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October 18, 2011

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Latest Posts from Economist's View


"The Seven Biggest Economic Lies"

Posted: 18 Oct 2011 12:24 AM PDT

Robert Reich:

The Seven Biggest Economic Lies, by Robert Reich: ...Here's a short ... effort to rebut the seven biggest whoppers now being told by those who want to take America backwards...:
1. Tax cuts for the rich trickle down to everyone else. Baloney. Ronald Reagan and George W. Bush both sliced taxes on the rich and what happened? Most Americans' wages (measured by the real median wage) began flattening under Reagan and have dropped since George W. Bush. Trickle-down economics is a cruel joke.
2. Higher taxes on the rich would hurt the economy and slow job growth. False. From the end of World War II until 1981,... the top taxes on the very rich were far higher than they've been since. Yet the economy grew faster during those years than it has since. ...
3. Shrinking government generates more jobs. Wrong again. It means fewer government workers – everyone from teachers, fire fighters, police officers, and social workers at the state and local levels to safety inspectors and military personnel at the federal. ...
4. Cutting the budget deficit now is more important than boosting the economy. Untrue. With so many Americans out of work, budget cuts now will shrink the economy. They'll increase unemployment and reduce tax revenues. That will worsen the ratio of the debt to the total economy. The first priority must be getting jobs and growth back by boosting the economy. Only then, when jobs and growth are returning vigorously, should we turn to cutting the deficit.
5. Medicare and Medicaid are the major drivers of budget deficits. Wrong. Medicare and Medicaid spending is rising quickly, to be sure. But that's because the nation's health-care costs are rising so fast. ...
6. Social Security is a Ponzi scheme. Don't believe it. Social Security is solvent for the next 26 years. It could be solvent for the next century if we raised the ceiling on income subject to the Social Security payroll tax. That ceiling is now $106,800.
7. It's unfair that lower-income Americans don't pay income tax. Wrong. There's nothing unfair about it. Lower-income Americans pay out a larger share of their paychecks in payroll taxes, sales taxes, user fees, and tolls than everyone else. ...

Seven more: tax cuts pay for themselves, regulation and uncertainty are holding back the economy, there are plenty of jobs but people don't want to work, Fannie, Freddie, and the CRA caused the crisis, CEOs deserve their high incomes, most unemployment is structural, and regulating the financial sector will harm economic growth. (And, for good measure, global warming doesn't exist and if does exits it wasn't caused by people. Even if it was caused by people, carbon taxes are still bad.)

links for 2011-10-18

Posted: 18 Oct 2011 12:06 AM PDT

Yglesias: Glass-Steagall Is Mostly A Red Herring

Posted: 17 Oct 2011 05:04 PM PDT

Mathew Yglesias argues that "Glass-Steagall is mostly a red herring":

Glass-Steagall Is Mostly A Red Herring, by Mathew Yglesias: Something I've heard from participants in the 99 Percent Movement is a revival of interest in rescinding the repeal of the 1932 Glass-Steagall Act. I think this is largely a misunderstanding...
First off, what did Glass-Steagall do? Well it did a number of things (like establish the FDIC) that were never repealed. But the rule that was repealed in the 1999 Gramm–Leach–Bliley Act were restrictions on the same holding company owning a bank and owning other kinds of financial companies. The thing about this is just that there's really nothing in particular about co-ownership that you can point to as having been a problem in the financial crisis. And if anything that fact seems to indicate that the repealers were right to think there's no special problem here — even in a huge financial crisis combined financial firms worked no worse than other kinds. ...

I am sympathetic to this point of view, i.e. that the elimination of Glass-Steagall wasn't an important causative factor in the crash. However, as I said a few days ago:

There is a debate over the extent to which removing Glass-Steagall -- the old version of the Volcker rule -- contributed to the crisis. However, whether the elimination of the Glass-Steagall act caused the present crisis is the wrong question to ask. To determine the value of reinstating a similar rule, the question is whether the elimination of the Glass-Steagall act made the system more vulnerable to crashes. When the question is phrased in this way, it's clear that it has for the reasons outlined above.

So there's still a reason to reinstate some version of the rule even if it wasn't the main problem in the banking sector this time around. 

Spence: The Global Jobs Challenge

Posted: 17 Oct 2011 10:35 AM PDT

Michael Spence:

The Global Jobs Challenge, by Michael Spence, Commentary, Project Syndicate: ...The third challenge is distributional. As the tradable part of the global economy (goods and services that can be produced in one country and consumed in another) expands, competition for economic activity and jobs broadens. That affects the price of labor and the range of employment opportunities within all globally integrated economies. Subsets of the population gain, and others lose, certainly relative to expectations – and often absolutely.
Many advanced countries – in fact, most of them – have experienced limited middle-income growth. ... In the United States, income inequality has risen as the upper end of the income and education spectrum benefits from globalization, while the rest experience declining employment opportunities in the tradable sector. ...
What does it mean – for individuals, businesses, and governments – that structural adjustment is falling further and further behind the global forces that are causing pressure for structural change?
Above all, it means that expectations are broadly inconsistent with reality, and need to adjust, in some cases downward. But distributional effects need to be taken seriously and addressed. The burden of weak or non-existent recoveries should not be borne by the unemployed, including the young. In the interest of social cohesion, market outcomes need to be modified to create a more even distribution of incomes and benefits, both now and in inter-temporal terms. ...
None of this will be easy. ... Nevertheless, the unemployed and underemployed, especially younger people, expect their leaders and institutions to try.

I don't like the call to accept that things will be worse in the future, and to get used to it. It is generally based upon the idea that much of our growth was due to the bubble - it was false growth -- and hence led to the perception that we can grow faster than is actually possible.

But if the resources hadn't have been invested in the financial industry, they wouldn't have been wasted, they would have gone elsewhere. If we had taken all the resources (and talent) that went into the financial sector and directed it elsewhere, it would have promoted growth and employment -- and likely of a far more stable and broad-based variety. In my view the challenge is to redirect these resources into productive uses, and to fix the mal-distribution of income gains. But simply accepting that expectations need to adjust downward -- that the fate of the middle and lower classes is a diminished future -- is not acceptable. We can do better than that.

Chow: Usefulness of Adaptive and Rational Expectations in Economics

Posted: 17 Oct 2011 09:54 AM PDT

Gregory Chow of Princeton on rational versus adaptive expectations:

Usefulness of Adaptive and Rational Expectations in Economics, by Gregory C. Chow: ...1. Evidence and statistical reason for supporting the adaptive expectations hypothesis ... Adaptive expectations and rational expectations are hypotheses concerning the formation of expectations which economists can adopt in the study of economic behavior. Since a substantial portion of the economic profession seems to have rejected the adaptive expectations hypothesis without sufficient reason I will provide strong econometric evidence and a statistical reason for its usefulness...
2. Insufficient evidence supporting the rational expectations hypothesis when it prevailed The popularity of the rational expectations hypothesis began with the critique of Lucas (1976) which claimed that existing macro econometric models of the time could not be used to evaluate effects of economic policy because the parameters of these econometric models would change when the government decision rule changed. A government decision rule is a part of the environment facing economic agents. When the rule changes, the environment changes and the behavior of economic agents who respond to the environment changes. Economists may disagree on the empirical relevance of this claim, e.g., by how much the parameters will change and to what extent government policies can be assumed to be decision rules rather than exogenous changes of a policy variable. The latter is illustrated by studies of the effects of monetary shocks on aggregate output and the price level using a VAR. Such qualifications aside, I accept the Lucas proposition for the purpose of the present discussion.
Then came the resolution of the Lucas critique. Assuming the Lucas critique to be valid, economists can build structural econometric models with structural parameters unchanged when a policy rule changes. Such a solution can be achieved by assuming rational expectations, together with some other modeling assumptions. I also accept this solution of the Lucas critique.
In the history of economic thought during the late 1970s, the economics profession (1) accepted the Lucas critique, (2) accepted the solution to the Lucas critique in which rational expectations is used and (3) rejected the adaptive expectations hypothesis possibly because the solution in (2) required the acceptance of the rational expectations hypothesis. Accepting (1) the Lucas critique and (2) a possible response to the Lucas critique by using rational expectations does not imply (3) that rational expectations is a good empirical economic hypothesis. There was insufficient evidence supporting the hypothesis of rational expectations when it was embraced by the economic profession in the late 1970s. This is not to say that the rational expectations hypothesis is empirically incorrect, as it has been shown to be a good hypothesis in many applications. The point is that the economic profession accepted this hypothesis for general application in the late 1970s without sufficient evidence.
3. Conclusions This paper has presented a statistical reason for the economic behavior as stated in the adaptive expectations hypothesis and strong econometric evidence supporting the adaptive expectations hypothesis. ... Secondly, this paper has pointed out that there was insufficient empirical evidence supporting the rational expectations hypothesis when the economics profession embraced it in the late 1970s. The profession accepted the Lucas (1976) critique and its possible resolution by estimating structural models under the assumption of rational expectations. But this does not justify the acceptance of rational expectations in place of adaptive expectations as better proxies for the psychological expectations that one wishes to model in the study of economic behavior. ...

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