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September 24, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View


Paul Krugman: Downhill With the G.O.P.

Posted: 24 Sep 2010 01:08 AM PDT

Republicans have thoroughly embraced the Irving Kristol strategy for political effectiveness:  "say whatever it takes to gain power":

Downhill With the G.O.P., by Paul Krugman, Commentary, NY Times: Once upon a time, a Latin American political party promised to help motorists save money on gasoline. How? By building highways that ran only downhill.
I've always liked that story, but the truth is that the party received hardly any votes. And that means that the joke is really on us. For these days one of America's two great political parties routinely makes equally nonsensical promises. ... And this party has a better than even chance of retaking at least one house of Congress this November.
Banana republic, here we come.
On Thursday, House Republicans released their "Pledge to America," supposedly outlining their policy agenda. In essence, what they say is, "Deficits are a terrible thing. Let's make them much bigger." The document repeatedly condemns federal debt — 16 times, by my count. But the main substantive policy proposal is to make the Bush tax cuts permanent, which ... would add about $3.7 trillion to the debt over the next decade — about $700 billion more than the Obama administration's tax proposals.
True, the document talks about the need to cut spending. But as far as I can see, there's only one specific cut proposed — canceling the rest of the Troubled Asset Relief Program, which Republicans claim (implausibly) would save $16 billion. That's less than half of 1 percent of the budget cost of those tax cuts. As for the rest, everything must be cut, in ways not specified — "except for common-sense exceptions for seniors, veterans, and our troops." In other words, Social Security, Medicare and the defense budget are off-limits.
So what's left? Howard Gleckman of the nonpartisan Tax Policy Center has done the math. As he points out, the only way to balance the budget by 2020, while simultaneously (a) making the Bush tax cuts permanent and (b) protecting all the programs Republicans say they won't cut, is to completely abolish the rest of the federal government: "No more national parks, no more Small Business Administration loans, no more export subsidies, no more N.I.H. No more Medicaid... No more child health or child nutrition programs. No more highway construction. No more homeland security. Oh, and no more Congress."
The "pledge," then, is nonsense. ... So how did we get to the point where one of our two major political parties isn't even trying to make sense?
The answer isn't a secret. The late Irving Kristol, one of the intellectual godfathers of modern conservatism, once wrote frankly about why he threw his support behind tax cuts that would worsen the budget deficit: his task, as he saw it, was to create a Republican majority, "so political effectiveness was the priority, not the accounting deficiencies of government." In short, say whatever it takes to gain power. That's a philosophy that now, more than ever, holds sway in the movement Kristol helped shape.
And what happens once the movement achieves the power it seeks? The answer, presumably, is that it turns to its real, not-so-secret agenda, which mainly involves privatizing and dismantling Medicare and Social Security.
Realistically, though, Republicans aren't going to have the power to enact their true agenda any time soon — if ever. Remember, the Bush administration's attack on Social Security was a fiasco, despite its large majority in Congress — and it actually increased Medicare spending.
So the clear and present danger isn't that the G.O.P. will be able to achieve its long-run goals. It is, rather, that Republicans will gain just enough power to make the country ungovernable, unable to address its fiscal problems or anything else in a serious way. As I said, banana republic, here we come.

Procyclicality

Posted: 24 Sep 2010 12:41 AM PDT

Paul Volcker on the difficulty of using discretionary authority to impose banking regulations that are restrictive during good times to discourage excessive risk taking, and somewhat more lax during bad times to encourage more lending:

Volcker Spares No One in Broad Critique, by Damian Paletta, RTE:  ...On procyclicality — "It's the hardest thing as a regulator in my opinion…when things are really going well, the economy is going well, the market is not disturbed, but you see developments in an institution or in markets that is potentially destabilizing, doing something about it is extremely difficult. Because the answer of the people in the markets is, 'what are you talking about? Things are going really well. We know more about banking and finance than you do, get out of my hair, if you don't get out of my hair I'm going to write my congressman.'" .

Rules that automatically vary procyclically can help with this problem, that is, if a Congress subject to regulatory capture will impose them and keep them in place. But rules can't cover everything -- it's often the things that the rules don't explicitly cover that are the most problematic -- and some degree discretionary authority is unavoidable in a well-regulated system.

links for 2010-09-23

Posted: 23 Sep 2010 11:02 PM PDT

Krugman and Wells: The Way Out of the Slump

Posted: 23 Sep 2010 03:14 PM PDT

Just a quick heads up to the second installment of the Krugman and Wells review of The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession by Richard C. Koo, Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram G. Rajan, and Crisis Economics: A Crash Course in the Future of Finance by Nouriel Roubini and Stephen Mihm:

The Way Out of the Slump, by Paul Krugman and Robin Wells, NYRB: How can the economy recover? Of the three books under review, Raghuram Rajan's Fault Lines says almost nothing about the question. He seems mainly concerned with preventing future bubbles, going so far as to call for an immediate rise in interest rates despite the depressed state of the economy. Nouriel Roubini and Stephen Mihm warn that recovery may be very slow—but they offer no solution, instead criticizing the solutions proposed by others. Only Richard Koo has something positive to propose—but his answer appears outside the realm of political possibility.

Most of the time, we count on central banks to engineer economic recovery following a slump, much as they did after the 2001 recession. Normally, when recession strikes, the Fed, the European Central Bank, or the Bank of England cuts the short-term interest rates it controls; market-determined longer-term rates fall in sympathy; and the private sector responds by borrowing and spending more.

The sheer severity of the slump after the 2008 housing bust means, however, that this normal response falls far short of what's needed. One way to revive the economy is to consider the so-called Taylor rule, a rule of thumb linking Fed interest rate policy to the levels of unemployment and inflation. Applying the historical Taylor rule right now, with inflation very low and unemployment very high, would mean that the Fed's main policy rate, the overnight rate at which banks lend reserves to each other, should currently be minus 5 or 6 percent. Obviously, that's not possible: nobody will lend at a negative interest rate, since you can always hold cash instead. So conventional monetary policy is up against the "zero lower bound": it can do no more. We're in the classic Keynesian liquidity trap, in which the economy is so awash in liquidity that adding more has no effect. What's left?

One answer is fiscal policy: the government can step in to spend when the private sector will not. We've already argued—in the first part of this review1—that a rise in government deficits played a key role in preventing the crisis of 2008 from turning into a full replay of the Great Depression. Why not use more deficit spending to push for a full recovery? ...[...continue reading...]...

What is Rich?

Posted: 23 Sep 2010 12:24 PM PDT

On the run today -- time is short with the start of school approaching -- so a quick thought between meetings:

When I was a little kid, being rich meant being able to buy the stuff I wanted without having to worry about how much it costs.

But as I got older -- and maybe this explains my choice of jobs -- being rich was much more about the ability to do what I wanted with my time. In this sense, you can have considerable wealth, but still not be rich. In fact, the quest for more and more stuff gets in the way (though it depends in part on what you want to do with your free time, if it's to play golf at an expensive club, sufficient wealth is a necessary condition).

Some of the richest people I know are quite poor in terms of having the stuff other people want, but free of the rat race, and as far as I can tell, they are generally happy. I think a lot of people are actually looking for freedom as they accumulate wealth -- they imagine being able to do whatever they want -- but don't realize that working longer and longer hours until there is no time left for anything else is not the best the way to get the freedom they are looking for.

But today is not a rich day for me, so off to the next appointment.

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