxpayers trying to skip out on a bill about to come due. The next time someone tells you the trust fund is full of worthless IOUs, try to guess what tax bracket he's in. ...
The trust fund may not last forever, but reports of its demise are certainly premature. The trustees say it will be drawn down to zero in 2037, at which point the program will only have enough money coming in from taxes to pay 78% of the benefits... So sometime in the next quarter-century — but by no means right now — does anything have to be fixed...?
That 2037 deadline ... is a moving target. It's based on long-term projections, which become more uncertain the further out you look. ... It has held steady at 2037 for two years despite the downturn, but that's still better than the projection in 1998, which was for exhaustion in 2032.
In short, if the new trustees report gets examined wisely and responsibly, it should put an end to all the current talk about raising the retirement age or cutting benefits. Social Security doesn't contribute a dime to the federal deficit, and in these days of market stagnation and cutbacks in pensions, it has never been more important to millions of Americans. The Pete Petersons of the world should find themselves a different target.

"Doubletalk Express"

Posted: 08 Aug 2010 10:08 AM PDT

Paul Krugman explains why critics of his charge that Paul Ryan's budget proposal is nothing more than "flimflam" are missing the point:

Doubletalk Express, by Paul Krugman: OK, here's Ryan's reply. As I predicted, a snow storm of words, dodging the math questions.

Notice that Ryan does not address the issue of the zero nominal growth assumption, and how that assumption — not entitlement reforms — is the key to his alleged spending cuts by 2020.

I also see that Ryan is perpetuating the runaround on revenue estimates. If you read either this article or his original response to the Tax Policy Center, you could easily get the impression that nobody would do a revenue estimate, that CBO said it was JCT's job, and JCT balked. Even Nate Silver has fallen for this. But read the original response carefully:

...Staff originally asked CBO to do a long-term analysis of both the tax and spending provisions in the Roadmap. However, CBO declined to do a revenue analysis of the tax plan, citing that it did not want to infringe on the traditional jurisdiction of the JCT. JCT, however, does not have the capability at this time to provide longer-term revenue estimates (i.e. beyond 10 years) [my emphasis]. Given these functional constraints for an official analysis, staff relied on its original work with the Treasury Department and other tax experts to formulate a reasonable expected path for long-term revenues given the tax policies in the Roadmap combined with the economic growth projections available at the time.

In other words, Ryan could have gotten JCT to do a 10-year estimate; it just wouldn't go beyond that. And he chose not to get that 10-year estimate. So it was Ryan's choice not to have any independent estimate of the 10-year revenue effects.

And bear in mind that the Tax Policy Center critique was five months ago. If Ryan disagreed with the center's estimates, he could have gone back to the JCT to get a different set of estimates. He never did.

By the way, if you look at the artful way his excuses are constructed — giving the false impression that he couldn't get a revenue score for love nor money — how is that not flimflam?

Finally, why is Ryan denying that he proposes dismantling Medicare as we know it? Replacing the system with vouchers surely fits that description.

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