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September 7, 2011

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Latest Posts from Economist's View


What Should Obama Do?

Posted: 07 Sep 2011 12:24 AM PDT

Brad DeLong:

...What in most important is not just what Obama proposes on Thursday (because nothing will get done by congress), but rather what he does in the weeks and months afterwards to actually tune the economy so that it creates more jobs. I think Obama should:

  1. Apply a full-court press to the Federal Reserve to get it to target nominal GDP to close the spending gap, for it is fear of risk that nobody will spend to buy what you make and confidence that your purchasing power is safe in cash that is holding back businesses from spending money to hire people.

  2. Apply a full-court press to the Federal Reserve to get it to engage in more quantitative easing--into taking more risk onto its own balance sheet, for it is an unwillingness on the part of Wall Street to hold the risk currently out there that is making it very difficult for a wide range of risky spending projects to get financing.

  3. Quantitative easing does not have to be done by the Fed: the Treasury can use residual TARP authority to take tail risk onto its own books as well, and should be doing so as much as possible.

  4. Expansion does not require that the federal government spend: using Treasury (and Fed!) money to grease the financing of infrastructure and other investments by states would pay enormous dividends.

  5. For the Treasury Secretary to announce that a weak dollar is in America's interest right now would not only boost exports, but it would immediately lead to a shift in monetary policy in Europe toward a much more expansionary profile--which would be good for the world.

None of these is first-best. All of these are likely to do some good. All should be tried.

What's discouraging is that there doesn't seem to be any sense of urgency about the employment crisis itself. It's more of a reluctant and begrudging response driven by a shift in the political winds. If the polls weren't falling, I doubt we'd even be hearing a speech on job creation. So I hope there's follow-through as well -- these things should be happening already -- but we'll see.

links for 2011-09-06

Posted: 06 Sep 2011 10:31 PM PDT

NBER Research Summary: The Role of Household Leverage

Posted: 06 Sep 2011 03:42 PM PDT

This NBER Research Summary by Atif Mian and Amir Sufi echoes many of the arguments I've been making about balance sheet recessions. In addition, the authors argue that the trouble in mortgage markets can be traced to a "securitization-driven shift in the supply of mortgage credit," and that "the expansion in mortgage credit was more likely to be a driver of house price growth than a response to it." They also show that "non-GSE securitization primarily targeted zip codes that had a large share of subprime borrowers. In these zip codes, mortgage denial rates dropped dramatically and debt-to-income ratios skyrocketed":

Finance and Macroeconomics: The Role of Household Leverage, by Atif R. Mian and Amir Sufi, NBER Reporter 2011 Number 3, Research Summary: The increase in household leverage prior to the most recent recession was stunning by any historical comparison. From 2001 to 2007, household debt doubled, from $7 trillion to $14 trillion. The household debt-to-income ratio increased by more during these six years than it had in the prior 45 years. In fact, the household debt-to-income ratio in 2007 was higher than at any point since 1929. Our research agenda explores the causes and consequences of this tremendous rise in household debt. Why did U.S. households borrow so much and in such a short span of time? What factors triggered the slowdown and collapse of the real economy? Did household leverage amplify macroeconomic shocks and make a quick recovery less likely? How do politics constrain policy responses to an economic crisis?

While the focus of our research is on the recent U.S. economic downturn, we believe the implications of our work are wider. For example, both the Great Depression and Japan's Great Recession were preceded by sharp increases in leverage.1 We believe that understanding the impact of household debt on the economy is crucial to developing a better understanding of the linkages between finance and macroeconomics. ...[continue reading]...

The Incentive to Supply Bad Ideas

Posted: 06 Sep 2011 01:08 PM PDT

The CBPP notices what may be a new trend:

Yet another state has proposed raising taxes on low-income residents to pay for new corporate tax breaks. Leading lawmakers in Missouri want to eliminate a property tax credit for low- and moderate-income seniors and people with disabilities in order to help finance new tax credits for businesses.
Sadly, swaps like this are increasingly common; both Michigan and Wisconsin have cut low-income programs this year to pay for business tax breaks.
The Missouri proposal, which the legislature will consider in a special session that begins today, would make renters ineligible for the state's property tax "circuitbreaker" credit. Landlords generally pass along a large share of their property taxes to tenants in the form of higher rents; the circuitbreaker credit helps offset those higher rents for more than 100,000 low-income and disabled Missouri residents. ... Some 29 states offer property tax circuitbreakers or similar programs.
Killing this tax credit would raise taxes on some of Missouri's most vulnerable residents by up to $750 a year. It would also hurt local retailers and other businesses, since low-income people are among those most likely to spend every dollar they have. That's not a smart deal for Missouri.

It used to be that policymakers would try to shift income from higher to lower income individuals based upon the idea that the lower savings rate at lower incomes would stimulate demand (i.e. the MPC is higher at lower incomes, so transferring income in this way increases consumption). That is a demand-side argument.

But with the victory of the supply-siders and the shift in the argument to incentives, the idea is that we need to encourage firms to build more buildings, buy more trucks, start more businesses, etc. Never mind that we are in a recession and corporations are already sitting on more funds that they care to spend, and that the current state of demand won't support such expenditures, if we give a tax cut to businesses or the rich they'll be oh so very motivated to go out and supply more stuff.

But who will buy it?

The supply-side, trickle down argument from the GOP goes beyond the rich:

...Sen. Jim DeMint (R-S.C.) told CNN yesterday that he's visited with a lot of business people lately, and he's learned they're "actually afraid to hire people" because they're "afraid of what the government will do to them."

That's awfully dumb — when Republicans find evidence of government punishing employers for hiring workers, they should let everyone know — but it was the next part of the interview that really stood out.

"I have talked to a lot of businesses in South Carolina who can't get employees to come back to work because they are getting unemployment and they're getting food stamps and they say, 'Call me when unemployment runs out.' […]

"There are a lot of people who desperately need it and we need to make sure that we have that safety net in place, but we also have to realize there are a lot of people gaming the system right now."

I'm not sure which of DeMint's talking points were supposed to believe — are employers afraid to hire or are they struggling with lazy people who won't apply for openings? — but the rhetoric is a reminder that Republicans just don't seem to like the unemployed.

In DeMint's mind, the jobless are living it up on meager unemployed benefits, and don't want to seek gainful employment.

Thus, instead of arguing that giving money to the unemployed helps to stimulate demand, and thereby boost sales and employment, the supply-sider's argument is that it makes the unemployed lazy. So we should take away all of that money and give it to the rich who, of course, deserve and earn every penny they get and will run out and invest it in new business ventures no matter how depressed the economy might be. It has nothing to do with the incentive to do what's best for the rich and powerful, it's what's best for the people whose programs get cut to fund these tax cuts for wealthy indiviuals and businesses.

So they do not favor more progressive taxes. The flatter the tax code, the better. However, a more progressive tax system makes people happier:

The way some people talk, you'd think that a flat tax system—in which everyone pays at the same rate regardless of income—would make citizens feel better than more progressive taxation, where wealthier people are taxed at higher rates. Indeed, the U.S. has been diminishing progressivity of its tax structure for decades.
But a new study comparing 54 nations found that flattening the tax risks flattening social wellbeing as well. "The more progressive the tax policy is, the happier the citizens are," says University of Virginia psychologist Shigehiro Oishi... Oishi conducted the study with Ulrich Schimmack of the University of Toronto at Mississauga and Ed Diener, also at University of Illinois and the Gallup Organization. ... That happiness, Oishi says, was "explained by a greater degree of satisfaction with the public goods, such as housing, education, and public transportation."

There is a qualification that how the taxes are spent appears to matter, more spending in and of itself isn't necessarily the key to happiness, but spending on the right things appears to make a difference.

There is a compromise position, spending that has supply-side effects in the long-run, but stimulates demand in the short-run. That is the idea behind stimulus spending as opposed to, say, giving income transfers of the same amount. We get an immediate boost to demand as goods and services are purchased to build the project, people are hired and spend their income, etc., and we get a long-run impact on the supply-side. And with interest rates so low, and the need for infrastructure so great, it's a pretty good (sure?) bet that the present value of the benefits from these projects exceeds the cost.

So what are we waiting for?

Flip-Flop or True Colors?

Posted: 06 Sep 2011 09:09 AM PDT

On the post below this one noting the GOP "flip-flop" on the stimulus, there's another way to interpret this, one I like better. In 2001 when the GOP was making the argument for a stimulus package, the real goal was permanent tax reduction, particularly for those at the upper end of the income distribution. The arguments about the stimulus were a way to try to reach this goal. Even if some in the GOP believed it would work, the stimulus itself was a secondary consideration. What we are seeing now -- the claim that government intervention is bad, bad, bad -- is what they actually believe. Thus, we don't need to appeal to "motivated skepticism" to explain the change in the GOP's argument.

So we have three hypotheses:

1. The GOP believes in stimulus, but even though it could help the economy they won't endorse it because it might help Obama's reelection chances (as well as their chances of taking the Senate).

2. It can be explained by "motivated skepticism."

3. The GOP (for the most part) doesn't believe in stimulus, but pretended it did in 2001 because it helped to get support for their tax cut agenda.

I lean toward 3.

The GOP Flip-Flop on Stimulus

Posted: 06 Sep 2011 07:02 AM PDT

In case you had any doubt that Republican opposition to stimulus measures is based on something besides economics:

Why did the GOP turn against stimulus? Ask a psychologist.m by Ezra Klein: ...It has become common for Republicans to deride the very concept of stimulus as absurd, to mock Keynesian economics as an ivory-tower fantasy, and to oppose temporary tax cuts as a recession-fighting measure. But during the Bush administration? All that was orthodox conservative policy.
In 2001, Grover Norquist called a national sales-tax holiday "exactly the kind of immediate stimulus our shell-shocked economy needs now." Norquist went on to quote George W. Bush's chief economist, Glenn Hubbard, saying we needed stimulus "sooner rather than later." Sen. Olympia Snowe (R-Maine) introduced a bill to that effect.
Around the same time, Rep. Paul Ryan (R-Wis.) held a hearing in which he invited Kevin Hassett, a conservative economist based at the American Enterprise Institute, to make the case for a fiscal stimulus. "The economists who studied this were quite surprised to find that fiscal policy in recessions was reasonably effective," Hassett testified. "It is just that folks tried a first punch that was too light and that generally we didn't get big measures until well into the recession."
Ryan was delighted by his answer. "That is precisely my point," he replied. "That is why I like my porridge hot. I think we ought to have this income tax cut fast, deeper, retroactive to January 1st, to make sure we get a good punch into the economy, juice the economy to make sure that we can avoid a hard landing."
So not only was it non-controversial that deficit-financed stimulus spending was an effective and desirable way to fight economic downturns, but it was taken as obvious by Paul Ryan — Paul Ryan! — that the big danger was that you did too little. Now, of course, Ryan takes the initial stimulus's inability to fully combat the recession as evidence of the policy's failure, even though we now know the recession was deep enough that standard calculations — the sort of calculations Hassett was referring to in his testimony — would have argued for a stimulus of more than $2 trillion. ...
The bottom line is this: Until quite recently, both parties supported the idea that you combat bad economies with stimulus spending. Now, during an extremely bad economy, the Republican Party has completely abandoned that position. That has left them without plausible solutions — the GOP talks now of things that have very little role in boosting short-term demand, such as deficit reduction and regulatory reform — and has left the Democrats without the votes to pass anything. And that's left the country deep in the hole.

The post uses the results from a psychology experiment to explain (dismiss?) the behavior as "a phenomenon known as motivated skepticism," but, as noted in the post, "it's a distinction without a difference, at least so far as policy outcomes go."

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