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September 30, 2010

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"The Ghost of Full Employment"

Posted: 30 Sep 2010 01:26 AM PDT

Should the government guarantee a job for anyone who wants one?:

The Ghost of Full Employment, by Jefferson Cowie, TAP: After nearly two years of bad economic news,... the ... government's direct response to the jobs and poverty crisis has ... drawn only from the narrow menu of economic fundamentalism -- tax cuts and stimulus. Now that gross domestic product is positive, the unemployment problem is mostly considered "structural" -- a skills mismatch -- and thus beyond our capacity to solve.
Yet not that long ago, in the midst of another long-term economic meltdown, politicians dared to think beyond the idea that growth alone would solve all problems. National leaders, including mainstream politicians in both parties, went so far as to propose a federally mandated and legally enforceable right to a job for every American.
That's right -- the federal guarantee of a job.
Their premise? That people's livelihoods are too important to be left to market mechanisms. ... In 1974, when the United States faced another period of double-digit unemployment and global economic crisis,... Sen. Hubert Humphrey and Rep. Augustus Hawkins ..., teamed up to advance a seductive idea: national planning that wouldn't simply promote growth, support Wall Street, or prop up consumption but ensure a job for every person. ...
Humphrey and Hawkins looked to revive Franklin Roosevelt's famous Economic Bill of Rights, the core of which was, as FDR explained in 1944, "the right to a useful and remunerative job in the industries or shops or farms or mines of the nation." The aggressive Keynesianism of the Humphrey-Hawkins Act was simple in concept: Federal policy should promote full employment..., and if that failed, government would then be triggered as the employer of last resort. ...
To contemporary ears, the idea of a federally guaranteed job sounds like crazy talk...
Today, as a similar economic malaise haunts the land, we ... need ... spirit and imagination. Despite its failure to deliver much of anything, the Humphrey-Hawkins Act serves as a striking example of national leaders thinking boldly about the collective economic well-being of the citizenry. ...
President Barack Obama's failure is not on specific policy grounds; it is in his more significant inability to help the nation reimagine a constructive role for the state. ...
The boldness of the Humphrey-Hawkins Act remains a forgotten artifact of a bygone political era, buried deep in the ideological layers of the post-Reagan world. Perhaps it's time to dig it up and ask ourselves if ... we actually have the courage and imagination to govern ourselves.

I can imagine how to do this in a large, one-shot, New Deal kind of way in times where there is a substantial amount of idle labor, but it's harder to imagine how to design a job guarantee program that would operate on an ongoing basis.

Depression Economics Needs to Become a Regular Part Macroeconomics

Posted: 30 Sep 2010 12:42 AM PDT

I have a new post at MoneyWatch:

Depression Economics Needs to Become a Regular Part Macroeconomics: ... In recent decades, people studying short-run stabilization policy have focused mainly on how monetary policy can be used to fine tune the economy during relatively normal times. Fiscal policy and "depression economics" were not part of the mainstream research agenda.

But how to manage the economy during severe recessions and depressions -- a time when fiscal policy is generally a key component of the policy response -- needs to be an integral part of the research agenda in macroeconomics, and a larger part of the curriculum at the graduate and undergraduate levels. ...

But will that happen?

Federal Reserve Board Nominations Confirmed

Posted: 30 Sep 2010 12:33 AM PDT

Brad DeLong reports:

Finally..., by Brad DeLong: At least one year late and many dollars short:

Nominations Confirmed: September 29: These nominees were confirmed by Voice Vote:

Sarah Bloom Raskin, of Maryland, to be a Member of the Board of Governors of the Federal Reserve System for the unexpired term of fourteen years from February 1, 2002

Janet L. Yellen, of California, to be a Member of the Board of Governors of the Federal Reserve System for a term of fourteen years from February 1, 2010

Janet L. Yellen, of California, to be Vice Chairman of the Board of Governors of the Federal Reserve System for a term of four years

We need a very different senate.

Will this change the balance of power enough to make a big difference? I hope so, but I'm not so sure that it will.

links for 2010-09-29

Posted: 29 Sep 2010 11:02 PM PDT

"Employers Aren’t Trying Hard to Hire"

Posted: 29 Sep 2010 12:19 PM PDT

Mark Whitehouse at Real Time Economics notes that if the unemployment problem is mainly structural rather than cyclical, hiring intensity ought to be going up, not down::

Employers Aren't Trying Hard to Hire, by Mark Whitehouse: Unemployed workers have a point when they complain that companies aren't really trying to fill open jobs, a new study suggests.
In recent months, policy makers have puzzled over the inadequate rate at which job searchers and job vacancies are coming together. ...
Explanations have tended to focus on workers. Extended unemployment benefits could make people less willing to take jobs that pay poorly or don't quite fit. Mortgage troubles and employed spouses could make it harder for people to move for work. People might not have the right qualifications for the jobs available.
A new paper, though, suggests employers themselves are at least part of the problem. The authors — Steven Davis of Chicago Booth School of Business, R. Jason Faberman of the Philadelphia Fed and John Haltiwanger of the University of Maryland — take a deep dive into Labor Department data and come up with an estimate of what they call "recruiting intensity," a measure of employers' vacancy-filling efforts including advertising, screening and wage offers.
Their finding: Employers haven't been trying as hard as they usually do. Estimates provided by Mr. Davis suggest that over the three months ending July, recruiting intensity was about 12% below the average for the seven years leading up to the recession. Their lack of effort probably accounts for about a quarter of the shortfall in the hiring rate.
Depressing as it might seem, the finding is in some ways encouraging. It suggests that the trouble with hiring might be more a "cyclical" function of low business confidence than a chronic, "structural" ailment that will last for years to come.

In other news, some members of the Fed are finally waking up:

Fed's Kocherlakota revises down forecast, by CalculatedRisk: Minneapolis Federal Reserve President Narayana Kocherlakota spoke in London today. He has been one of more optimistic Fed presidents, and he revised down his forecast today ...

Kocherlakota ... still seems too optimistic, but he is moving in the right direction.

And on the coming QE2:

My own guess is that further uses of QE would have a more muted effect on Treasury term premia. Financial markets are functioning much better in late 2010 than they were in early 2009. As a result, the relevant spreads are lower, and I suspect that it will be somewhat more challenging for the Fed to impact them.

...It is interesting that certain Fed presidents are now revising down their overly optimistic forecasts - all but guaranteeing QE2 (even if he thinks it will have little impact).

If only they'd listen:

...presently the Fed does not feel the benefits [of further action]outweigh the costs, and it remains in "wait and see" mode.
My first question for the Fed would be this. To date, you have overestimated the strength of the recovery at every step. ... Given the forecasts to this point, all of which have been too rosy, I would place more weight on the downside, quite a bit more...
So, in my view, the Fed should drop its relatively rosy forecast for the recovery and take more account of the downside risks, the Fed should place more weight on the unemployment problem, and have less fear of inflation — the risk right now is in the other direction. Making these adjustments that would compel the Fed to action instead of "waiting and seeing," a policy that, to date, has kept the Fed from getting out in front of the economy's problem.
It's time for the Fed to stop playing catch-up as it waits and sees that its forecasts were wrong, and and take the steps needed to boost the economy. ...


People need jobs, or more social support until jobs appear, and both the Congress and the Fed are failing to do all that they can do to help. Apparently, imagined fears of deficits and inflation are more important than the real struggles of the unemployed.

September 29, 2010

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"The Easy and Legal Way to Stop Currency Manipulation"

Posted: 29 Sep 2010 01:17 AM PDT

Daniel Gros:

A reciprocity requirement: The easy and legal way to stop currency manipulation, by Daniel Gros, Vox EU: The endless discussions about global imbalances, and China's supposedly self-serving exchange-rate policy, have for a long time, resembled discussions about the weather; everybody talked about it, but nobody did anything. This is now changing. ...
The US political system has become so frustrated by this situation that Congress is now seriously considering whether to label the country a "currency manipulator" and impose trade sanctions which would be illegal under WTO rules and threaten to throw the global trading system into turmoil.
But there is another way. The US (and Japan) could easily prevent the Chinese Central Bank from continuing its intervention policy without breaking any international commitment. The US and Japan only need to invoke the principle of reciprocity and declare that they will limit sales of their public debt henceforth to only include official institutions from countries in which they themselves are allowed to buy and hold public debt. Instead of the "moral suasion", tried in vain by the Japanese, the Chinese authorities would just be told that they can buy more US T-bills Japanese bonds only if they allow foreigners to buy domestic Chinese debt.
Imposing such a "reciprocity" requirement on capital flows would be perfectly legal..., there are no legal constraints on the impositions of capital controls.
This "reciprocity" measure would of course be equivalent to a very specific form of controls on capital inflows. Capital controls are always somewhat leaky, but not in this case because the Chinese Central Bank would find it difficult to hide its huge investments going through western financial institutions. No reputable financial institution would dare to become a hidden intermediary for the Chinese given that no institution bidding for hundreds of billions of T-Bills would take the risk of secretly fronting the Chinese government...
As a practical matter the introduction of the reciprocity requirement should provide a grand fathering of the existing stocks of Chinese official assets abroad (already above $2,500 billion). However, the Central Bank of China would not be able to continue its interventionist policy – and that is what counts for foreign exchange markets.
The immediate objection is, "What if the Chinese react emotionally and dump their holdings of T-Bills and US agency debt on the market? Would that not disrupt the US government debt market?" This "dumping" is not as simple as it sounds. What assets would the Chinese Central Bank buy when it sells T-Bills? There are not many choices if the Chinese Central Bank wants to dispose of thousands of billions of dollars. Either it holds cash in the form of bank deposits (this would mean a massive refinancing of the US banking system) or it buys other US assets (which would mean a refinancing of the US private sector). Moreover, the reciprocity requirement could be extended to private debt instruments as well. But this is probably not necessary as the Chinese Central Bank is unlikely to invest hundreds of billions of dollars (or euro) in private assets. Buying euro assets would of course constitute an alternative, but this does not appear too attractive at present, and would be prevented by the Europeans adopting the same reciprocity requirement.
The US might hesitate to impose a reciprocity requirement for sales of its public debt because (in contrast to Japan) it needs foreign financing for its public sector deficit. But this also constitutes the litmus test for the sincerity of the US position which cannot have it both ways, i.e. Chinese financing of its external deficit and an end to currency intervention. The choice is now up to the US, it can easily stop Chinese interventions without violating any international commitment if it is willing to rely on domestic savings to finance its own fiscal deficits.

I don't think most members of Congress would be willing to take the large risk they would attach to imposing reciprocity. But how large are the risks? Paul Krugman:

given the fact that we're in a liquidity trap, a decision by China to buy fewer of our bonds would actually be doing us a favor — it would weaken the dollar, and help our exports.

Here's the latest: 

House Is Likely to Pressure China to Raise Renminbi: The House is expected to give the Obama administration another tool in its diplomatic pouch to pressure China to let its currency rise in value, reflecting growing concern around the country over the loss of manufacturing jobs, persistently high unemployment and a rising trade deficit.
In what is likely to be one of Congress's last significant measures before the election, the House will vote Wednesday on a symbolic but not insignificant measure threatening China with punitive tariffs on its imports to the United States. ...
But it is unclear whether the legislation, which faces cloudy prospects in the Senate, will succeed this time in prodding a China that has become more self-confident on the world stage. ...


"The legislation will strengthen the administration's hand in its negotiations with China, but also risks provoking a strong backlash," said Eswar S. Prasad ... of ... Cornell and a former head of the International Monetary Fund's China division. "Ultimately its short-term effect is likely to be more symbolic than substantive." ...

Professor Prasad ... warned that if the Congressional proposal went forward, China could retaliate by limiting American imports or denying American manufacturers and financial institutions "the coveted prize of access to rapidly growing Chinese markets."

A policy that is "more symbolic than substantive" is my expectation as well.

"Can business afford Jim DeMint?"

Posted: 29 Sep 2010 01:08 AM PDT

Steven Pearlstein says the business community is "about to create a political monster":

Can business afford Jim DeMint?, by Steven Pearlstein, Commentary, Washington Post: For all you in the business community who are rooting for a Republican victory in the November elections, a bit of unsolicited advice: Be careful what you wish for.
You're probably thinking that with Republicans in control of one or both houses of Congress, business will be back on top again, setting the agenda... In reality, what you'll get is political paralysis for the next two years, and quite possibly longer than that.
Just ask Sen. Jim DeMint ... the new Republican kingpin and enforcer on Capitol Hill. DeMint told Bloomberg Businessweek last week that his goal for the next Senate is "complete gridlock." ... For DeMint, this is war. The only acceptable outcome is total victory...
I know what you're thinking. You're thinking that, once the heat of the election season has passed, cooler heads will prevail... Don't kid yourselves. You're about to create a political monster that you can't control...
It's convenient to blame the media, or cable news or the blogosphere for this state of political polarization. To that list of culprits I'd add you - business leaders who, in order to score modest wins in legislative or regulatory battles, make common cause with those who trample on the truth, poison the political conversation, demonize opponents and undermine respect and support for government.
Criticize President Obama - that's easy, guys. But is there anyone there at the Business Roundtable with the courage to criticize Jim DeMint?

With respect to gridlock -- I'm more worried about Obama and other Democrats trying to overcome gridlock and, in the name of centrism and bipartisanship, giving too much away.

links for 2010-09-28

Posted: 28 Sep 2010 11:02 PM PDT

"Congress is Lame"

Posted: 28 Sep 2010 06:48 PM PDT

Ryan Avent says the institutional structure of Congress inhibits good policy:

Built to break, by Ryan Avent: ...Congress is lame. ... Why? ... Why is it so difficult to pass decent policy?

South Carolina Sen. Jim DeMint warned Monday evening that he would block all legislation that has not been cleared by his office in the final days of the pre-election session. 

Bret Bernhardt, DeMint's chief of staff, said in an e-mail to GOP aides that his boss would place a hold on all legislation that has not been cleared by both parties by the end of the day Tuesday. 

Any senator can place a hold to block legislation - and overcoming that would require the Senate to take time-consuming steps to invoke cloture, which would require 60 votes.

This is a stupid rule. Why would the Senate adopt it? Well, as with most of today's procedural obstacles, it was put in place for a sensible reason—to pause the passage of legislation while senators from states directly affected had time to review the bill—but has come to be abused for partisan tactical purposes. The Senate is full of rules like this that can be used to bring business to a complete halt. Their use has, at various points in the past, gone from being frowned upon to being acceptable (or at least common). The filibuster falls into this category. Modern Americans may find it hard to believe that not so long ago contentious pieces of legislation passed the Senate with a simple majority vote. No longer.

Now, the story of why politics is so disappointing in America right now is more obviously more complicated than the increase in use of the Senate's procedural obstructions. But this is an important story. In economics, we understand that institutions—statutory and and cultural—have a powerful impact on economic outcomes. Incentive structures in institutions determine whether it's more profitable to invest or rent-seek. This in turn influences the allocation of capital, physical and human, which determines growth rates. And expected growth rates feed back into the decision of whether and where to invest...or rent-seek.

As observers of the political system, economists should take the incentives built into institutions seriously. Supermajoritarian rules limit accountability by driving a wedge between who is responsible for policy outcomes and who is held responsible. If opposition legislators have the ability to block bills, the failure of which will be laid on the ruling party, then there is no incentive for the opposition to bargain and compromise. If the legislature is sclerotic, then Congress will become less appealing to people interested in passing good policies and more appealing to those looking for a platform from which to demagogue. The result is an uptick in demagoguery, which makes Congress still less appealing to those interested in conducting actual business. ...

[P]eople choose whether to seek office based on the things they're likely to accomplish there, and they behave once in office according to the incentives they face. If government consistently disappoints, it's not the fault of the men and women in Congress. It's the institution itself. And the conversation should become less about which party should be in charge and more about which rules need to be reformed.

But why is it that "If opposition legislators ... block bills, the failure ... will be laid on the ruling party..."? Is this due to problems with the institutional structure of Congress, or with the media reporting on the issues? Is it due to a better GOP noise machine? Or is it due to something else entirely such as the tactical decisions made by Democrats. Democrats seem unable to do the simplest things the GOP does so well such as giving bills catchy names that imply a vote against the legislation is a vote against America, let alone pursue more complicated coordinated strategies. If the roles were reversed and Democrats were obstructing policies the GOP was trying to pass, I'm not so sure it would be the GOP that would be blamed.

Update: Via email:

Hey Mark -
Saw your post. FWIW political scientists think the reason the ruling party is blamed is that the public doesn't follow the mechanics of Congress lately and tends to hold the president's party accountable for the state of the country in midterms. Process-based explanations (they didn't let us pass our agenda) don't tend to work, nor do catchy bill names or spin tactics etc. In some ways, this is more encouraging than what pessimists say about democracy -- the public really does respond to results (very broadly defined) and isn't as easily manipulated as people think (at least in domestic policy) -- but there are lots of subtleties that are lost. With that said, of course a big question going forward is how to make our system work in a partisan era where the opposition party is empowered by the filibuster.

Part of another email:

..If Republican public relations pins the blame on the Democrats you've bought their spin with your criticism, "Democrats seem unable to do the simplest things the GOP does so well…"

Shadow Banks Pose Major Threat to Financial Stability

Posted: 28 Sep 2010 09:00 AM PDT

September 28, 2010

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Alternative Definitions of the Business Cycle

Posted: 28 Sep 2010 01:08 AM PDT

More Bad News about Unemployment

Posted: 28 Sep 2010 12:42 AM PDT

Unemployment could continue rising through the first half of 2011:

Forecasting Growth over the Next Year with a Business Cycle Index, by David Lang and Kevin J. Lansing, FRBSF Economic Letter: The current economic recovery is proceeding at a tepid pace despite massive federal fiscal stimulus and extremely low interest rates. Forecasts derived from business cycle indicators produced by the Chicago and Philadelphia Federal Reserve Banks predict that real U.S. GDP growth through the first half of 2011 will remain at or below potential. If these forecasts prove accurate, then the historical relationship between real GDP growth and the labor market suggests that the unemployment rate could rise by as much as 0.5 percentage point during this period.
The National Bureau of Economic Research Business Cycle Dating Committee has determined that the recent recession ended in June 2009. Since then, the U.S. economy has recorded four consecutive quarters of positive real GDP growth. During this period, inventory accumulation by businesses accounted for more than half the growth, while real final sales of domestically produced goods and services grew only at an annual 1.1% rate on average. Due to the severity of the recession and the lackluster nature of the recovery so far, the level of real GDP at the end of the second quarter of 2010 was still 1.3% below the pre-recession peak reached more than 2½ years ago.
Recent weaker-than-expected economic data have raised concerns about the recovery's staying power. In a recent Economic Letter, Berge and Jorda (2010) estimate the probability of falling back into recession during the next two years at around 50%. While discussions in the media often focus on the likelihood of a "double dip," it is important to recognize that, even if the economy avoids another recession, future real GDP growth may not be strong enough to prevent the unemployment rate from rising. Standard macroeconomic models would predict an increase in the unemployment rate if real GDP growth over the next two to four quarters were to fall below the economy's potential growth rate, defined as the sum of the long-run trend growth rates of productivity and the labor force. The Congressional Budget Office (CBO 2010) estimates that the U.S. economy's potential annual growth rate over the next five years is 2.1%. Other estimates of potential growth are significantly higher. If real GDP growth were to fall below potential growth for a sustained period, then the unemployment rate would be expected to rise.
In this Economic Letter, we use two well-known business cycle indicators to help forecast real GDP growth two to four quarters ahead. According to our empirical forecasting models, real GDP growth will remain at or below estimates of potential growth through the first half of 2011, implying a significant risk of rising unemployment. ...[...continue...]...

One of the points I try to make in the post above this one is that a focus on alternatives to the NBER measure of the business cycle that give employment more weight could improve the policy response to unemployment problems.

links for 2010-09-27

Posted: 27 Sep 2010 11:02 PM PDT

Are America's Rich Falling Behind The Super-Rich?

Posted: 27 Sep 2010 05:29 PM PDT

As a follow-up to the post below this one, to the Todd Hendersons and Ben Steins out there, and with a hat tip to Barry Ritholtz, Tim Duy suggests:

"The Great Income Shift"

Posted: 27 Sep 2010 04:24 PM PDT

In case you need a reminder of how the distribution of income has changed in recent decades:

Enough Is Enough on Tax Cuts for Wealthy, by Chuck Marr, CBPP: In yesterday's New York Times, Richard Thaler ... neatly refuted the arguments for borrowing tens of billions of dollars each year to keep President Bush's tax cuts flowing to the most affluent 2 percent of people in the country. He then posed a central question: "whether we want a society in which the rich take an ever-increasing share of the pie, or prefer to return to conditions that allow all classes to anticipate an increasing standard of living."
As I've noted before, over the last three decades a stunning shift in income has taken place in this country, from the middle class to those few at the very top of the income scale. Back in 1979, the middle 20 percent of Americans had more than twice as large a share of the nation's total after-tax income as the top 1 percent. But by 2007, the top 1 percent's slice of the economic pie had more than doubled and in fact exceeded the middle class's slice, which had shrunk.
This great income shift means the average middle-income American family had about $9,000 less after-tax income in 2007, and an average household in the top 1 percent had $741,000 more, than they would have had if the 1979 income distribution had remained. Here's how this looks in graph and table form:

Fully two-thirds of the income gains in the last economic expansion (2001-2007) flowed to just the top 1 percent. This is not a healthy sign for a society. As Professor Thaler urges, we need to decide whether we want to promote still-greater inequality (by extending the high-income tax cuts) or lean against this trend. Each year the average millionaire gets about $125,000 from the Bush tax cuts, according to the Urban-Brookings Tax Policy Center. Now seems to be a good time to say enough is enough.

Let me ask again: Is it possible for an outcome to be equitable when, as in recent decades, nearly all of the gains from growth accrue to one class?

If you want to know why people are so angry, you're looking at a big part of the reason.

"When it All Went Wrong"

Posted: 27 Sep 2010 01:09 PM PDT

September 27, 2010

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Paul Krugman: Structure of Excuses

Posted: 27 Sep 2010 12:42 AM PDT

Arguments that we can't do anything about the unemployment problem are structurally unsound:

Structure of Excuses, by Paul Krugman, Commentary, NY Times: What can be done about mass unemployment? All the wise heads agree: there are no quick or easy answers. There is work to be done, but workers aren't ready to do it — they're in the wrong places, or they have the wrong skills. Our problems are "structural," and will take many years to solve. ...
Who are these wise heads I'm talking about? ...Narayana Kocherlakota, the president of the Federal Reserve Bank of Minneapolis,... has attracted a lot of attention by insisting that dealing with high unemployment isn't a Fed responsibility: "Firms have jobs, but can't find appropriate workers. The workers want to work, but can't find appropriate jobs," he asserts, concluding that "It is hard to see how the Fed can do much to cure this problem."
Now, the Minneapolis Fed is known for its conservative outlook, and claims that unemployment is mainly structural do tend to come from the right... But some people on the other side of the aisle say similar things. For example, former President Bill Clinton recently told an interviewer that unemployment remained high because "people don't have the job skills for the jobs that are open."
Well,... what should we be seeing if statements like those of Mr. Kocherlakota or Mr. Clinton were true? The answer is, there should be significant labor shortages somewhere... — major industries that are trying to expand but are having trouble hiring, major classes of workers who find their skills in great demand, major parts of the country with low unemployment even as the rest of the nation suffers.
None of these things exist. Job openings have plunged in every major sector, while the number of workers forced into part-time employment ... has soared. Unemployment has surged in every major occupational category. Only three states, with a combined population not much larger than that of Brooklyn, have unemployment rates below 5 percent.
Oh, and where are these firms that "can't find appropriate workers"? The National Federation of Independent Business has been surveying small businesses for many years, asking them to name their most important problem; the percentage citing problems with labor quality is now at an all-time low...
So all the evidence contradicts the claim that we're mainly suffering from structural unemployment. Why, then, has this claim become so popular?
Part of the answer is that this ... always happens during periods of high unemployment — ...pundits and analysts believe that declaring the problem deeply rooted, with no easy answers, makes them sound serious.
I've been looking at what self-proclaimed experts were saying about unemployment during the Great Depression; it was almost identical to what Very Serious People are saying now. Unemployment cannot be brought down rapidly, declared one 1935 analysis, because the work force is "unadaptable and untrained. It cannot respond to the opportunities which industry may offer." A few years later, a large defense buildup finally provided a fiscal stimulus adequate to the economy's needs — and suddenly industry was eager to employ those "unadaptable and untrained" workers.
But now, as then, powerful forces are ideologically opposed to ... government action on a sufficient scale to jump-start the economy. And that, fundamentally, is why claims that we face huge structural problems have been proliferating: they offer a reason to do nothing about the mass unemployment that is crippling our economy and our society. ...
We aren't suffering from a shortage of needed skills; we're suffering from a lack of policy resolve. As I said, structural unemployment isn't a real problem, it's an excuse — a reason not to act on America's problems at a time when action is desperately needed.

"Raters Ignored Proof of Unsafe Loans"

Posted: 27 Sep 2010 12:24 AM PDT

This sounds pretty fishy:

Raters Ignored Proof of Unsafe Loans, Panel Is Told, by Gretchen Morgenstern, NY Times: As the mortgage market grew frothy in 2006 ... ratings agencies charged with assessing risk in mortgage pools dismissed conclusive evidence that many of the loans were dubious, according to testimony given last week to the Financial Crisis Inquiry Commission. ...

D. Keith Johnson, a former president of Clayton Holdings, a company that analyzed mortgage pools for the Wall Street firms that sold them, told the commission on Thursday that almost half the mortgages Clayton sampled from the beginning of 2006 through June 2007 failed to meet crucial quality benchmarks that banks had promised to investors. Yet, Clayton found, Wall Street was placing many of the troubled loans into bundles known as mortgage securities.

Mr. Johnson said he took this data to officials at Standard & Poor's, Fitch Ratings and to the executive team at Moody's Investors Service. "We went to the ratings agencies and said, 'Wouldn't this information be great for you to have as you assign tranche levels of risk?' " ... But none of the agencies took him up on his offer, he said, indicating that it was against their business interests to be too critical of Wall Street. "If any one of them would have adopted it," he testified, "they would have lost market share." ...

Before assembling mortgage pools, brokerage firms hired independent analytical companies like Clayton to sample loans and flag any that were problematic. Clayton was one of two large due diligence companies that watched for loans that did not meet specifications like geographic diversity and the loan-to-value ratios..., as well as the credit scores and incomes of borrowers. ...

Because these loan samples were provided to the Wall Street investment banks that commissioned them, they could see throughout 2006 and into 2007 that the mortgages they were financing and selling to investors were becoming increasingly sketchy.

The results of the Clayton analyses were not disclosed to investors buying the loan pools. Instead, Wall Street firms used the information to pressure the lenders issuing the most troubled loans to accept a lower price for them, according to prosecutors who have investigated these cases.

A more proper procedure ... would have been for lenders ... to buy back the problem loans and replace them with higher-quality mortgages. But because these companies did not have enough capital to do that, they were happy to sell the troubled mortgages cheaply to the brokerage firms.

Since Wall Street firms were paying lower prices for the troubled loans, they could have passed along those discounts to customers, reducing investor risk. But Wall Street charged investors the same high prices associated with better-quality loans, thereby increasing their own profits on the problematic securities... To be sure, the prospectuses ... contained brief warnings that some of the mortgages might not meet stated underwriting standards. But few investors probably realized that huge portions of the pools had failed to meet the benchmarks. ...

links for 2010-09-26

Posted: 26 Sep 2010 11:03 PM PDT

Reich: Republican Economics as Social Darwinism

Posted: 26 Sep 2010 04:14 PM PDT

Robert Reich:

Republican Economics as Social Darwinism, by Robert Reich: John Boehner, the Republican House leader who will become Speaker if Democrats lose control of the House in the upcoming midterms, recently offered his solution to the current economic crisis: "Liquidate labor, liquidate stocks, liquidate the farmer, liquidate real estate. It will purge the rottenness out of the system. People will work harder, lead a more moral life."
Actually, those weren't Boehner's words. They were uttered by Herbert Hoover's treasury secretary, millionaire industrialist Andrew Mellon, after the Great Crash of 1929. But they might as well have been Boehner's because Hoover's and Mellon's means of purging the rottenness was by doing exactly what Boehner and his colleagues are now calling for: shrink government, cut the federal deficit, reduce the national debt, and balance the budget. And we all know what happened after 1929, at least until FDR reversed course.
Boehner and other Republicans would even like to roll back the New Deal and get rid of Barack Obama's smaller deal health-care law. The issue isn't just economic. We're back to tough love. The basic idea is force people to live with the consequences of whatever happens to them. In the late 19th century it was called Social Darwinism. Only the fittest should survive, and any effort to save the less fit will undermine the moral fiber of society.
Republicans have wanted to destroy Social Security since it was invented in 1935... Republicans also hate unemployment insurance. ... Finally, like Hoover and Mellon, Republicans want to cut the deficit and balance the budget at a time when a large portion of the workforce is idle.
This defies economic logic. When consumers aren't spending, businesses aren't investing and exports can't possibly fill the gap, and when state governments are slashing their budgets, the federal government has to spend more. Otherwise, the Great Recession will turn into exactly what Hoover and Mellon ushered in – a seemingly endless Great Depression.
It's also cruel. Cutting the deficit and balancing the budget any time soon will subject tens of millions of American families to unnecessary hardship and throw even more into poverty.
Herbert Hoover and Andrew Mellon thought their economic policies would purge the rottenness out of the system and lead to a more moral life. Instead, it purged morality out of the system and lead to a more rotten life for millions of Americans.
And that's exactly what Republicans are offering yet again.

September 26, 2010

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What the Rich Don’t Need

Posted: 26 Sep 2010 01:23 AM PDT

Richard Thaler says "Demanding that the rich get a tax cut as a condition for tax relief for others is simply elitist":

What the Rich Don't Need, by Richard Thaler, Commentary, NY Times: Want to give affluent households a present worth $700 billion over the next decade? In a period of high unemployment and fiscal austerity, this idea may seem laughable. Amazingly, though, it is getting traction in Washington.
I am referring, of course, to the current debate about whether to extend all, or just some, of the tax cuts of President George W. Bush... President Obama has proposed retaining the current rates on incomes up to $200,000 for individuals and $250,000 for couples. ...
 Republican leadership has drawn a line in the sand, saying it will oppose Mr. Obama's bill unless all taxpayers remain at current rates. Although it wouldn't put it this way, the Republican position is, in effect, that if the rich can't share in the bounty, rates should rise for everyone.
They offer three arguments to support their view. The first is that it is folly to raise taxes in a weak economy. ...
Tax cuts are one of many ways to stimulate the economy. Building infrastructure, for example, is another. We have to choose. And if the primary goal is stimulating the economy, tax breaks to the rich are simply not cost-effective. ...
The second argument is that not extending the tax cuts to high-income earners would impose an excessive burden on small businesses. Here, however, ... the fact that 3 percent of the businesses earn nearly half of the money is precisely what many people are concerned about: growing income inequality.
Which brings us to the third argument. Conservatives say that to do anything other than extending tax cuts to everyone would amount to "class warfare." The best response to that notion comes from Warren E. Buffett: "There's class warfare, all right, but it's my class, the rich class, that's making war, and we're winning." ...
And what about incentives? Will the owners of the profitable small businesses work less hard, or hire fewer people, if their own after-tax income falls? This is a much-researched question, and ... we shouldn't expect significant real reductions in economic activity...
The question comes down to whether we want a society in which the rich take an ever-increasing share of the pie, or prefer to return to conditions that allow all classes to anticipate an increasing standard of living. Demanding that the rich get a tax cut as a condition for tax relief for others is simply elitist. Tea Partiers, take note.

Is it possible for an outcome to be equitable when, as in recent decades, nearly all of the gains from growth accrue to one class?

Will Wall Street's Attacks Turn Obama into a "True Populist"?

Posted: 26 Sep 2010 01:17 AM PDT

Is Obama about to become more populist?:

Wall Street's attacks could turn President Obama into a true populist, by Jacob S. Hacker and Paul Pierson, Commentary, Washington Post: Corporate America's stance toward the Obama administration has recently deteriorated into vitriolic attacks and outright opposition. ... Far more ominous for the White House, business has been putting its money where its mouth is: In sector after sector, corporate campaign contributions ahead of November's elections are going to Republicans.
Conventional explanations for this mounting opposition focus on policies and personalities, insisting that the president has embraced runaway government or unnecessarily ruffled business's feathers. ...
But this has it exactly backward. The business-Obama divorce isn't about personalities, and it's not ... anti-business policies. Instead, it reflects a deeper disconnect between corporate leaders and the rest of America... This disconnect has blinded corporate leaders to the extent to which most Americans feel that the government, far from crushing corporate America, has been looking out only for those at the top.
Had Obama realized sooner that he would never win over corporate America, he might have pursued rhetoric and policies that would have alienated fewer voters. ... But could the president have ... won over the public by launching the very thing his detractors in the business community already accuse him of: a populist campaign to reform the economy?
To many on the left, the answer is yes. Journalist Robert Kuttner ... blames ... an economic team that was too solicitous of Wall Street. Democratic pollster Stan Greenberg, meanwhile, has found that Obama's fight against extending tax cuts to the very rich resonates powerfully with crucial voting blocs.
Still, the barriers to a more populist route weren't limited to Obama's temperament and his Cabinet. They extended to his Congress, in particular the conservative Democrats in the Senate and the "Blue Dogs" in the House... A more populist route would have alienated them, jeopardizing Obama's entire agenda.
After November, however, Democratic moderates will probably no longer be at the center of the action. With even more Republican votes needed to overcome a filibuster, and with the GOP shifting ever further to the right, Congress is likely to descend into gridlock.
At that point, tough talk will no longer threaten important legislative opportunities. The president will be free to speak frankly about middle-class concerns and draw sharper ideological distinctions. By swinging its support to the GOP, business could bring on a more strident Obama -- in rhetoric, and maybe even in substance.

Maybe Obama will change, but his heart of hearts does not seem to be populist by nature.

links for 2010-09-25

Posted: 25 Sep 2010 11:03 PM PDT

"Greed May Not be Good for the Economy, but Envy is Worse"

Posted: 25 Sep 2010 12:33 PM PDT

Here we go again. Whenever there is discussion of raising taxes on the rich, the inevitable the charge that people in favor of raising taxes are suffering from "envy" of the success of others is levied. The argument is that the envious don't know what's good for them -- if the policies they favor are enacted, they will only hurt the economy and themselves. Further, the argument states, it's a mistake for the envious to suggest that "those making over $250,000 should feel guilty for the hard work they have done." You know, like the hard work Ben Stein did to inherit money from his parents:

Greed may not be good for the economy, but envy is worse, by Carlos Lozada, Commentary, Washington Post: ...[I]s greed capitalism's worst sin? Not so, argues economist Victor Claar. In a speech at the American Enterprise Institute last week, Claar posited that another deadly sin -- envy -- is an inherent part of the free-market system and can prove even more insidious.
Claar, a co-author of "Economics in Christian Perspective," relied on Thomas Aquinas's definition of envy: sadness at the good of another. He cited the biblical parable of the prodigal son, in which the older sibling is envious of his dissolute brother, whose return home sparks a big party. "It sounds like blue-collar frustrations that we hear today," Claar said. " 'I did everything the right way, I played by all of the right rules -- and here I am.' "
Whether because of differing intelligence, skill, ambition or luck, free markets produce different outcomes for different people, so envy is inevitable. And in democratic systems, "envious majorities" can push for policies that "narrow the gap between them and the targets of their envy."
But Claar worries that this road can lead to initiatives that, "in the guise of social justice," produce greater unemployment or less overall wealth. And those results in turn lead to "outrage at the system that generated the outcome."
Was Claar talking about President Obama's policies? "The current administration does seem to be keen on taking from the rich to give to the poor," he said in an e-mail. "Sometimes the tone is not mean -- 'spread the wealth around' -- yet at times it is, suggesting those making over $250,000 should feel guilty for the hard work they have done to contribute something others find valuable enough to voluntarily pay for. So our efforts to reduce envy may very well reduce long-term growth by discouraging effort, invention and discovery in the most talented among us." ...

Several points. First, the implicit assumption here is that the existing tax distribution is fair, and any deviation from the present distribution would be unfair to the wealthy. But why is the present tax structure more equitable than another? That question is not addressed, but there are plenty of reasons to believe that equitable taxes require a progressive structure. Whether it's too progressive or not progressive enough is worth asking, and I think a more progressive structure is quite consistent with equity -- partly for the reasons I'll outline below --  but the point is that there is nothing that says the current distribution is necessarily correct (and economics cannot speak to equity).

Second, there is an efficiency argument made in defense keeping taxes where they are. The argument is that if we raise taxes on the wealthy to levels where, in the past, growth was robust, it will harm growth. But at the tax rates being discussed presently, there's no reliable evidence that this is true. It's asserted to defend the existing tax structure, the 'you don't know what's good for you' defense, but again there is no basis for this assertion.

Third, the argument is that the wealthy deserve the income they receive as a reward for their for their skill, ambition, intelligence, hard work, and the resulting contribution to the social good. Consider, however, that most of the gains in recent years went to the financial industry, and mostly to the very, very top, and that the social gains from a huge financial meltdown and subsequent recession are hard to see. From this perspective, the efficiency argument rests on pretty shaky ground.

Fourth, the idea that incomes have nothing at all to do with inheritance and privilege, monopoly power, cronyism, and the like is not defensible. To the extent that higher taxes are clawing back unearned gains, as they do, there is nothing inequitable or inefficient about it. If anything, we are clawing back too little, not too much.

People aren't envious, they are frustrated and furious with a system that causes them to lose equity in their homes, have their retirement funds evaporate, have their employment prospects plummet, while at the same time bailing out those at the top who caused the problems. It's not envy, it's a plea for social justice, a plea for they typical household to get the same consideration as the wealthy on Wall Street. Just look at how quickly Washington moved to bailout Wall Street, and how much reluctance there is to tackle the unemployment problem. The argument is that it was necessary to save Wall Street to avoid an even bigger meltdown and a worse outcome for Main Street, and there is something to that, but the rewards could have been distributed differently. And if the ultimate goal was to help Main Street, why not offer more help directly instead of through a "help the big players and hope it trickles down" approach?

Most people do not begrudge income that is earned no matter how high that income is, but when it's clear that forces other than reward for hard work and contribution to the social good are behind the distribution of income, that's a different matter. When some households are struggling mightily just to keep up, let alone make gains, while others are rewarded in excess of their contribution to the social good, it's no wonder that people sense the system is set up to work against them, and that they are angry and frustrated with it.