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October 24, 2011

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Latest Posts from Economist's View


Paul Krugman: The Hole in Europe’s Bucket

Posted: 24 Oct 2011 12:33 AM PDT

Is the euro system doomed?:

The Hole in Europe's Bucket, by Paul Krugman, Commentary, NYTimes: If it weren't so tragic, the current European crisis would be funny, in a gallows-humor sort of way. ...
I'll get to the tragedy in a minute. First, let's talk about the pratfalls... Greece, where the crisis began, is no more than a grim sideshow. The clear and present danger comes instead from ... Italy, the euro area's third-largest economy. Investors, fearing a possible default, are demanding high interest rates on Italian debt. And these high interest rates, by raising the burden of debt service, make default more likely. ...
To save the euro, this threat must be contained. But ... here's the problem: All the various proposals ... ultimately require backing from major European governments, whose promises to investors must be credible for the plan to work. Yet Italy is one of those major governments; it can't achieve a rescue by lending money to itself. And France, the euro area's second-biggest economy, has been looking shaky lately... There's a hole in the bucket, dear Liza, dear Liza. ...
What makes the story really painful is the fact that none of this had to happen. ... Britain, Japan and the United States ... have large debts and deficits yet remain able to borrow at low interest rates. What's their secret? The answer, in large part, is that they retain their own currencies, and investors know that in a pinch they could finance their deficits by printing more of those currencies. If the European Central Bank were to similarly stand behind European debts, the crisis would ease dramatically. ...
But such action, we keep being told, is off the table. The statutes ... supposedly prohibit this kind of thing, although one suspects that clever lawyers could find a way to make it happen. The broader problem, however, is that the whole euro system was designed to fight the last economic war. It's a Maginot Line built to prevent a replay of the 1970s, which is worse than useless when the real danger is a replay of the 1930s. ...
The ... European elite, in its arrogance, locked the Continent into a monetary system that recreated the rigidities of the gold standard, and — like the gold standard in the 1930s — has turned into a deadly trap.
Now maybe European leaders will come up with a truly credible rescue plan. I hope so, but I don't expect it.
The bitter truth is that it's looking more and more as if the euro system is doomed. And the even more bitter truth is that given the way that system has been performing, Europe might be better off if it collapses sooner rather than later.

"More Jobs Predicted for Machines, Not People"

Posted: 24 Oct 2011 12:24 AM PDT

The "key to winning the race" is to make machines complements, not substitutes:

More Jobs Predicted for Machines, Not People, by Steve Lohr, NY Times: A faltering economy explains much of the job shortage in America, but advancing technology has sharply magnified the effect, more so than is generally understood...
The automation of more and more work once done by humans is the central theme of "Race Against the Machine," an e-book to be published on Monday. "Many workers, in short, are losing the race against the machine," the authors write.
Erik Brynjolfsson, an economist and director of the M.I.T. Center for Digital Business, and Andrew P. McAfee, associate director and principal research scientist at the center, are two of the nation's leading experts on technology and productivity. The tone of alarm in their book is a departure for the pair, whose previous research has focused mainly on the benefits of advancing technology. ...
Faster, cheaper computers and increasingly clever software, the authors say, are giving machines capabilities that were once thought to be distinctively human, like understanding speech, translating from one language to another and recognizing patterns. ...
The skills of machines, the authors write, will only improve. ... Yet computers, the authors say, tend to be narrow and literal-minded, good at assigned tasks but at a loss when a solution requires intuition and creativity — human traits. A partnership, they assert, is the path to job creation in the future.
"In medicine, law, finance, retailing, manufacturing and even scientific discovery," they write, "the key to winning the race is not to compete against machines but to compete with machines."

links for 2011-10-24

Posted: 24 Oct 2011 12:06 AM PDT

 

The Importance of the EITC for Working Families

Posted: 23 Oct 2011 11:07 AM PDT

I didn't know that prior to the crisis, i.e. in the period from 1989 to 2006, "Approximately half of all taxpayers with children used the Earned Income Tax Credit (EITC) at least once during this 18-year period." And the people who use the program pay far more in taxes than the EITC uses:

New Research Highlights Importance of EITC for Working Families, by Indivar Dutta-Gupta, CBPP: New research shows that a larger share of families than we might think turn to a key federal work support — the Earned Income Tax Credit (EITC) — but that most of them receive the credit for only a year or two at a time.

Taken together with other research, the new study suggests that while the EITC helps some workers who are persistently paid low wages, for most families who use it, the credit provides effective but temporary help during hard times. ...

The study, from Tim Dowd of the Joint Committee on Taxation and John Horowitz of Ball State University, examined EITC use from 1989 to 2006 and found:

  • Approximately half of all taxpayers with children used the EITC at least once during this 18-year period.
  • A large majority (61 percent) of those using the EITC did so for only one or two years at a time — only 20 percent used it for more than five straight years (see graph).

The EITC goes to working people — the overwhelming majority of them families with children — with incomes up to roughly $49,000.  Earlier unpublished research from Dowd and Horowitz found that EITC users pay much more in federal income taxes over time than they receive in EITC benefits.  Taxpayers who claimed the EITC at least once during the 18-year period from 1989 through 2006 paid several hundred billion dollars in net federal income tax over this period, after subtracting the EITC and any other refunds.

Dowd and Horowitz's new study also found that EITC use is highest when children are youngest — which is also when parents' wages are lowest.  (Working parents' wages rise, on average, as their children grow up.)  This finding is particularly important given the importance of income for young children's learning and the evidence that poverty in early childhood may reduce children's earnings as adults.

RedState explains compassionate conservatism:

we must tell the truth about the EITC...  They are not tax credits; they are welfare payments – and must be eliminated

What is their solution?:

Oh, but you might ask, what would you do for low-income families?  Well, we can't offer more tax cuts to those who don't pay taxes...  But we could make this promise: by fostering a true free market society – one that is devoid of over-taxation, regulation, litigation, and yes – subsidization – they would have a realistic opportunity to receive a decent paycheck, instead of a handout.

And what if free markets don't do the job? Republicans who want to scale back the EITC should heed the words of their hero:

President Ronald Reagan ... called it "the best anti-poverty, the best pro-family, the best job-creation measure to come out of Congress."

When you believe, falsely, that 47% of the people are essentially leeches living off the other 53% (instead of viewing them as the people who do much of the hard work in society to create the wealth the upper tiers enjoy but get little in return -- wages have lagged behind productivity), this kind of warped view is the outcome. If the "Approximately half of all taxpayers with children used the EITC" in the last 18 years were to stop working -- if they actually became the deadbeats the right portrays them to be -- the severe economic problems that we'd have would give us a much better sense of their value.

"Coordinated Fiscal and Monetary Policy"

Posted: 23 Oct 2011 09:36 AM PDT

I've been making these points in various ways since the crisis started, but with frustratingly little notice or effect. Maybe Brad DeLong will have more luck:

DeLong Smackdown Watch: Nominal GDP Targeting Through Unconventional Monetary Policy and Through Fiscal Policy Edition, by Brad DeLong: Duncan Black complains because he thinks I have not been critical enough of nominal GDP targeting via unconventional monetary policy alone:

Eschaton: Why Don't They Lend Me $30 Billion On The Security Of My Cats?: If we're going to actually move to more "unconventional" monetary policy, can we please recognize that the reason to do so is largely because conventional monetary policy - acting through the banking system - isn't working? We should understand that it isn't working because it almost destroyed the world a few years ago and is about to do so again because, you know, nothing changed and the overpaid assholes who almost destroyed the world then are still in charge. If we're going to give out dodgy loans, how about giving dodgy loans to people who might do something with the money other than visiting the Great Casino?

Point taken.

Touché.

I will report to the reeducation camp tomorrow...

I have been saying that coordinated fiscal and monetary policy--jen-U-ine helicopter drops or simple government-print-and-buy-useful-stuff--is the superior way to accomplish nominal GDP targeting, and that doing so via monetary policy alone runs risks.

But I have not been saying so loudly enough.

Look: targeting the nominal GDP path via monetary policy alone in a liquidity trap is a bet that private-sector financiers will:

  • be confident that the policy will not be reversed when the economy emerges from its liquidity trap,

  • be confident that the policy will succeed and that they should start spending now in anticipation of the faster nominal GDP growth that the policy will produce, plus

  • a little bit of taking risk onto the Federal Reserve's balance sheet and so freeing up private financier risk-bearing capacity to expand their loan portfolio.

Mostly, that is, the policy is a policy that succeeds if it is generally expected to succeed and fails if it is generally expected to fail. It thus has the confidence fairy nature.

To the extent that the policy does not have the confidence fairy nature, it is because it changes asset supplies here and now and thus private financiers' incentives to lend and businesses' incentives to produce. It does so because the policy involves swapping one asset for another asset that is not the same.

Right now because we are in a liquidity trap short-term Treasury bills and cash are effectively, for the moment, the same asset: they are both short-term zero-yield safe nominal government liabilities. Very few believe that the Federal Reserve's buying Treasury bills for cash and saying: "See! We are doing something! Nominal GDP growth will be faster! You should raise your expectations of real growth and inflation and act accordingly!" would actually do anything. By contrast, if the Federal Reserve buys long-term Treasury or agency or private debt the assets it is buying carry an expectational term premium, duration risk, and (perhaps) default risk: they are not identical to the assets that they are selling. Because the private sector's asset holdings change, private-sector financiers and businesses have incentives to change their behavior even if they don't buy the appearance of the confidence fairy at all--and the fact that they will change their behavior even if they don't believe is a reason for people to believe.

The superiority of unconventional monetary policy thus works off of the fact that the assets the government is buying are different than the assets it is selling--and thus the more different the assets it buys from the assets it sells, the greater the non-confidence-fairy bang from the policy.

What asset is most different from cash?

With a helicopter drop, the Federal Reserve sells cash and it buys… nothing at all. Cash and nothing are pretty different assets. Add cash to private-sector portfolios and take nothing away, and portfolios have shifted in meaningful ways and people will change what they do.

With print-money-and-buy-useful-things, the government sells cash and buys… roads, bridges, research into public health, flu shots, killer robots--all kinds of things that are very very different indeed from cash.

Thus--as Milton Friedman's teacher Jacob Viner knew well back in 1933--coordinated fiscal and monetary expansion via printing money and buying useful stuff (or handing it out via helicopter drops) is a policy that really does not have the confidence fairy nature. Because it does not require confidence to start working, it will (probably) work much more rapidly and certainly.

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