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December 31, 2010

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Paul Krugman: The New Voodoo

Posted: 31 Dec 2010 12:24 AM PST

Republicans used to claim that tax cuts paid for themselves so that they could rail against the deficit and cut taxes at the same time. Though some in the GOP still resort to this defense of tax cuts, now that the "tax cuts pay for themselves" myth has been exposed, Republicans are turning to a new defense of simultaneously cutting taxes and giving "impassioned speeches denouncing federal red ink" that is every bit as flimsy as the old one:

The New Voodoo, by Paul Krugman, Commentary, NY Times: Hypocrisy never goes out of style, but, even so, 2010 was something special. For it was the year of budget doubletalk — the year of ... railing against deficits while doing everything they could to make those deficits bigger. ...
In the first half of 2010, impassioned speeches denouncing federal red ink were the G.O.P. norm. And concerns about the deficit were the stated reason for Republican opposition to extension of unemployment benefits, or for that matter any proposal to help Americans cope with economic hardship.
But the tone changed during the summer, as B-day — the day when the Bush tax breaks for the wealthy were scheduled to expire — began to approach. My nomination for headline of the year comes from the newspaper Roll Call, on July 18: "McConnell Blasts Deficit Spending, Urges Extension of Tax Cuts."
How did Republican leaders reconcile their purported deep concern about budget deficits with their advocacy of large tax cuts? Was it that old voodoo economics — the belief, refuted by study after study, that tax cuts pay for themselves — making a comeback? No, it was something new and worse. ...
2010 marked the emergence of a new, even more profound level of magical thinking: the belief that deficits created by tax cuts just don't matter. For example, Senator Jon Kyl of Arizona — who had denounced President Obama for running deficits — declared that "you should never have to offset the cost of a deliberate decision to reduce tax rates on Americans."
It's an easy position to ridicule. After all, if you never have to offset the cost of tax cuts, why not just eliminate taxes altogether? But the joke's on us because ... the incoming House majority plans to make changes in the "pay-as-you-go" rules ... that effectively implement Mr. Kyl's principle. Spending increases will have to be offset, but revenue losses from tax cuts won't. Oh, and ... any spending increase must be offset by spending cuts elsewhere; it can't be paid for with additional taxes.
So if taxes don't matter, does the incoming majority have a realistic plan to cut spending? Of course not. Republicans say that ... defense, Medicare and Social Security — all the big-ticket items — are off the table. So they're talking about a 20 percent cut in what's left, which includes things like running the judicial system and operating the Centers for Disease Control and Prevention; they have offered no specifics about where the cuts will fall.
How will this all end? I have seen the future, and it's on Long Island, where I grew up.
Nassau County — the part of Long Island that directly abuts New York City — is one of the wealthiest counties in America and has an unemployment rate well below the national average. So it should be weathering the economic storm better than most places.
But a year ago, in one of the first major Tea Party victories, the county elected a new executive who railed against budget deficits and promised both to cut taxes and to balance the budget. The tax cuts happened; the promised spending cuts didn't. And now the county is in fiscal crisis. ...
Nassau County shows how easily responsible government can collapse in this country, now that one of our major parties believes in budget magic. All it takes is disgruntled voters who don't know what's at stake — and we have plenty of those. Banana republic, here we come.



links for 2010-12-30

Posted: 30 Dec 2010 10:01 PM PST

"Hazards in Interpreting Seasonals"

Posted: 30 Dec 2010 05:31 PM PST

Once again, Menzie Chinn finds that an analysis from Casey Mulligan does not hold up to closer scrutiny:

Hazards in Interpreting Seasonals, by Menzie Chinn: Professor Casey Mulligan has an interesting post, in which he observes that while retail sales are about 15-20% higher in December than in the previous three months, retail employment is only about 4% higher in December than October, thus proving that fiscal stimulus cannot be very effective at raising employment. ...

Professor Mulligan's calculation is essentially a one observation regression of the change nominal retail sales on change in retail employment. ... But I think this ... is irrelevant. First, the employment that is relevant is the total employment associated with Christmas-goods production and distribution (in addition to retail employment). Second, the activity variable that is relevant is not sales, but US related value-added. So not:



Δ(value added)/Δ(employment)

The value of retail sales incorporates the value added from retail services, plus the value imbedded in the goods themselves. Those goods were produced over the entire year (i.e., not all Christmas ornaments are made in December). The counter-objection could be that Christmas ornaments aren't typically made in the US. But then I know that at least some of the gifts are American made (after all, Wisconsin cheese makes a fine holiday gift! And most of the gifts I received were American made). That relates to the value added component. Thus, the relevant numerator is smaller, and the relevant denominator bigger, implying the relevant ratio is smaller than Professor Mulligan purports. ...

There are many valid approaches to critiquing the idea of fiscal stimulus efficacy (e.g., CBO (Nov. 2010). This is not one of them. ...

By the way, this article highlights the hazards of over-interpreting seasonal effects. The canonical example occurred forty years ago, when Arthur Laffer interpreted the seasonal correlation of GDP and money as a causal relationship [4] (critique here). (This episode is not written down in any textbook as far as I know, but is passed down by word-of-mouth as a cautionary tale.)

Menzie also points to this statement from Mulligan:

...the fiscal-stimulus act depresses supply, because many of its major programs -- the unemployment-insurance extension, the food-stamp program expansion, the home buyer tax credit and more -- are directed at people with low incomes.

In other words, the less you work and earn, the larger your entitlement to various components of the act. By reducing supply as it increases demand, the fiscal-stimulus act could well reduce total employment...

According to this view of the world, a big part of our economic and employment problem right now is that "people with low incomes" would rather live on unemployment insurance and food stamps than work. It's not the lack of jobs that is the problem, it's the fact that people won't take jobs that aren't there.

It would be silly to say that nobody ever exploits the existence of a government program, of course that happens (but that doesn't mean the costs of these programs exceed the benefits, i.e. the mere existence of a cost is not enough to conclude that a program should be discontinued, it's the net benefits that matter). However, to attribute the major part of our employment problem to this behavior flies in the face of the available evidence on hiring behavior by firms relative to the number of people seeking jobs. There simply aren't enough jobs to go around, and we have not been creating jobs at a fast enough pace to keep up with population growth, let alone reabsorb the millions of workers who have lost their jobs during the recession.

Our problems did not arise with "people with low incomes," though there seems to be a concerted effort to place the blame on this segment of society (e.g., see the claims from conservatives that the CRA caused the crisis, claims that have been thoroughly rebutted but persist nonetheless). To find those who are actually to blame, looking a bit further up in the income distribution -- somewhere up near the very top -- would be more fruitful.

Initial Claims for Unemployment Insurance Fall Below 400,000

Posted: 30 Dec 2010 09:59 AM PST

At CBS MoneyWatch, a reaction to today's news on initial claims for unemployment insurance:

Initial Claims for Unemployment Insurance Fall Below 400,000

Update: I should add the cautionary note that seasonal adjustment procedures can be misleading near holidays, so the good news in the report comes with lots of uncertainty.

December 30, 2010

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Who Should Replace Larry Summers?

Posted: 30 Dec 2010 12:42 AM PST

Noam Scheiber defends Gene Sperling as "a leading candidate or the leading candidate to replace Larry Summers as head of Obama's NEC":

Is the Favorite to Replace Larry Summers Too Close To Wall Street?, by Noam Scheiber, TNR: ...Gene Sperling, a counselor to Secretary Tim Geithner,... was director of Bill Clinton's National Economic Council (NEC) in the late '90s, a period when the White House got pretty good marks for its understanding of business and the broader economy. But ... Sperling often speaks up for the little guy in internal deliberations—he was one of the administration wonks most concerned about executive pay, and he argued passionately for saving Chrysler...
Sperling's record has suddenly become highly relevant because, depending on who you talk to, he's either a leading candidate or the leading candidate to replace Larry Summers as head of Obama's NEC. In light of the forgoing, you might also think he'd be a liberal favorite for the job. But Sperling has recently taken some lumps in the Huffington Post for his alleged sympathy for bankers and his ties to former Clinton Treasury Secretary Robert Rubin. ...
Sperling was NEC director when the Clinton administration ushered in some unfortunate deregulatory changes, pretty much every account I've either read or heard from people involved confirms that ... Sperling was a marginal player at best. ...
What about his instincts when he did work on issues of interest to Wall Street? ... Sperling turns out to be the Treasury official who was most influential in helping persuade Geithner to embrace a fee on large financial firms to make the government whole after TARP, the vehicle for its various bailouts. The president unveiled the 10-year, $90 billion fee in January of 2010. Wall Street promptly howled. ...
Long story short: This hardly strikes me as the profile of a man out to do the banks' bidding. Sperling may not be the kind of populist who makes the average HuffPo reader swoon. But I doubt his record as a policymaker inspires much chuckling on Wall Street.

I still think a break from the Wall Street connected side of the Clinton administration would have political value. Even better, no matter the choice, would be to show through action that the administration is, in fact, determined to reduce the chances of another meltdown by being tough on the financial sector. But, so far as I can tell, that doesn't seem to be the direction Obama intends to go.

Would a Revival of Cities Spur Economic Growth?

Posted: 30 Dec 2010 12:36 AM PST

Ed Glaeser makes the case for cities:

America's revival begins in its cities, by Edward L. Glaeser, Commentary, Boston Globe: ...America's 12 largest metropolitan areas collectively produced 37 percent of the country's output in 2008, the last year with available data. ...
During the 1980s, we looked at Japan and saw an economy that seemed to be surpassing our own. Today, we watch with unease as China surges. Yet American decline is not inevitable. During the 25 years after 1982, our real gross domestic product increased by 3.3 percent per year... Our post-1982 growth involved massive economic restructuring. Manufacturing employment fell by 39 percent from its peak ... in 1979. The 1979-2009 manufacturing decline was more than offset by the 126 percent increase in employment in "professional and business services" and the 184 percent increase in education and health jobs. ...
To succeed in the future, the country needs to produce a stream of new ideas, like personal computers, Facebook, and steerable catheters. We must produce goods and services innovative enough to command the high prices needed to cover high labor costs. Such breakthroughs rarely come from solitary geniuses. ...
Cities have long enabled economic creativity. ... The urban edge in engendering innovation explains why globalization and technology have made cities more, not less, important. The returns to being smart have increased, and humans get smart by being around smart people in cities. ...
For decades, the American dream has meant white picket fences and endless suburbs. But the ideas created in dense metropolitan areas power American productivity. We should reduce the pro-homeownership bias of housing policies, such as the home mortgage interest deduction, which subsidize suburban sprawl and penalize cities. We should rethink infrastructure policies that encourage Americans to move to lower-density environments. Most importantly, we should invest and innovate more in education, because human capital is the ultimate source of both urban and national strength.
As we grope towards a brighter future, we must embrace our cities, and invest in the skills that are central to their success.

See also Daniel Little: Thinking Cities Darkly:

...Cities capture much of what we mean by "modern," and have done so since Walter Benjamin's writings on Paris (link). But unlike the eighteenth or nineteenth centuries, much of our imagining of cities since the early twentieth century has been dark and foreboding. A recent volume edited by Gyan Prakash, Noir Urbanisms: Dystopic Images of the Modern City, offers a collection of recent work in cultural studies that attempts to decode some of this dark imagery. ...

Prakash's excellent introduction begins with these observations:

As the world becomes increasingly urban, dire predictions of an impending crisis have reached a feverish pitch. Alarming statistics on the huge and unsustainable gap between the rates of urbanization and economic growth in the global South is seen to spell disaster. The unprecedented agglomeration of the poor produces the specter of an unremittingly bleak "planet of slums." Monstrous megacities do not promise the pleasures of urbanity but the misery and strife of the Hobbesian jungle. The medieval maxim that the city air makes you free appears quaint in view of the visions of an approaching urban anarchy. Urbanists write about fortified "privatopias" erected by the privileged tow all themselves off from the imagined resentment and violence of the multitude. Instead of freedom, the unprecedented urbanization of poverty seems to promise only division and conflict. The image of the modern city as a distinct and bounded entity lies shattered as market-led globalization and media saturation dissolve boundaries between town and countryside, center and periphery. From the ruins of the old ideal of the city as a space of urban citizens there emerges, sphinx-like, a "Generic City" of urban consumers.

As important as it is to assess the substance of these readings of contemporary trends in urbanization, it is equally necessary to examine their dark form as a mode of urban representation. This form is not new. Since the turn of the twentieth century, dystopic images have figured prominently in literary, cinematic, and sociological representations of the modern city. In these portrayals, the city often appears as dark, insurgent (or forced into total obedience), dysfunctional (or forced into machine-like functioning), engulfed by ecological and social crises, seduced by capitalist consumption, paralyzed by crime, wars, class, gender, and racial conflicts, and subjected to excessive technological and technocratic control What characterizes such representations is not just their bleak mood but also their mode of interpretation, which ratchets up a critical reading of specific historical conditions to diagnose crisis and catastrophe.

All the essays are interesting and insightful...

links for 2010-12-29

Posted: 29 Dec 2010 10:01 PM PST

Fannie, Freddie, and the Pain Caucus

Posted: 29 Dec 2010 10:33 AM PST

The members of the Pain Caucus see things differently when they will be the ones blamed for the pain (which tells us something about how all those calls for deficit reduction from the GOP are likely to turn out). House Republicans, who now have responsibility for the oversight of Fannie and Freddie, have decided that dismantling Fannie Mae and Freddie Mac isn't so urgent after all:

Suddenly, some members of the GOP realize they actually will be part of the government, by Richard Green: Alan Zibel writes in the Wall Street Journal:

Earlier this year, leading House Republicans proposed to privatize mortgage giants Fannie Mae and Freddie Mac or place them in receivership starting in two years.

Now, as Republicans prepare to assume control of the House next week, they aren't in as big a rush, cautioning that withdrawing government support in the housing market should be gradual.

"We recognize that some things can be done overnight and other things can't be," said Rep. Scott Garrett (R., N.J.), incoming chairman of the House Financial Services subcommittee, which oversees Fannie and Freddie. "You have to recognize what the impact would be on the fragile housing market as it stands right now."

I actually don't think the mortgage market will ever be truly a private sector enterprise. Suppose Fannie and Freddie were to go away: the most likely entities to step into the residential finance market would be banks. Would this be privatization? Not really. Banks receive explicit guarantees (FDIC) and, as we know from recent events, implicit guarantees as well (TARP was nothing if not the execution of an implicit Federal guarantee).

The conservative complaint about Fannie and Freddie is that they privatized profit while socializing risk. This is doubtless true. I just don't see how it is any less true for banks.

DeLong: A Time to Spend

Posted: 29 Dec 2010 09:36 AM PST

Brad DeLong argues that "the first principle of macroeconomic policy is that because only the government can create the investment-grade financial assets that are in short supply in a depression, it is the government's task to do so." He then asks, "How well have the world's governments performed this task over the past three years?":

A Time to Spend, by J. Bradford DeLong, Commentary, Project Syndicate: The central insight of macroeconomics is a fact that was known to John Stuart Mill in the first third of the nineteenth century: there can be a large gap between supply and demand for pretty much all currently produced goods and services and types of labor if there is an equally large excess demand for financial assets. And this fundamental fact is a source of big trouble.
A normal gap between supply and demand for some subset of currently produced commodities is not a serious problem, because it is balanced by excess demand for other currently produced commodities. ... The economy rapidly rebalances itself... By contrast, a gap between supply and demand when the corresponding excess demand is for financial assets is a recipe for economic meltdown. ... Thus, because only the government can create the investment-grade financial assets that are in short supply in a depression, it is the government's task to do so. ...
How well have the world's governments performed this task over the past three years?  In East Asia (minus Japan), governments appear to have been doing rather well. ... In North America, governments appear to have muddled through. They have not provided enough bank guarantees, forced enough mortgage renegotiations, increased spending enough ... to ... and facilitate a rapid return to full employment. But unemployment has not climbed far above 10%, either.
The most serious problems right now are in Europe. Uncertainty about how, exactly, the liabilities of highly leveraged banks and over-leveraged peripheral governments are to be guaranteed is shrinking the supply of safe savings vehicles at a time when macroeconomic rebalancing calls for it to be rising. And the rapid reductions in budget deficits that European governments are now pledged to undertake can only increase the likelihood of a full double-dip recession.
The broad pattern is clear: the more that governments have worried about enabling future moral hazard by excessive bailouts and sought to stem the rise in public debt, the worse their countries' economies have performed. The more that they have focused on policies to put people back to work in the short run, the better their economies have done. ...

December 29, 2010

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Fed Watch: Curiously Weak Consumer Confidence

Posted: 28 Dec 2010 11:04 PM PST

Tim Duy:

Curiously Weak Consumer Confidence, by Tim Duy: There was a bit of angst regarding yesterday's Conference Board consumer confidence report. See, for example, Mark Thoma and Brad DeLong. The report appears to contradict the generally positive Univ. of Michigan report - still weak compared to pre-recession, but at least moving in the right direction. More interestingly, it is at odds with recent consumer spending reports, not just early reports of the best Christmas season (in terms of year-over-year gains) since 2005, but also the most recent trends in personal consumption expenditures.
Something is off-kilter, and has been since mid-year. Consumer confidence appears too low relative to actual consumption. Either confidence should be moving higher, as the Univ. of Michigan survey suggests, or consumption needs to slow dramatically. Place your bets.
Consider the recent trends in real consumer spending (percentage change are log difference approximations):


To be sure, the trend since the recovery began is decidedly lower than the pre-recession trend. But this trend hides a recent acceleration. Average monthly growth for 2010 to date is 0.2%, but for the most recent three months (Sept.-Nov.), the rate accelerates to 0.35%, well above the pre-recession trend and, dare I say it, something much more like the kind of "catch-up" we would be hoping to see - or would have been hoping to see earlier in the recovery. The pessimist in me, however, tends to think this acceleration is not entirely sustainable. Pessimism aside, this kind of growth has driven a nontrivial acceleration in the year-over-year figures:


Now, compare year-over-year consumption growth with consumer confidence (UMich., because I have those charts on hand):


Note the divergence beginning in July of last year - confidence tumbles, and stays low despite growing real consumption. To be sure, this is a noisy relationship, but it appears the last five readings are anomalous. Consider a scatterplot and simple linear regression:


Now isolate the five most recent observations:


They are all consistently above the fitted regression line, and the one-sided nature of the error is sufficient to slightly lift the R-squared of the regression. Also note that the most recent reading, with UMich. confidence rising to 71.6, is a movement in the "right" direction, toward the fitted line.
But here comes the hard part - a movement in the "right" direction could also occur if consumption growth slowed, pushing the year-over-year figures to the 0.5-1.0 percent range. The expected policy path will obviously depend on which "right" move occurs. If confidence rises to match spending, expect the Fed to draw large scale asset purchases to a close when the current program expires. Also expect that the Administration will feel more confident to give the go-ahead to spending consolidation. Expect the opposite if spending growth falls to match confidence.
The reasons to expect more tempered spending growth in the months ahead are well known at this point. Weak job growth, need to rebuild wealth and/or the flip side of need to reduce debt loads, the related weak housing market (also angst over the Case-Shiller numbers yesterday, but I will try to address that tomorrow night), impending retirement needs, threat of zombie apocalypse, etc.). A seemingly endless list of pessimism, to be sure. And well justified pessimism at that. Still, all of these factors have been in play for the past year, yet consumer spending accelerates as if households are in blissful ignorance. Perhaps they are.
Ignorance aside, I think the acceleration needs an explanation of some sorts. Throwing out some ideas, first note that household balance sheets are in a better position, at least measured by the debt servicing costs:


Also, saving rates are well above pre-recession lows:


Consumption can be supported by taking savings rates back down to zero, or close to it. To be sure, you can respond angrily that consumers desperately need to rebuild their asset base, that policies such as ZIRP that encourage spending simply kick the can down the road, etc. And these things might be true. But, in the near term, one cannot deny the potential for consumer spending support via a falling saving rate. This is especially important given occasional concerns about rising oil prices. When the last oil shock hit in 2006-7, saving rates were hovering around 2%, not much cushion to absorb the shock. At least at 5.3% consumers have a little more wiggle room.
Finally, real income less transfer payments are on the rise:


Yes, yes, yes, well below pre-recession peaks and trends. But the direction is decidedly positive, and provides support for accelerated spending. And it provides some cushion as the 99er's fall off the insurance rolls.
Bottom line: Consumer confidence figures appear inconsistent with actual spending patterns. That inconsistency will be resolved by either confidence rising or falling spending growth, with more or less obvious policy implications. There will be a tendency to assume the resolution will come from decelerating spending growth. To be sure, the recent trend appears unsustainable. But I also think it is worth paying attention to the more positive household spending data.

links for 2010-12-28

Posted: 28 Dec 2010 10:11 PM PST

Reich: The Tea Party Strategy

Posted: 28 Dec 2010 07:29 PM PST

Robert Reich has a prediction:

New Years Prediction (I): The Tea Party Conservative Strategy for 2011, by Robert Reich: Next week starts the new Congress, and with it the Tea Party conservatives. What's their strategy? What will they rally around?  
They'll grouse endlessly about government spending but I don't think they'll use any particular spending bill to mobilize and energize their grass roots. The big bucks are in Social Security, Medicare, and defense, which are too popular. And their support for a permanent extension of the Bush tax cuts will make a mockery of any argument about  taming the deficit.  
Nor will they focus on the debt ceiling. Their opposition to raising it will generate a one-day story... Most Americans aren't particularly interested in the debt ceiling, don't know what it means, and don't feel affected by it.
Instead, I expect their rallying cry will be about the mandatory purchase of health care built into the new healthcare law. The mandate is the least popular, and least understood, aspect of that law. Yet it's the lynchpin. Without it, much of the rest of the law falls apart: It's impossible to cover all high-risk Americans, including those with pre-existing conditions, unless those at far lower risk are required to buy insurance.
Knowing they don't stand a chance of getting a direct repeal of the mandate..., they'll try to strip the federal budget appropriation of money needed to put the mandate into effect. This could lead to a standoff with the White House over government funding in general, and a possible government shutdown.
My betting is Tea Party conservatives wouldn't mind a government shutdown over the healthcare mandate. Unlike Bill Clinton's showdown with Newt Gingrich, which hurt the conservative cause, Tea Partiers believe this one could be helpful. ...
Advice to Obama White House: Get ready.

My worry, or one of them anyway, is that despite Reich's assurances to the contrary, the big story will be Social Security.

[See also: Why We Need an Individual Mandate for Health Insurance.]

How Fast Will the Economy Recover?

Posted: 28 Dec 2010 11:16 AM PST

[I just posted this at CBS MoneyWatch:]

I have been pretty pessimistic about the speed of the recovery. The worry is not about a double dip -- I think the probability of that happening is pretty low. But I have been worried about an "agonizingly slow recovery," particularly for employment, one that is measured in years rather than months.

However, recent news such as the rise in long-term interest rates, which appears to be due to the expectation of a better economy ahead, along with better than expected Christmas sales, changes in the yield curve, falling jobless claims, increased consumer spending, and other signs of an improving economy had me thinking that I may need to reassess my pessimism. Perhaps the recovery will still be drawn out, but not quite as slow as expected. That would be good news.

But two pieces of data released today have me moving back toward the more pessimistic outlook. Consumer confidence is down, and house prices are still falling. The fact that the fall in consumer confidence seems to be related to a fall in job market prospects adds to the worries. Overall, recent data has been mixed with some encouraging signs coupled with signs that we still face significant hurdles.

So where does that leave us? I can't help but hope that despite today's data and other negative signs the economy will do better than I expect. But policymakers must recognize that we do not yet have the all clear sign, the economy will likely still need help to recover. Thus, although further stimulus is off the table after the tax deal, policymakers must resist the temptation to ignore negative data and to focus instead on the data pointing to a faster recovery than expected as an excuse to cut the deficit (and hence the stimulus) before the economy is ready to stand on its own. As I said recently in response to a question at The Economist, cutting the deficit too soon could cause big problems:

... If Congress had credibility, there would be no need to worry about the trade-off between helping the economy escape the recession and reducing the deficit. Congress could do what is needed to help the economy now, and promise—credibly with specific plans—to reduce the deficit once the economy has recovered. That would give us the best of both worlds.

But, unfortunately, that's not the Congress we have, credibility is not its strong suit, and legislators seem determined to demonstrate their intent with actions now rather than a commitment to take this up when the economy is stronger. This will place additional drag on an already slow recovery...

So let's hope we can at least realize the promise of gridlock and maintain the status quo until the economy is on better footing. ...

Will talk of deficit reduction turn to action before the economy is ready for it? Unfortunately, I don't think we can rule that out, but the worry may not be as large as one might presume from media reports on the GOP's deficit fighting intentions. As the CBPP reports, House Republican Rule Changes Pave the Way For Major Deficit-Increasing Tax Cuts, Despite Anti-Deficit Rhetoric. So it appears that the deficit reduction rhetoric may be an excuse to cut spending on programs the GOP does not like, e.g. cuts to social insurance programs, rather than an actual intent to cut the deficit. However, we need more spending on social programs not less -- insecurity is growing in our increasingly global economy -- and tax cuts accompanied by cuts to social services would be going in the wrong direction.

December 28, 2010

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"Keynes on the 'Psychology of Society'"

Posted: 27 Dec 2010 11:07 PM PST

Richard Green:

Keynes on the "Psychology of Society," by Richard Green: ...The ... Economic Consequences of the Peace ... has a section early on that really struck me:

Europe was so organized socially and economically as to secure the maximum accumulation of capital.  While there were some continuous improvements in the daily conditions of life of the mass of the population, Society was so framed to throw a great part of the increased income into the control of the class least likely to consume it.  The new rich of the 19th century were not brought up to large expenditures, and preferred the power which investment gave them to the pleasures of immediate consumption.  In fact, it was precisely the inequality of the distribution of wealth which made possible those vast accumulations of fixed wealth and of capital improvements which distinguished that age from all others.  Herein lay, in fact, the main justification of the Capitalist System.  If the rich had spent their new wealth on their own enjoyments, the world long ago would have found such a regime intolerable.  But like bees they saved and accumulated, not less to the advantage of the whole community because they themselves held narrower ends in prospect.

The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war [WWI], could never have come about in a Society where wealth was divided equitably.  The railways of the world, which that age built as a monument to posterity, were, not less than the Pyramids of Eqypt, the work of labor which was not free to consume in immediate enjoyment the full equivalent of its efforts.

Thus this remarkable system depended for its growth on a double bluff or deception.  On the one hand the laboring classes accepted from ignorance or powerlessness, or were compelled, perusade or cajoled by custom, convention, authority, and the well-established order of Society into accepting a situation in which they could call their own very little of the cake that they and Nature and the capitalists were co-operating to produce.  And on the other hand the capitalist classes were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice.

links for 2010-12-27

Posted: 27 Dec 2010 10:01 PM PST

Sachs: America’s Political Class Struggle

Posted: 27 Dec 2010 10:17 AM PST

Jeff Sachs says the "level of political corruption in America is staggering," and that "powerful forces, many of which operate anonymously under US law, are working relentlessly to defend those at the top of the income distribution. ... The Republican Party's real game is to try to lock that income and wealth advantage into place." However, while the "rich will try to push such an agenda,... ultimately they will fail":

America's Political Class Struggle. by Jeffrey D. Sachs, Commentary, Project Syndicate: ...This month's deal ... to extend the tax cuts initiated a decade ago by President George W. Bush is being hailed as the start of a new bipartisan consensus. I believe, instead, that it is a false truce...
Since Ronald Reagan became President in 1981, America's budget system has been geared to supporting the accumulation of vast wealth at the top of the income distribution. Amazingly, the ... annual income of the richest 12,000 households is greater than that of the poorest 24 million households.
The Republican Party's real game is to try to lock that income and wealth advantage into place. They fear, rightly, that sooner or later everyone else will begin demanding that the budget deficit be closed in part by raising taxes on the rich. ... The Republicans are out to prevent that by any means. ... Their leaders in Congress are already declaring that they will slash public spending in order to begin reducing the deficit. ...
For the moment, most Americans seem to be going along with Republican arguments that it is better to close the budget deficit through spending cuts rather than tax increases. Yet when the actual budget proposals are made, there will be a growing backlash. ...
The problem for the rich is that, other than military spending, there is no place to cut the budget other than in areas of core support for the poor and working class. Is America really going to cut health benefits and retirement income? Will it really balance the budget by slashing education spending...? Will America really let its public infrastructure continue to deteriorate? The rich will try to push such an agenda, but ultimately they will fail.
Obama swept to power on the promise of change. So far there has been none. His administration is filled with Wall Street bankers. His top officials leave to join the banks... He is always ready to serve the interests of the rich and powerful, with no line in the sand, no limit to "compromise."
If this continues, a third party will emerge, committed to cleaning up American politics and restoring a measure of decency and fairness. This ... will take time. The political system is deeply skewed against challenges to the two incumbent parties. Yet the time for change will come. The Republicans believe that they have the upper hand and can pervert the system further in favor of the rich. I believe that they will be proved wrong.

I agree that there is a growing sense that neither party represents the interests of the middle class, but I'm not sure that a third party -- which could split Democrats and increase the power of the GOP -- is the best answer to this. I'd prefer that we break the lock that big money has on the political process, and then rely upon the natural evolution of a Democratic Party that is not as beholden to big money interests. But the chances of reducing the influence of wealth on the political process are disappointingly dim, and even a third party would eventually be captured by the same forces.

December 27, 2010

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Paul Krugman: The Finite World

Posted: 27 Dec 2010 12:42 AM PST

It's not always about us:

The Finite World, by Paul Krugman. Commentary, NY Times: Oil is back above $90 a barrel. Copper and cotton have hit record highs. Wheat and corn prices are way up. Over all, world commodity prices have risen by a quarter in the past six months. So what's the meaning of this surge?
Is it speculation run amok? Is it the result of excessive money creation, a harbinger of runaway inflation just around the corner? No and no.
What the commodity markets are telling us is that we're living in a finite world,... the rapid growth of emerging economies is placing pressure on limited supplies of raw materials, pushing up their prices. And America is, for the most part, just a bystander in this story. ...
This doesn't necessarily ... reject the notion that speculation is playing some role... But the fact that world economic recovery has also brought a recovery in commodity prices strongly suggests that recent price fluctuations mainly reflect fundamental factors.
What about commodity prices as a harbinger of inflation? Many commentators on the right have been predicting for years that the Federal Reserve ... is setting us up for severe inflation. ... Yet inflation has remained low. What's an inflation worrier to do?
One response has been a proliferation of conspiracy theories, of claims that the government is suppressing the truth about rising prices. But lately many on the right have seized on rising commodity prices as proof that they were right all along, as a sign of high overall inflation just around the corner.
You do have to wonder what these people were thinking two years ago, when raw material prices were plunging. If the commodity-price rise of the past six months heralds runaway inflation, why didn't the 50 percent decline in the second half of 2008 herald runaway deflation?
Inconsistency aside, however, the big problem with those blaming the Fed ... is that ... commodity prices are set globally, and what America does just isn't that important a factor.
In particular,... the primary driving force behind rising commodity prices isn't demand from the United States. It's demand from China and other emerging economies. As more and more people in formerly poor nations are entering the global middle class, they're beginning to drive cars and eat meat, placing growing pressure on world oil and food supplies.
And those supplies aren't keeping pace. Conventional oil production has been flat for four years; in that sense, at least, peak oil has arrived. ... Also, over the past year, extreme weather ... played an important role in driving up food prices. And, yes, there's every reason to believe that climate change is making such weather episodes more common.
So what are the implications of the recent rise in commodity prices? It is, as I said, a sign that we're living in a finite world, one in which resource constraints are becoming increasingly binding. This won't bring an end to economic growth, let alone a descent into Mad Max-style collapse. It will require that we gradually change the way we live, adapting our economy and our lifestyles to the reality of more expensive resources.
But that's for the future. Right now, rising commodity prices are basically the result of global recovery. They have no bearing, one way or another, on U.S. monetary policy. For this is a global story; at a fundamental level, it's not about us.

links for 2010-12-26

Posted: 26 Dec 2010 10:21 PM PST

"The Bond Market Sees an Improving Economy"

Posted: 26 Dec 2010 10:40 AM PST

Jim Hamilton reviews recent changes in the yield curve and concludes that:

...One goal of the Fed's second round of quantitative easing begun at the start of November was to flatten the yield curve. That obviously didn't happen, and I discussed some of the reasons why a few weeks ago. A second goal was to increase inflationary expectations, which was achieved.

Even so, all we've done is moved back to about where we were a year ago. And a year ago, if you recall, things really weren't that great.

But at least now we're moving in the right direction.

December 26, 2010

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links for 2010-12-25

Posted: 25 Dec 2010 10:01 PM PST

Shiller: Stimulus, Without More Debt

Posted: 25 Dec 2010 05:04 PM PST

Robert Shiller argues that the balanced budget multiplier can help us solve our problems:

Stimulus, Without More Debt, by Robert Shiller, Commentary, NY Times: The $858 billion tax package signed into law this month provides some stimulus for our ailing economy. With the unemployment rate at 9.8 percent, more will certainly be needed, yet further deficit spending may not be a politically viable option.Instead, we are likely to see a big fight over raising the national debt ceiling, and a push to reverse the stimulus we already have.
In that context, here's some good news extracted from economic theory: We don't need to go deeper into debt to stimulate the economy more..., a concept known as the "balanced-budget multiplier theorem" states that national income is raised, dollar for dollar, with any increase in government expenditure on goods and services that is matched by a tax increase.
The reasoning is very simple: On average, people's pretax incomes rise because of the business directly generated by the new government expenditures. If the income increase is equal to the tax increase, people have the same disposable income before and after. So there is no reason for people, taken as a group, to change their economic behavior. But the national income has increased by the amount of government expenditure, and job opportunities have increased in proportion. ...
John Maynard Keynes ... liked to emphasize that the deficit-spending multiplier was greater than 1, because the income generated by deficit spending also induces second and third rounds of expenditure. ... In contrast, the balanced-budget multiplier theory says that there are no extra rounds of expenditure... — meaning that the multiplier is 1.0 — but sometimes that is enough. ...  People have jobs again: end of story. What kind of jobs? Building highways and improving our schools are just two examples...
At present, however, political problems could make it hard to use the balanced-budget multiplier to reduce unemployment. People are bound to notice that the benefits of the plan go disproportionately to the minority who are unemployed, while most of the costs are borne by the majority who are working. ... Another problem is that pursuing balanced-budget stimulus requires raising taxes. And, as we all know, today's voters are extremely sensitive to the very words "tax increase."
But... It's conceivable that an effective case will be made in the future for a new stimulus package, if more people come to understand that a few years of higher taxes and government expenditures could fix our weak economy and provide benefits like better highways and schools — without increasing the national debt.

This is a second best solution that combines a large negative shock with a large positive shock to produce, on net, a much smaller positive impact on the economy. It would be better to have the large positive shock, i.e. stimulus, now while the economy is struggling to recover, and save the negative shock for a time when the economy is overheated and a negative shock is the policy that is needed. However, since Congress has very little credibility, there is no guarantee that a positive shock now will be offset later through tax increases or spending reductions. In fact there's reason to believe that Congress will not be inclined to pay for the spending when it's time to do so -- raising taxes and cutting spending is unpopular even in the best of times. Thus, because Congress cannot be trusted to do the right thing in the future, we are stuck with suggestions such as above that compress the spending and the means to pay for it into a single time period. This overcomes the problem of future Congresses not abiding by promises that are made now. But it comes at the cost of much less effective stimulus measures either because we adopt balanced budget approaches such as suggested above, or because spending measures are less aggressive than needed due to fear that it will create budget problems down the road.