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October 31, 2010

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links for 2010-10-30

Posted: 30 Oct 2010 11:01 PM PDT

"How Immigrants Create More Jobs"

Posted: 30 Oct 2010 04:34 PM PDT

Tyler Cowen:

How Immigrants Create More Jobs, by Tyler Cowen, Commentary, NY Times: In the campaign season now drawing to a close, immigration and globalization have often been described as economic threats. The truth, however, is more complex.
Over all, it turns out that the continuing arrival of immigrants ... is encouraging business activity here, thereby producing more jobs, according to a new study. Its authors argue that the easier it is to find cheap immigrant labor at home, the less likely that production will relocate offshore. ...
The study notes that when companies move production offshore, they pull away not only low-wage jobs but also many related jobs, which can include high-skilled managers, tech repairmen and others. But hiring immigrants even for low-wage jobs helps keep many kinds of jobs in the United States... In other words, immigrants may be competing more with offshored workers than with other laborers in America. ...
Debates on immigration and labor markets reflect some common human cognitive failings — namely, that we are quicker to vilify groups of different "others" than we are to blame impersonal forces.
Consider the fears that foreign competition, offshoring and immigration have destroyed large numbers of American jobs. In reality, more workers have probably been displaced by machines... Yet we know that machines and computers do the economy far more good than harm and that they create more jobs than they destroy.
Nonetheless, we find it hard to transfer this attitude to our dealings with immigrants, no matter how logically similar "cost-saving machines" and "cost-saving foreign labor" may be in their economic effects. ...
As a nation, we ... should be looking to immigration as a creative force in our economic favor. Allowing in more immigrants, skilled and unskilled, wouldn't just create jobs. It could increase tax revenue, help finance Social Security, bring new home buyers and improve the business environment.
The world economy will most likely grow more open, and we should be prepared to compete. That means recognizing the benefits — including the employment benefits — that immigrants bring to this country.

October 30, 2010

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"White House Considering 'Decoupling' Top-Tier Tax Cut"

Posted: 30 Oct 2010 01:24 AM PDT

The administration is considering a new strategy on extending the Bush tax cuts:

White House considering 'decoupling' top-tier tax cut, by By Lori Montgomery, Washington Post: With Republicans poised to gain ground in Tuesday's elections, the White House is losing hope that Congress will approve its plan to raise taxes on the nation's wealthiest families and is increasingly focusing on a new strategy that would preserve tax breaks for both the wealthy and the middle class.
According to people familiar with talks at the White House and among senior Democrats on Capitol Hill, breaking apart the Bush administration tax cuts is now being discussed as a more realistic goal. That strategy calls for permanent extension of cuts that benefit families earning less than $250,000 a year, and temporary extension of cuts on income above that amount.
The move would "decouple" the two sets of provisions, Democrats said, and focus the debate when tax cuts for the rich expired next year or the year after. Republicans would be forced to defend carve-outs for a tiny minority populated by millionaires, an unpopular position that would be difficult to advance without the cover of a broad-based tax cut for everyone, aides in both parties said. ...
The battle over taxes will be reengaged when lawmakers return to Washington in mid-November. If Congress fails to act before the end of the year, virtually every taxpayer will see increased withholding take a bite out of their paychecks in January.
Democrats had hoped to deal with the issue before the election but could not agree on a strategy. ...
While advocating permanent extension, Republican leaders have said they would accept a two-year extension of all the cuts.
Administration officials said they have begun plotting strategy for the lame-duck legislative session but declined to comment on decoupling or another idea floated in recent weeks: embracing tax breaks for the rich in exchange for Republican support for additional economic stimulus.
The stimulus could take the form of Obama's proposal to provide additional business tax breaks, which the president touted Friday... Or it could take the form of an extension of Obama's signature tax break for the middle class, Making Work Pay, which is scheduled to expire in December, congressional aides said.

Why does decoupling and fighting over one versus two years draw a sharper political contrast than decoupling and arguing over zero versus one? Republicans have every intention of making the tax cuts permanent in any case, they're just trying to delay the main battle until they have a better chance of winning. Democrats have misplayed this.

Also, notice how the talk of additional stimulus from the administration is now entirely about tax cuts? Additional spending, which would have a larger and more certain effect on aggregate demand and employment, is not even mentioned. Talk about giving up without a fight.

And what kind of deal is "We'll trade tax cuts for the wealthy for tax cuts for business and the middle class" anyway? That sounds like the path to making the tax cuts for the wealthy permanent. There's no need to trade. Put tax cuts for the middle class and businesses to a vote and dare the party that has never seen a tax cut it doesn't like to vote it down.

links for 2010-10-29

Posted: 29 Oct 2010 11:01 PM PDT

"Friedman was All Wrong about Japan ... and the Great Depression"

Posted: 29 Oct 2010 05:39 PM PDT

As I've noted before, one thing I've learned from this recession is that it's not as easy to increase the money supply as I thought. It's easy to create additional bank reserves and increase the monetary base, but if the new reserves simply pile up in the banking system, then they don't have much of an effect on the supply of money:

More On Friedman/Japan, by Paul Krugman: ...So: David Wessel quoted what Milton Friedman said about Japan in 1998, and interpreted it as meaning that Friedman would favor quantitative easing now. I think that's right. And just to be clear, I also favor QE — largely because it might help some, and seems to be just about the only policy lever still available in the face of political reality.

But I think it's also important to note that Friedman was all wrong about Japan — and that you can argue that he was also wrong about the Great Depression, for the same reason.

For what Friedman argued, both for Japan in the 1990s and America in the 1930s, was that all the central bank needed to do was more — push out those reserves into the banking system. This would raise the money supply, and a higher money supply would have the usual effects.

But the Bank of Japan tried that — and found that pushing more reserves into the banks didn't even lead to rapid growth in the money supply, let alone end the problem of deflation. Here's a chart of growth rates of the monetary base and of M2, Friedman's preferred monetary aggregate:

DESCRIPTION
Bank of Japan

So, after 2000 the Bank of Japan engineered a huge increase in the monetary base; this was the original quantitative easing. And it didn't even translate into a surge in the money supply! This is why I'm so skeptical of people who say that all the Fed has to do is target higher nominal GDP growth — in liquidity trap conditions, the Fed doesn't even control money, so how can you blithely assume that it controls GDP?

And this also calls very much into question Friedman's famous claim that the Fed could easily have prevented the Depression, which gradually got transmuted into the claim that the Fed caused the Depression. Yes, M2 fell — but why should we believe that the Fed had any more control over M2 in the 30s than the BOJ had over M2 more recently?

Again, that doesn't mean that I oppose having the Fed engage in unconventional asset purchases. I'm just trying to be realistic about the likely results. We really, really need expansionary fiscal policy along with Fed policy; and we're not going to get it.

Real GDP Grows at 2 Percent in the Third Quarter

Posted: 29 Oct 2010 09:54 AM PDT

I just posted this at MoneyWatch:

The BEA reports its advanced estimate for GDP in the third quarter:

Real gross domestic product ... increased at an annual rate of 2.0 percent in the third quarter of 2010, (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.7 percent

Calculated Risk notes "a few key numbers":

  • "The change in real private inventories added 1.44 percentage points to the third-quarter change in real GDP after adding 0.82 percentage point to the second-quarter change. Private businesses increased inventories $115.5 billion in the third quarter, following increases of $68.8 billion in the second quarter and $44.1 billion in the first."

    Without the boost in inventories, GDP would have been barely positive in Q3.

  • "Real personal consumption expenditures increased 2.6 percent in the third quarter, compared with an increase of 2.2 percent in the second."

    This was a little stronger than expected, and PCE will probably slow over the next couple of quarters.

  • Investment: Nonresidential structures increased 3.9 percent, equipment and software increased 12.0 percent and real residential fixed investment decreased 29.1 percent.

    As expected, residential investment declined sharply after the Q2 tax credit boost.

    Overall this was a weak report and will not derail QE2 next Wednesday (further easing from the Fed).
  • Positive growth is better than negative growth, but this is a loss relative to trend growth, and the fact the inventories are driving growth is of concern. Dean Baker puts it into perspective:

    It may not be immediately obvious quite how weakly the economy is growing. First, we need a reference point. When an economy gets out of a steep recession, it should be soaring, not just scraping into positive territory. In the first four quarters following the end of the 1974-75 recession, growth averaged 6.1%. In the four quarters following the end of the 1981-92 recession, growth averaged 7.8%. The growth rate averaged just 3.0% in the four quarters following the end of this recession.
    But the actual picture is even worse. Most of this growth was driven by the inventory cycle as firms went from running down their inventories to rebuilding them. If inventory fluctuations are pulled out, growth in demand averaged just 1.1% over the four quarters following the end of the recession. Final demand growth was down to just 0.6% in the most recent quarter.
    This is cause for serious concern. Inventories grew at the second fastest rate ever in the last quarter. Growth is certain to slow in future quarters, meaning that inventories will be a drag on an already slowing economy. Instead of accelerating, we are likely to see growth just scraping along near zero.

    I've been expecting a long, slow, agonizing recovery, in part because there's little chance that fiscal policy authorities will give the economy the boost it needs to recover faster. As I noted yesterday, the forecast from Macroadvisers is that employment won't fully recover until 2013. I made the same forecast about a year ago, but full recovery by 2013 is looking optimistic now. I wouldn't be surprised if it takes even longer than that.

    The San Francisco Fed is also expecting a slow recovery:

    Frbsf--08

    And, again, even that might be optimistic given that they are forecasting an average growth rate for 2010 of 2.5% and today's estimate came in below that.

    This is not a strong report. As Calculated Risk notes above, this won't derail quantitative easing. However, I don't expect another round of quantitative easing to have a large impact on the growth rate of GDP. Thus, while this won't derail QEII the problem is that it won't move fiscal policymakers to action, and fiscal policy is, in my opinion, the best way to help the economy recover faster.

    October 29, 2010

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    Paul Krugman: Divided We Fail

    Posted: 29 Oct 2010 01:17 AM PDT

    Large Republican gains in the midterms will lead to Congressional chaos and a weaker economy:

    Divided We Fail, by Paul Krugman, Commentary, NY Times: Barring a huge upset, Republicans will take control of at least one house of Congress next week. How worried should we be by that prospect? ...

    This is going to be terrible. In fact, future historians will probably look back at the 2010 election as a catastrophe for America, one that condemned the nation to years of political chaos and economic weakness.
    Start with the politics. In the late-1990s, Republicans and Democrats were able to work together on some issues. President Obama seems to believe that the same thing can happen again today. ... Good luck with that.
    After all, that era of partial cooperation in the 1990s came only after Republicans had tried all-out confrontation, actually shutting down the federal government in an effort to force President Bill Clinton to give in to their demands for big cuts in Medicare.
    Now, the government shutdown ended up hurting Republicans politically... But the lesson current Republicans seem to have drawn from 1995 isn't that they were too confrontational, it's that they weren't confrontational enough. ... Mitch McConnell, the Senate minority leader, has received a lot of attention thanks to a headline-grabbing quote: "The single most important thing we want to achieve is for President Obama to be a one-term president." ...
    Mr. McConnell was saying ... that, in 1995, Republicans erred by focusing too much on their policy agenda and not enough on destroying the president... So this time around, he implied, they'll stay focused on bringing down Mr. Obama.
    True, Mr. McConnell did say that he might be willing to work with Mr. Obama in certain circumstances — namely, if he's willing to do a "Clintonian back flip," taking positions that would find more support among Republicans than in his own party. Of course, this would actually hurt Mr. Obama's chances of re-election — but that's the point.
    We might add that should any Republicans in Congress find themselves considering the possibility of acting in a statesmanlike, bipartisan manner, they'll surely reconsider after looking over their shoulder at the Tea Party-types, who will jump on them if they show any signs of being reasonable. The ... Tea Party is one reason smart observers expect another government shutdown...
    Beyond the politics, the crucial difference between the 1990s and now is the state of the economy.
    When Republicans took control of Congress in 1994, the U.S. economy had strong fundamentals... In this favorable environment, economic management was mainly a matter of putting the brakes on the boom ... and head off potential inflation. And this was a job the Federal Reserve could do on its own by raising interest rates, without any help from Congress.
    Today's situation is completely different. The economy, weighed down by the debt that households ran up during the Bush-era bubble, is in dire straits; deflation, not inflation, is the clear and present danger. And it's not at all clear that the Fed has the tools to head off this danger. Right now we very much need active policies on the part of the federal government to get us out of our economic trap.
    But we won't get those policies if Republicans control the House. In fact, if they get their way, we'll get the worst of both worlds: They'll refuse to do anything to boost the economy now, claiming to be worried about the deficit, while simultaneously increasing long-run deficits with irresponsible tax cuts — cuts they have already announced won't have to be offset with spending cuts.
    So if the elections go as expected next week, here's my advice: Be afraid. Be very afraid.

    "Why Business Should Fear the Tea Party"

    Posted: 29 Oct 2010 01:11 AM PDT

    Robert Reich wonders why business leaders aren't more concerned about the tea party:

    Why Business Should Fear the Tea Party, by Robert Reich, Commentary, WSJ: America's business leaders have not exactly shied away from offering political views ... which makes particularly curious the deafening silence of business leaders about the tea party that's now taking over the GOP and about to take over a chunk of Congress.
    Maybe business leaders see it as a relatively harmless fringe group... Business leaders should take a closer look. ... By fueling the Republican surge in the midterm elections, the tea party has become the single most powerful force in the GOP. ...
    At the least, business leaders who complain about uncertainties caused by Mr. Obama's policies might be concerned. John Castellani, the former head of the Business Roundtable ..., told Bloomberg Businessweek..., with remarkable understatement, "This kind of extremism makes it much harder to plan from a business perspective." ...
    Underlying all of this is a deep tea party suspicion that big government is in cahoots with big business and Wall Street, against the rest of America. This has been the conventional view among leftist conspiracy theorists for years but it's now emerging full-throttle on the right.
    Lesser known is that a higher proportion of tea party adherents believes that free trade agreements hurt the nation overall (61%) than does the general population (53%)...
    History has shown that people threatened by losses of jobs, wages, homes and savings are easy prey for demagogues who turn those fears into anger at major institutions, as well as individuals and minorities who become easy scapegoats—immigrants, foreign traders, certain religious groups. ...
    Business leaders should be standing up to this dangerous idiocy, while actively supporting policies to relieve the economic stresses that fuel it. Their silence in both regards is bad for business and threatens the stability of our economic and political system.

    Aren't people like Rupert Murdoch, David Koch, and Charles Koch providing major backing for the Tea Party?

    Comment Amnesty

    Posted: 29 Oct 2010 01:08 AM PDT

    I've decided it's time to declare comment amnesty. All blocks, etc. are removed. Clean slate. I do this about once a year, though this is the first time I've noted it here.

    I don't really have a formal comment policy. It's mostly discretionary. I read them as much as I can, and delete the ones I think should be deleted. But if I had to describe it, it's something like this:

    I do all of the comment monitoring, and I sometimes I don't have time to do anything but scan through them fast and make quick, on the fly decisions (and there are times, like last week, when I don't get to them at all for several days -- still catching up on those). I'm sure I don't always get it right. I sometimes miss the context and misinterpret comments, and it's not always consistent. Things that get deleted one day might not on another. I try to guard against that, but I have my grouchy, intolerant days just like everyone else. There have been more than a few occasions when I've overreacted and regretted it later, and probably an equal number where I've underreacted. I do my best. It won't be perfect.

    I dislike it when the very first comment on a post sets the wrong tone or sends the conversation in the wrong direction. So comments higher in the comment stream where they have a large impact on how the conversation proceeds, the first in particular, get more scrutiny. That's especially true if it's a post that took a lot of effort and is trying to explain something I think is important.

    All comments about the comment policy are deleted. If you have something to say about that, send me an email.

    There are some things that are simply out of bounds. The bounds are pretty loose, but they do exist.

    I wish I could do more to manage comments, but I can barely keep up as it is.

    I sometimes react negatively to pot shots at economics or economists. Not always -- context matters -- but sometimes I do.

    Sometimes, and this happens on those grouchy, intolerant days in particular, I simply have a negative reaction to a comment, get mad, and delete it. Those are the ones I'm most likely to regret. I do try to catch myself, but don't always manage to do so. Some people rub me the wrong way too.

    When guests post at my site, colleagues, etc., I am far less tolerant.

    There are two reactions to getting a comment deleted. One is to try again after rewriting to tone things down, and I don't usually have any trouble after that. They get the message and that's that. The other is to protest loudly by various means, often email or another comment, and keep it up until I'm forced to block them altogether. It generally ends up that way. Having to deal with the few people who can't control themselves in commets is, to me, the very worst part of blogging. Some days, I can hardly read comments because I dread having to deal with the few that go to these extremes. And some days I don't read them for just that reason.

    The best way to get a comment deleted is to misrepresent something I say in a post, and then attack me for it. In general, I don't see any reason why I should tolerate getting trashed on my own site. There are ways to disagree without doing that.

    I sometimes delete comments that make false claims or link to sites I cannot, in good conscience, send people to. When you put links to those sites in your comments, they are likely to get deleted. False and misleading claims are sometimes deleted too, especially when they are used to try and counter a point I think is important (or when is the first comment on a post).

    I do the best I can, but I can't check every word of every comment.

    I used to send emails to people when I deleted comments, and I sometimes still do. But they mostly turn out to be fake emails, that appears to be highly correlated with getting a comment deleted, and it just brings a flaming email in return. So I mostly stopped bothering.

    When fights break out in comments, and it seems to be interfering with the conversation, gets personal, etc., I am likely to delete the entire set of comments.

    People who have been here a long time are given more leeway when they occasionally step over the line. There are a couple of people who have been here almost from day one, when they were, pretty much, the only ones on the site. They stuck around, kept the conversation going, and helped to build the site. They are more part of the site than visitors to it.

    I don't delete as many comments as this post makes it seem, it's really not that many (excluding the never ending battle aganst spam which brings multiple deletions daily).

    I'd hoped the comments under the daily links posts would be a way for people to pass on links I might have missed. People do add quite a few links (thanks), but mostly people treat these like open threads. Works for me. That's a good place to take off topic comments or conversations.

    You are always welcome to get your own blog -- they're free at Google -- where you can say whatever you want without the worry that some unfair, grouchy, intolerant, ideological tyrant might not to allow your brilliant takedown comment to stay. That would be your blog, this is mine, and I will run it as I think is best. You can run yours as you think is best.

    All of the rules I forgot to mention or haven't thought of yet are in force.

    Most of you are great. Please keep commenting.

    I expect it won't take long for some of you to get back on the banned list -- the same behavior will produce the same outcome -- but perhaps I misjudge. Hope so. I'll try to be tolerant, but there are limits.

    I will probably regret this post.

    links for 2010-10-28

    Posted: 28 Oct 2010 11:01 PM PDT

    Richard Freeman: Labor Law is Broken

    Posted: 28 Oct 2010 12:33 PM PDT

    The National Labor Relations Act is broken, something that has likely contributed to stagnant earnings and the rise in income inequality:

    Labor Law Is Broken, Economist Says, by Steven Greenhouse, NY Times: In a new paper, Richard B. Freeman, a labor economist at Harvard, said he had some "harsh and impolitic" news for the National Labor Relations Act on its 75th anniversary. He declared that the law "has become an anachronism irrelevant for most workers and firms." ...
    Mr. Freeman ... wrote that the act was passed to replace the costly unionization fights of yesteryear – often involving strikes, lockouts, violent confrontations — with "a 'laboratory conditions' elections process for ascertaining workers' attitudes toward union representation that would be free from employer pressures or dishonest statements by employers or unions." He said unionization elections in the private-sector "have turned into massive employer campaigns against unions."
    That, he wrote, is a major reason the percentage of private-sector workers in unions has fallen to 7 percent, down from nearly 40 percent in the 1950s.
    He argued that the penalties in the National Labor Relations Act were weak and "have failed to deter firms from illegal actions to prevent unionization." ... "Far from a laboratory conditions experiment in democracy," he wrote, "the N.L.R.B. process turned into the same costly fight between unions and firms that union organizing was before the act, albeit in a different venue with different weapons." ...
    Professor Freeman said it was hardly surprising that the percentage of public-sector workers in unions was five times as high as the percentage of private-sector workers. One big reason for this, he wrote, is that private-sector employers "have sizable monetary incentives to oppose unionism," and the penalties that N.L.R.B. "has at its disposal are too limited to offset these incentives." He noted that government officials, unlike corporate officials,... "...have little to gain and much to lose from fighting unions." ...
    Professor Freeman wrote that "the failure of the N.L.R.A. process to meet the needs of workers and firms moved the U.S. close to the union-free world that many opponents of trade unions have long desired."
    He suggested that if unions were stronger, the United States might not have the highest income inequality in the developed world or stagnant real earnings for all but the highest paid. He also said that if unions were stronger, a liberal coalition "would presumably have greater countervailing power" to Wall Street and have helped push through stronger financial reforms.
    In conclusion, Professor Freeman had four recommendations. He called for strengthening the penalties against illegal actions by management and unions, recommending penalties against individual managers or union leaders who break the law. Second, he said labor laws should be amended to protect supervisors from being fired or punished if they want to remain neutral...
    Third, he called for early voting at neutral venues instead of having unionization elections held at the work site on a single day. ... He said this "should reduce intimidation or pressure from management or union activists...
    Lastly, Professor Freeman recommends an idea that union leaders hate — allowing employers to set up employee committees that address not just productivity, but also issues that deal with workers' well-being, like hours or pace of work. ... He said that a similar system in Canada works well. ... But unions oppose this idea, asserting that it could lead to management-dominated committees and could convince many workers that they do not need a union.

    People often blame gloabalization and technical change for the decline in unions, but that is far from the complete story.

    October 28, 2010

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    "The Pace of Job Creation Has Been Frustratingly Meager"

    Posted: 28 Oct 2010 12:42 AM PDT

    Macroadvisers says employment is not likely to recover until 2013:

    Macro Musing: Are We in Another Jobless Recovery?:

    • The U.S. is in the midst of another "jobless recovery," in the sense that employment gains have been meager relative to enormous job losses that occurred during 2008 and 2009.
    • We anticipate that job gains will continue at a moderate rate, and that the pre-recession peak in private nonfarm payroll employment won't be reached until 2013, nearly 4 years after the recession ended.
    • This would be roughly comparable to the time it took to regain the pre-recession peak in employment following the 2001 recession, but approximately twice as long as the recovery in employment following the 1990–91 recession and approximately four times as long following recessions in 1970, 1973–75, and 1981–82.
    • The overwhelming factor contributing to the much more sluggish pace of job creation in recent recoveries is much slower growth of output.
    • In contrast, other factors — including productivity growth and changes in the workweek — have played only minor roles in accounting for slower growth of private nonfarm payrolls in recent recoveries.
    • The severity of the decline in employment during 2008 and 2009 is largely accounted for by the weakness in output during the recession, and not by anomalous behavior of productivity.

    Are we in a jobless recovery? Yes, if one doesn't quibble too much with semantics. While it is not the case that there have been no jobs gained in the last few months, the pace of job creation has been frustratingly meager ... [more] ...

    Emp

    I made the same forecast about a year ago, but full recovery by 2013 is looking optimistic now. I wouldn't be surprised if it takes even longer than that.

    "Shares in our Democracy"

    Posted: 28 Oct 2010 12:34 AM PDT

    Robert Reich:

    ...The great bulk of campaign money is coming from a narrower and narrower circle of monied interests. Anyone who doubts the corrupting effect has not been paying attention. Our elected representatives have been acutely sensitive to the needs of Wall Street bankers, hedge-fund managers, and the executives of big pharma, big oil, and the largest health insurance companies. This is not because these individuals and interests are particularly worthy or specially deserving. It is because they are effectively bribing elected officials with their donations. Such donations are not made out of charitable impulse. They are calculated investments no less carefully considered than investments in particular shares of stock. They are shares in our democracy. ...

    "An Energized Minority Trumps a Tepid Majority"

    Posted: 28 Oct 2010 12:12 AM PDT

    Larry Bartels argues that despite the popularity of president Obama's proposal to allow the tax cuts for richest 2% expire, the decision by Democratic leaders in Congress to adjourn without voting on the proposal was politically expedient:

    On Taxes, an Energized Minority, by Larry Bartels, Model Politics: During the 2008 campaign Barack Obama skillfully crafted a popular position on renewing the big Bush-era tax cuts. Obama pledged to keep the lower tax rates for families earning less than $250,000 per year—the vast majority of American taxpayers—while letting the top tax rate revert to its 2000 level.
    With the tax cuts set to expire at the end of this year President Obama has stuck to that position, despite a concerted effort by conservatives to insist that none of the tax cuts should be allowed to expire in the midst of a recession. What is more, he has managed to keep ... Americans on his side. A YouGov/Polimetrix survey fielded last week found that 42% of the public support the president's position... Only 28% ... favor retaining all the tax cuts, including those for the richest taxpayers.
    Despite this sustained public support for the president's position, Democratic leaders in Congress were unwilling to bring the issue to a vote before adjourning last month. ... In light of the popular support for the president's position, was that a political miscalculation?
    Probably not. For one thing, likely voters in next week's election are much more evenly divided in their views about the Bush tax cuts. ... This difference is partly due to the much-noted "enthusiasm gap" between Republicans and Democrats. ... Even more importantly, the sizable minority of people who want the tax cuts for affluent taxpayers renewed seem to attach much more weight to this issue than the slim majority who want them to expire. ...
    An even more lopsided difference appears in the impact of tax cut preferences on presidential approval. People who support President Obama's position on this issue are only slightly more approving..., while those who want to renew all the tax cuts are moved about five times as far toward disapproving. ...
    These differences in preference intensity cannot be explained in terms of simple self-interest. On average, the people who want to renew the tax cuts for top earners are somewhat more affluent than the population as a whole; but only 8% say they have household incomes of $150,000 or more... Half have household incomes of less than $50,000, and almost that many say they don't even know anyone who earns more than $200,000 per year.
    These results suggest that candidate Obama's skillful-looking proposal to allow the tax cuts to expire only for the richest 2% of taxpayers has turned out to be very costly for President Obama and his party, despite its overall popularity. Of course, the president and his allies in Congress could still push to implement the proposal in a lame duck session. If they do, it will be a principled choice rather than a politically expedient one. For expedient politicians, an energized minority trumps a tepid majority every time.

    links for 2010-10-27

    Posted: 27 Oct 2010 11:02 PM PDT

    DeLong: The Humiliation of Britain

    Posted: 27 Oct 2010 11:23 AM PDT

    Brad DeLong:

    The Humiliation of Britain, by J. Bradford DeLong, Commentary, Project Syndicate: ...Even though the British government's credit is still solid gold, Prime Minister David Cameron's administration is about to embark on what may be the largest sustained fiscal contraction ever: a plan to shrink the government budget deficit by 9% of GDP over the next four years. ...

    Cameron's government used to claim that its policies would produce a boom by bringing a visit from the Confidence Fairy that would greatly reduce long-term interest rates and cause a huge surge of private investment spending. Now it appears to have abandoned that claim in favor of the message that failure to cut will produce disaster. ...
    What is so bad about continuing to run large budget deficits until the economic recovery is well established? Yes, the debt will be higher and interest on that debt will have to be paid, but the British government can borrow now at extraordinarily favorable terms. When interest rates are low and you can borrow on favorable terms, the market is telling you to pull government spending forward into the present and push taxes back into the future.
    Advocates of austerity counter that confidence in the government's credit might collapse, and the government might have to roll over its debt on unfavorable terms. ...

    To be sure, back in the 1970's, confidence in the credit of the British government collapsed, forcing it to borrow from the IMF... But that is why Keynes and Harry Dexter White established the IMF in the first place. An IMF program restores confidence in the fiscal soundness of governments that markets distrust. The lending allows the necessary medium- and long-term spending cuts and tax increases to be undertaken at a more appropriate time.
    Borrowing from the IMF may be humiliating for government officials. But businesses establish lines of credit for future contingencies all the time, and they don't think there is anything humiliating about resorting to them when those contingencies come to pass. And what, really, is so humiliating about borrowing from your own citizens? ...
    To borrow from your own people is especially non-humiliating when your economy is in depression, when the interest rates at which you can borrow are at near-record lows, and when every economic argument cries out for spending now and taxing later.
    What is humiliating is to have a government that cuts a half-million public-sector jobs and causes the loss of another half-million jobs in the private sector. In an economy of 30 million jobs, that translates into an increase in the unemployment rate of 3.5 percentage points – at a time when no sources of expanding private-sector demand exist to pick up the slack. Britain's finest hour this is not.

    As I noted yesterday, my worry is that the outcome of the midterm elections will make it more likely that we'll catch the austerity bug and begin trying to balance the budget before the economy is ready.

    October 27, 2010

    Latest Posts from Economist's View

    Latest Posts from Economist's View


    Fed Watch: Too Little

    Posted: 27 Oct 2010 01:17 AM PDT

    Sudeep Reddy reports on the Fed's plans for another round of quantitative easing:

    The Federal Reserve is likely to announce a new bond-buying program next week structured around smaller purchases that can be adjusted over time, rather than the shock-and-awe approach it employed in 2009. It's a cautious strategy that considers the uncertainty around both the pace of the recovery and the costs of embarking on another round of purchases.

    He also notes that an old speech from Bernanke helps us to understand why the Fed is adopting a gradual approach:

    ...Then he [Bernanke] gets into miniature golf:
    "Imagine that you are playing in a miniature golf tournament and are leading on the final hole. You expect to win the tournament so long as you can finish the hole in a moderate number of strokes. However, for reasons I won't try to explain, you find yourself playing with an unfamiliar putter and hence are uncertain about how far a stroke of given force will send the ball. How should you play to maximize your chances of winning the tournament?
    "Some reflection should convince you that the best strategy in this situation is to be conservative. In particular, your uncertainty about the response of the ball to your putter implies that you should strike the ball less firmly than you would if you knew precisely how the ball would react to the unfamiliar putter. This conservative approach may well lead your first shot to lie short of the hole. However, this cost is offset by the important benefit of guarding against the risk that the putter is livelier than you expect, so lively that your normal stroke could send the ball well past the cup. Since you expect to win the tournament if you avoid a disastrously bad shot, you approach the hole in a series of short putts (what golf aficionados tell me are called lagged putts). Gradualism in action!"
    Bernanke tends to spend much of his free time watching baseball, not golf, so give him some credit for this one

    But is gradualism always best? If the putt is up a steep hill and the flag is just over the crest, and there is a large flat spot behind it, gradualism is the wrong approach. In this case, you'd want to be sure to clear the crest of the hill. There's still a sense in which you would play conservatively, especially after clearing the hill, but the point is that the first shot should guard against undershooting. The putter may be deader than you expect, and to guard against this you'd want to give the putt a little extra force so as to be sure to clear the hill. If the putter turns out to be lively instead of dead and you overshoot, that's still better than an outcome where the ball rolls all the way back down the hill and you have to try it all over again.

    This has come up before. As I noted in January 2009 during the debate over the size of the fiscal stimulus package:

    the stimulus package is like driving up an icy hill. If you don't have enough momentum from the start and fail to provide enough "stimulus" to get the car over the crest of the hill, you can slide all the way back to the bottom, crashing into things along the way and end up worse off than when you started. Maybe you can give it more gas along the way if needed without spinning out, and perhaps you can hold your position if you don't make it to the top, and then start again from the higher level. But that's not a chance I want to take when I'm sitting at the bottom wondering if I can make it to the top without wrecking my car. The possibility of falling all the way back to the bottom and ending up worse off would make me want to start with sufficient momentum and then some.

    Gradualism is not always the best approach (even in miniature golf). As Paul Krugman said recently in response to a Bernanke speech indicating that the Fed is likely to be cautious in implementing unconventional policies such as quantitative easing, "half-hearted measures are a good way of guaranteeing that unconventional policy fails."

    A defense of the gradualist approach comes from Jim Bullard, president of the St. Louis Fed, in an email responding to Tim Duy's opposition to a "disciplined" QE program:

    ...on the "disciplined" QE program: The quote from Vince Reinhart, who is a great guy, gives the "shock and awe" view of QE. I do not think this is remotely correct. We know how monetary policy works: through the expected future path of policy, not through the actual move on a particular day. When we make 25 basis point moves on the federal funds rate, those are small viewed in isolation, but they have important effects for macroeconomic stabilization because they imply an expected interest rate path over the coming years. The same is true for QE. A move on a particular day may seem small, but it implies a path for future policy, and a series of smaller moves may add up to a very large move if the incoming data are consistent with such an outcome. The "shock and awe" view, if applied to interest rate targeting, would suggest very large interest rate movements in response to relatively small changes in incoming data, a policy that most would view as destabilizing for the macroeconomy. The same is true for QE. So the point is that QE moves should be commensurate with the incoming data (a.k.a. "state contingent"). Of course we can argue about the incoming data--and I know you have strong views on that--but I think my position on a "disciplined" QE program is correct and that the dangerous policy is to make destabilizing moves out of line with the incoming data.

    Here's the Reinhart quote Bullard refers to:

    I think Chairman Bernanke probably disagrees [that the Fed is out of ammunition] on two main counts. One is there's still communication. The Fed could convey they're going to keep interest rates low for a very long time. They've probably done as much as they can on that front. They maybe could do a little bit more. But that leads to one other option, which is buying stuff, buying Treasury securities. Now, Alan Binder I think, believes that that effect isn't that great, but the way you get around that is to buy in very large volume..., it will have to do very large purchases of Treasury securities.

    And here's Tim Duy's latest Fed Watch, which addresses this issue:

    Too Little, by Tim Duy: Federal Reserve policymakers must be pleased with themselves. Market participants have fallen in line like lemmings off a cliff pursuing the obvious trades as the excitement over quantitative easing builds. Equities, bonds, commodities are all up. Dollar is down. Perhaps more importantly, measured inflation expectations have trended higher. Psychology is a powerful thing. Like leverage.

    But like leverage, psychology can turn against you. The psychology of market participants forms on the back of expectations, which in this case is for the Fed to announce a significant expansion of the balance sheet on November 3. If the Wall Street Journal is correct, the Fed is poised to disappoint those expectations with an announcement of "a few billion dollars over several months." This looks like a clear effort to temper expectations.

    How can Federal Reserve Chairman Ben Bernanke not view this as anything but yet another major policy error? The first supposedly "shock and awe" balance sheet expansion failed to reflate the economy. What kind of expectations should we have for the "shock and disappoint" strategy? And the stakes are even greater. Market participants already dutifully followed the first reflation attempt, and have eagerly embraced the second. Just exactly how many bites at the apple does Bernanke expect he is going to get? Fool me once….

    Moreover, the Fed's communication strategy will almost certainly become more muddled in future months. A reminder from the Wall Street Journal:

    In the next few months, internal opposition to Mr. Bernanke's approach could intensify as presidents of three regional Fed banks who have expressed skepticism about the plan—Narayana Kocherlakota of Minneapolis, Richard Fisher of Dallas and Charles Plosser of Philadelphia—take voting positions on the Fed's policy-making body.

    To be sure, Fed policymakers will argue that they are trying to preserve flexibility. Why is it that "flexibility" means the ability to scale up? Why can't "flexibility" mean the ability to scale down? Seriously, it is not as if the Fed is in any danger of hitting either of the objectives in the dual mandate anytime soon. And does Bernanke really believe that it will be any easier to offer a credible commitment to scale up once Dallas Federal Reserve Chairman Richard Fisher is a voting member of the FOMC?

    And to what extent does a smaller than anticipated QE reflect a concern about a precipitous fall in the Dollar? Is this part of the G20 "agreement" to end currency battles? Taking currency effects off the table will greatly reduce the effectiveness of any QE strategy. Does Bernanke expect to win this battle on expectations alone, without actually having to live up to those expectations?

    Bottom Line: Right now, I have more questions than answers. The US economy is operating below potential to the tune of about a trillion dollars give or take. The Obama Administration is poised to turn its attention to deficit reduction, seemingly oblivious to the historical errors of Japanese fiscal policy, not to mention the US experience in the Great Depression. For better or worse, that leaves monetary policy to bear the burden. But the Federal Reserve is signaling they are poised to deliver far less than necessary to meet expectations, expectations that already were likely overly optimistic. Truly, it boggles the mind, and suggests that Bernanke is far more worried about the specter of inflation than the real pain of unemployment.

    links for 2010-10-26

    Posted: 26 Oct 2010 11:02 PM PDT

    The Dangers of Gridlock in Economic Policy

    Posted: 26 Oct 2010 11:52 AM PDT

    At MoneyWatch, I have a new post:

    The Dangers of Gridlock in Economic Policy

    It gives three reasons to worry if Republicans make significant gains in the midterm elections.

    How Quantitative Easing Can Help State and Local Governments

    Posted: 26 Oct 2010 08:28 AM PDT

    I have a new column explaining how quantitative easing can help state and local governments:

    Stimulus from the Fed Can Yield a High Return to Taxpayers

    The column also discusses how the federal government might be be induced to give state and local governments help in solving their budget problems.