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February 28, 2011

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Paul Krugman: Leaving Children Behind

Posted: 28 Feb 2011 12:33 AM PST

Budget hawks are confused by the meaning of "putting children first":

Leaving Children Behind, by Paul Krugman, Commentary, NY Times: Will 2011 be the year of fiscal austerity? At the federal level, it's still not clear: Republicans are demanding draconian spending cuts, but we don't yet know how far they're willing to go in a showdown with President Obama. At the state and local level, however, there's no doubt about it: big spending cuts are coming.
And who will bear the brunt of these cuts? America's children. ... Consider, as a case in point, what's happening in Texas, which more and more seems to be where America's political future happens first.
Texas likes to portray itself as a model of small government, and indeed it is. Taxes are low, at least if you're in the upper part of the income distribution (taxes on the bottom 40 percent ... are actually above the national average). Government spending is also low. ...
But here's the thing: While low spending may sound good in the abstract, what it amounts to in practice is low spending on children, who account directly or indirectly for a large part of government outlays at the state and local level.
And in low-tax, low-spending Texas, the kids are not all right. The high school graduation rate, at just 61.3 percent, puts Texas 43rd out of 50 in state rankings. Nationally, the state ranks fifth in child poverty; it leads in the percentage of children without health insurance. And only 78 percent of Texas children are in excellent or very good health, significantly below the national average. ...
It's not a pretty picture; compassion aside,... how the state can prosper in the long run with a future work force blighted by childhood poverty, poor health and lack of education.
But things are about to get much worse. ... For months, Gov. Rick Perry had boasted that his "tough conservative decisions" had kept the budget in surplus while allowing the state to weather the recession unscathed. But after Mr. Perry's re-election, reality intruded — funny how that happens — and the state is now scrambling to close a huge budget gap. (...achieved with an overwhelmingly nonunion work force.)
So how will that gap be closed? Given the already dire condition of Texas children, you might have expected ... high-income Texans, who pay much less in state and local taxes than the national average, to be asked to bear at least some of the burden.
But you'd be wrong. Tax increases have been ruled out...; the gap will be closed solely through spending cuts. Medicaid, a program that is crucial to many of the state's children, will take the biggest hit, with the Legislature proposing a funding cut of no less than 29 percent... And education will also face steep cuts, with school administrators talking about as many as 100,000 layoffs.
The really striking thing about all this isn't the cruelty — at this point you expect that — but the shortsightedness. What's supposed to happen when today's neglected children become tomorrow's work force?
Anyway, the next time some self-proclaimed deficit hawk tells you how much he worries about the debt we're leaving our children, remember what's happening in Texas, a state whose slogan right now might as well be "Lose the future."

Fed Watch: Commodity Shock

Posted: 28 Feb 2011 12:24 AM PST

Tim Duy:

Commodity Shock, by Tim Duy: How quickly the world can change. Just a few weeks ago, incoming data suggested room for optimism. And, in large measure, continue to do so. Regional manufacturing reports have been largely solid, while initial unemployment claims declined during the month, ending last week just a hair above the 400k mark. Even consumers appeared a bit brighter, with confidence rising to its highest level in three years (still low, but the right direction). To be sure, there were some setbacks as well. The revisions to 4Q10 GDP were disappointing, although I would still focus on the final demand figure rather than the headline. Non-defense, non-air capital goods declined sharply, almost erasing the previous month's surge. But an up-and-down pattern has been a persistent feature of that data series in recent months, suggesting little to worry about in the context of other generally positive manufacturing indicators.

The rapidly evolving situation in the Middle East, however, threatens to unsettle this positive momentum as oil prices surge. Unfortunately, the suddenly choppy economic waters catch US monetary policymakers off guard, and it shows in recent Fedspeak. It appears that the Fed is stuck between two narratives, one in which the energy price shock turns inflationary given signs of economic improvement in recent months, and another in which oil undermines a still-nascent recovery. It is an unfortunate debate to have during this period of uncertainty and this early in the recovery.

The usual suspects seize upon recent data to argue for a new evaluation of the Fed's large scale asset purchases. From the Wall Street Journal:

"Should economic prospects continue to strengthen, I would not rule out changing the policy stance to bring QE2 to an early close," Federal Reserve Bank of Philadelphia President Charles Plosser said. "If the growth rates of employment and output begin to accelerate or if inflation or inflation expectations begin to rise, then it may be time to begin taking our foot off the accelerator," he said.

Richmond Fed President Jeffrey Lacker continues along the same argument:

Lacker was asked if he would dissent against continued bond buying if he had a voting slot on the FOMC this year. He declined to say, but added he takes "very seriously" the Fed's pledge to continuously re-evaluate the program. Lacker said recent growth levels should have "tilted things in the direction in modifying the program," adding he believes QE2 has had a "minimal contribution" in driving the current recovery.

And, unsurprisingly Kansas City Federal Reserve President Thomas Hoenig continues to rail against the inflationary implications of Fed policy. More surprising is a bit of hawkishness from Governor Janet Yellen:

Yellen said "any increase that seemed to be sustained in inflation expectations or core inflation, that looked like we were getting pass through [from commodity price gains] that seemed to be sustained, would demand a response" from monetary policy.

She also said the Fed would have to be ahead of the curve and would need to move to tighten policy before inflation became an issue, repeating a mantra common to central bankers. She noted that, in past years, the central bank had enjoyed the "luxury" of unexpected commodity price gains not passing through to inflation in any significant fashion.

This suggests that Yellen is sympathetic to the notion that the recent economic upswing offers a path for commodity price gains to work their way to core inflation. Meanwhile, St. Louis Federal Reserve President Robert Bullard plays all sides of the table. Via (again) the Wall Street Journal, he raises the prospect of additional easing:

But while Bullard, a non-voting Fed member this year, said QE2 could be adjusted, he still said a third bond-buying effort is not totally off the table, given tensions in the Middle East and rising oil prices and ongoing concerns about the euro-zone debt crisis.

Still, this clearly is not the direction he is leaning:

For now though, "looking at the data today and the outlook, the natural thing would be to say either that we should pull back a little bit" on bond-buying, or just follow through with the program if the consensus is the economic outlook is not sufficient enough to end the program before June, he said.

I think it is somewhat silly to be discussing an early end to the LSAP as it only adds another layer of uncertainty on what was already an increasingly uncertain environment. Somewhat pointless as well – the end is fast approaching in any event. Indeed, I find the debate disappointing, albeit expected. Policymakers appear to have learned little from their failed exercise in hawkishness this time last year.

What should be our baseline expectation for policy at this juncture? First, the current LSAP policy concludes as planned, at least in magnitude. They could choose a more gradual end to the policy, but I am hard pressed to see a change in the ultimate amount given the time horizon (June will come faster than we think). Indeed, continuing high unemployment alone argues against meaningful alteration of the policy despite signs of economic health. Second, the oil price shock raises the odds for another round of easing. Simply put, the recent trajectory of commodity prices threatens to shift the story from a benign signal that the economy is on the mend to something much more dire. And much more dire generally induces monetary easing, not tightening.

Consider an example I recently used in class. The question: What is the impact of a commodity price shock? To gain some direction, construct a four variable vector autoregression of commodity prices, core PCE prices, real GDP, and the federal funds rate. For a commodity price measure, I used the PPI measure for Crude Materials for Further Processing:


To implement the model, I took the first difference of the natural log of each of the first three variables (DIFFCOM, DIFFPRICES, DIFFGDP), multiplying each by 100 to convert to percentages. The commodity price measure is quite variable:

I estimated the model with 5 quarterly lags over the period 1984:1 to 2010:4. I then generated impulse response functions to examine the impact of an unexpected shock to commodity price inflation:


The results suggest that a roughly 8 percentage point increase in commodity prices yields virtually no impact on core inflation, but, after four quarters, drives real GDP growth down .17 percentage points. Monetary policy responds with a .23 percentage point decrease in the fed funds rates after 7 quarters. Of course, in the current zero interest rate environment this response would need to be mimicked with a fresh expansion of the quantitative easing (I have yet to find a satisfactory replacement for the federal funds rate to take into account the zero bound. Topic for future research).

Also of interest is the GDP forecast from this model:


This translates to a Q4-over-Q4 forecast of 3.7% for 2011, pretty much dead center of the Fed's central tendency in the most recent minutes. In contrast to the Fed's prediction of sustained higher growth in 2012 and 2013, GDP forecasts in this model more quickly decelerate to trend growth.

Recall that the estimation period of this model was through the final quarter of last year. Note that commodity prices continued to rise in 2011, with the measure used here rising 10% in January compared to the fourth quarter average. February's read will be even higher. In other words, we are experiencing a significant commodity price shock this quarter. While certainly a drag on growth, is it yet sufficient to derail the recovery? The White House thinks no:

Earlier in the day, Austan Goolsbee, chairman of the White House Council of Economic Advisers, said that the U.S. economy can withstand oil price increases so far.

"Anything like we have seen so far neither we nor the private sector has forecast that would derail our recovery," Goolsbee said yesterday at a breakfast with reporters organized by the Christian Science Monitor.

I would tend to agree – if commodity price inflation slows sharply at this point. But the surge of recent weeks has already exceeded my expectations, and memories of 2007 and 2008 still linger fresh in my mind. The economy can't withstand another quick run to $140 a barrel, and I suddenly feel that we are at a tipping point to brings such a run into view.

Bottom Line: The recent surge in oil has been a blow to my rising optimism. With this surge coming on the heels of accelerating US activity, monetary policymakers will offer some concern over the inflationary impact. Recent history, however, suggests the opposite - that unless the tide of rising commodity prices is soon arrested, Fed officials will find themselves faced with the prospect of yet another round of quantitative easing.

links for 2011-02-27

Posted: 27 Feb 2011 10:01 PM PST

"It’s Time for Leadership"

Posted: 27 Feb 2011 09:12 AM PST

The GOP's plan to cut Pell Grants, Head Start, and other such programs won't do much to solve our budget problem, and it's likely to slow the economy's recovery. But it does help to complete the process of turning tax cuts for the wealthy into cuts to social programs:

The Budget Fight Continues, NY Times: In defense of their bill to slash federal spending by $61 billion over the next seven months, House Republicans claim they are trying to make the economy grow and create jobs. In truth, such deep and sudden cuts could derail the recovery, without ever addressing the real sources of budget deficits — mainly explosive health care costs and incessant high-end tax cuts.
The question is whether the Obama administration and the Senate can prevail against the false rhetoric. ...
In a recent report, economists at Goldman Sachs estimated that the House cuts would reduce economic growth by 1.5 percentage points to 2 percentage points in the second and third quarters of 2011. That would devastate employment. ... [Update: see here for corrections to these numbers.]
The cuts also would be off point. All of them come from discretionary spending, a sliver of the budget... Over the past decade, Pentagon spending has accounted for almost all of the increase in discretionary outlays... Aside from defense, there is not a lot to cut prudently.
Which leads to the strongest argument of all against the House Republican bill — most of the cuts would be counterproductive. Annual spending on education through high school is cut by 12 percent... (since the cuts would be squeezed into the rest of the current budget year, they are even deeper on an annualized basis).
Those cuts include reductions to Head Start that would remove 218,000 children from the program and cuts to elementary education that would hit 2,400 schools and nearly one million students. Pell Grants for college would also be cut by nearly $6 billion. Transportation investments would be cut by 9 percent, or $8.1 billion... Americorps and other community-service programs would be eliminated, although their benefit to society surely exceeds their $1.2 billion cost. Since national service programs are matched by $800 million from foundations and other sources, that would be lost, too. ... Financial regulators would endure deep cuts that would cripple their ability to carry out the Dodd-Frank financial reform law. That's asking for another financial crisis.
Given the need to placate House Republicans, some cuts are inevitable. Senators can turn to President Obama's budget for 2012 as a template for cutting while preserving priorities. It's time for leadership.

February 27, 2011

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links for 2011-02-26

Posted: 26 Feb 2011 10:01 PM PST

"The Debate That’s Muting the Fed’s Response"

Posted: 26 Feb 2011 12:42 PM PST

Christina Romer:

The Debate That's Muting the Fed's Response, by Christina Romer, Commentary, NY Times: ...Monetary policy makers are all hawks now. Even those who most emphasize the Fed's role in fighting unemployment oppose policies that would raise inflation noticeably above the Fed's implicit target of about 2 percent.
The real division is not about the acceptable level of inflation, but about its causes, and the dispute is limiting the Fed's aid to the economic recovery. The debate is between what I would describe as empiricists and theorists.
Empiricists, as the name suggests, put most weight on the evidence. Empirical analysis shows that the main determinants of inflation are past inflation and unemployment. Inflation rises when unemployment is below normal and falls when it is above normal. ...
Theorists, on the other hand, emphasize economic models that assume people are highly rational in forming expectations of future inflation. ... For theorists, any rise in an indicator of expected or future inflation, like the recent boom in commodity prices, suggests that the Fed's credibility is at risk. They fear that general inflation could re-emerge quickly, despite high unemployment.
Now, not every monetary policy maker fits neatly into these categories. ... But the main division is between the empiricists who say "inflation is unlikely at 9 percent unemployment" and the theorists who say "inflation could bite us at any moment." ... Although the Survey of Professional Forecasters ... shows virtually no change in long-run inflation expectations since the start of the program, the theorists hold fast to their concerns.
As a confirmed empiricist, I am frustrated that the two sides have been able to agree only on painfully small additional aid for a very troubled economy. For a sense of how much more useful monetary policy could be, one can look to the Great Depression.
By 1933, short-term interest rates were near zero — just as they are today. As I described in a 1992 academic article, Franklin D. Roosevelt took the United States off the gold standard in April 1933, and rapid devaluation led to huge gold inflows and a large increase in the money supply. ... Expectations of deflation, which had been enormous, abated quickly. As a result, with nominal rates at zero, real interest rates ... plummeted. The first types of demand to recover were ones that were sensitive to interest rates. ...
The Fed could engage in much more aggressive quantitative easing, both in size and in scope, to further lower long-term interest rates and value of the dollar. It could more effectively convey to markets its intentions for the funds rate, which would also lower long-term rates. And it could set a price-level target, which, unlike an inflation target, calls for Fed policy to take past years' price changes into account. That would lead the Fed to counteract some of the extremely low inflation during the recession with a more expansionary policy and lower real rates for a while.
All of these alternatives would be helpful and would retain the Fed's credibility as a defender of price stability. And any would be better than doing too little just because some Fed policy makers believe in an unproven, theoretical view of how inflation works.

Since my views on monetary policy haven't always been reflected accurately when other people have characterized them, let me make them clear once again. I have never argued that monetary policy won't work at all when the economy is near the zero bound. What I have said is that monetary policy alone cannot close the output and employment gaps in severe recessions, and that fiscal policy has an important role to play in aiding monetary policy in spurring a recovery. I have called for more aggressive QE -- I was very clear that I did not think that QE2 was large enough or that is was done soon enough, e.g. I complained about the Fed waiting until the election was over before announcing the policy -- and I have also called for more aggressive fiscal policy. When I respond to those who call solely for monetary policy, it is not because I think that monetary policy won't work at all, it's because monetary policy alone is likely to be insufficient. We shouldn't take that chance.

From the very start of this crisis, I have called for a portfolio of policies as a response to our considerable uncertainty over both monetary and fiscal policy multipliers. My view is that fiscal policy is more powerful than monetary policy in severe recessions, but we don't know all that much about these multipliers in normal times, and we know even less about how they work in severe recessions (most estimates of monetary and fiscal policy multipliers come from models that don't connect the financial and real sectors very well, and hence miss a key transmission mechanism in this recession, and the studies use data that mostly come from normal times). The portfolio approach is useful when there is so much uncertainty over the effectiveness of policy because if one of the policies doesn't work as well as hoped, perhaps another will fill the void. In addition, to me it was also a case of asking which error is worse, overstimulating the economy and putting too many people to work too fast, or doing too little and enduring an "agonizingly slow recovery" to repeat a phrase I used often. I think the costs are asymmetric, that doing too little is a bigger error, so the response should be aggressive and it should involve all the tools at our disposal, i.e. it should involve both monetary and fiscal policy. We haven't done enough of either type of policy, and what we have done has been put into place much later than would have been optimal.

However, while I don't think we did enough, or did it fast enough, I also believe that what has been done on both the monetary and fiscal policy fronts has helped. The empirical evidence isn't all in and won't be for some time, but my reading of the evidence to date is that these policies helped to avoid a much worse outcome. (Even if, when summed across federal, state, and local levels, the net fiscal stimulus was relatively small, as appears to be the case, things still would have been worse without the federal stimulus offsetting the losses at the state and local level.)

Right now, we could use more of both types of policy, it's not too late to do more given the expectation that full recovery of employment is years away. Thus, I am also frustrated with the "painfully small additional aid for a very troubled economy," but my frustration is not just with monetary policymakers. Fiscal policymakers have also failed to do enough.

"Scott Walker's Real Motive"

Posted: 26 Feb 2011 10:26 AM PST

Jonathan Chait:

Scott Walker's Real Motive, by Jonathan Chait: ...Howard Fineman really advances the ball here:

The real political math in Wisconsin isn't about the state budget or the collective-bargaining rights of public employees... It is about which party controls governorships and, with them, the balance of power on the ground in the 2012 elections.
For all of the valid concern about reining in state spending..., the underlying strategic Wisconsin story is this: Gov. Scott Walker, a Tea Party-tinged Republican, is the advance guard of a new GOP push to dismantle public-sector unions as an electoral force. ...[A]ccording to ... GOP strategists and Gov. Haley Barbour of Mississippi -- who chaired the Republican Governors Association in 2010 -- the power and money of public-employee unions was the reason.
"We are never going to win most of these states until we can do something about those unions"... "They have so much incentive to work hard politically because they are, in effect, electing their own bosses -- the Democrats who are going to pay them better and give them more benefits. And the Democrats have the incentive to be generous."
This is how top Republicans see the matter: a vicious cycle of union-to-Democrat-to-union power that they are determined to break.

February 26, 2011

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links for 2011-02-25

Posted: 25 Feb 2011 10:01 PM PST

The Contribution Scam

Posted: 25 Feb 2011 01:08 PM PST

Paul Krugman:

The Contribution Scam: David Cay Johnston has a terrific piece up about the nonsense of comparing government workers to private-sector counterparts by claiming that the government pays for more of their benefits. As he says,

Out of every dollar that funds Wisconsin' s pension and health insurance plans for state workers, 100 cents comes from the state workers.

How can that be? Because the "contributions" consist of money that employees chose to take as deferred wages – as pensions when they retire – rather than take immediately in cash. The same is true with the health care plan. If this were not so a serious crime would be taking place, the gift of public funds rather than payment for services.

Thus, state workers are not being asked to simply "contribute more" to Wisconsin' s retirement system (or as the argument goes, "pay their fair share" of retirement costs as do employees in Wisconsin' s private sector who still have pensions and health insurance). They are being asked to accept a cut in their salaries so that the state of Wisconsin can use the money to fill the hole left by tax cuts and reduced audits of corporations in Wisconsin.

The labor agreements show that the pension plan money is part of the total negotiated compensation. The key phrase, in those agreements I read (emphasis added), is: "The Employer shall contribute on behalf of the employee." This shows that this is just divvying up the total compensation package, so much for cash wages, so much for paid vacations, so much for retirement, etc.

So the right question — the only question — is whether government workers are getting an overall good deal compared with private-sector workers. Why, then, are we hearing so much about the meaningless contribution comparison?

The answer is simple: it's because doing the comparison right doesn't yield the desired answer. The new report by the Times gets the same answer as other studies: low-paid government workers do a bit better than their private-sector counterparts, but others if anything do worse.

Luo and Cooper report this as a "mixed answer" — but in terms of the political debate, it's a body blow to the union-bashers, whose whole position is that public-sector workers are welfare queens in Cadillacs. They need to show outrageous overpayment, not rough equivalence at best.

And so they turn to a meaningless comparison that, to the unwary, sounds as if it supports their case.

Yes, some public-sector workers are overpaid. So are some private-sector workers. Doesn't anyone read Dilbert? But the whole idea that union excesses are at the core of state and local fiscal problems is false, and only deliberate obfuscation keeps that from being obvious.

Fourth Quarter GDP Revised Downward

Posted: 25 Feb 2011 09:59 AM PST

Fourth quarter GDP was revised downward:

A disappointing day, by Ryan Avent: ...let me draw your attention to two stories... First, America's fourth quarter GDP growth has been revised down:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.8 percent in the fourth quarter of 2010, (that is, from the third quarter to the fourth quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.6 percent...

The downward revision to the percent change in real GDP primarily reflected an upward revision to imports and downward revisions to state and local government spending and to personal consumption expenditures (PCE) that were partly offset by an upward revision to exports.

And Britain's economy shrank by more than initially thought:

Britain's economy shrank more than initially estimated in the fourth quarter, complicating the task of the Bank of England as a split deepens among policy makers on whether to withdraw stimulus.

Gross domestic product fell 0.6 percent from the previous three months, compared with an initial estimate for a 0.5 percent drop, the Office for National Statistics said today in London. The statistics office said its "best estimate" for the impact of cold weather on the data remains 0.5 percent. The slump was led by construction and investment.

The American data helps explain labor market figures that looked unusually bad given growth. In both cases, the fiscal and monetary authorities should be asking themselves whether they've overestimated the performance of these economies and their ability to handle big, and largely unnecessary, short-term budget cuts.

Though certainly better than lower growth, a 2.6% growth rate is not much progress. It's basically treading water, though barely. To "recover" what was lost in the recession, including lost jobs, we need to grow much faster than that. Unfortunately for the millions of unemployed, problems at the state and local level are far from over, there are other headwinds working against growth as well (e.g. the prospect of higher oil prices, the end of the stimulus package), but policymakers have moved on to other things. And worse, the main topic presently, cutting the budget, works against the employment and output growth.

February 25, 2011

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Paul Krugman: Shock Doctrine, U.S.A.

Posted: 25 Feb 2011 12:42 AM PST

As I said earlier today, Republicans "do not intend to allow the budget deficit brought about by the crisis to go to waste," and that is true at both the federal and state levels:

Shock Doctrine, U.S.A., by Paul Krugman, Commentary, NY Times: ...Naomi Klein's best-selling book "The Shock Doctrine" ... argued that ... right-wing ideologues have exploited crises to push through an agenda that has nothing to do with resolving those crises, and everything to do with imposing their vision of a harsher, more unequal, less democratic society.
Which brings us to Wisconsin 2011, where the shock doctrine is on full display.
In recent weeks, Madison has been the scene of large demonstrations against the governor's budget bill, which would deny collective-bargaining rights to public-sector workers. Gov. Scott Walker claims that he needs to pass his bill to deal with the state's fiscal problems. But his attack on unions has nothing to do with the budget. In fact, those unions have already indicated their willingness to make substantial financial concessions — an offer the governor has rejected.
What's happening in Wisconsin is, instead, a power grab — an attempt to exploit the fiscal crisis to destroy the last major counterweight to the political power of corporations and the wealthy. And the power grab goes beyond union-busting. The bill in question is 144 pages long, and there are some extraordinary things hidden deep inside.
For example, the bill includes language that would allow officials appointed by the governor to make sweeping cuts in health coverage for low-income families without having to go through the normal legislative process.
And then there's this... The state of Wisconsin owns a number of plants supplying heating, cooling, and electricity to state-run facilities (like the University of Wisconsin). The language in the budget bill would, in effect, let the governor privatize any or all of these facilities at whim. Not only that, he could sell them, without taking bids, to anyone he chooses. And note that any such sale would, by definition, be "considered to be in the public interest."
If this sounds to you like a perfect setup for cronyism and profiteering ... you're not alone. Indeed, there are enough suspicious minds out there that Koch Industries, owned by the billionaire brothers who are playing such a large role in Mr. Walker's anti-union push, felt compelled to issue a denial that it's interested in purchasing any of those power plants. Are you reassured?
The good news from Wisconsin is that the upsurge of public outrage — aided by the maneuvering of Democrats in the State Senate, who absented themselves to deny Republicans a quorum — has slowed the bum's rush. If Mr. Walker's plan was to push his bill through before anyone had a chance to realize his true goals, that plan has been foiled. And events in Wisconsin may have given pause to other Republican governors, who seem to be backing off similar moves.
But don't expect either Mr. Walker or the rest of his party to change those goals. Union-busting and privatization remain G.O.P. priorities, and the party will continue its efforts to smuggle those priorities through in the name of balanced budgets.

Has Consumption Inequality Mirrored Income Inequality?

Posted: 25 Feb 2011 12:24 AM PST

This paper by Mark Aguiar and Mark Bils finds that "consumption inequality has closely tracked income inequality over the period 1980-2007":

Has Consumption Inequality Mirrored Income Inequality?, by Mark A. Aguiar and Mark Bils, NBER Working Paper No. 16807, February 2011: Abstract We revisit to what extent the increase in income inequality over the last 30 years has been mirrored by consumption inequality. We do so by constructing two alternative measures of consumption expenditure, using data from the Consumer Expenditure Survey (CE). We first use reports of active savings and after tax income to construct the measure of consumption implied by the budget constraint. We find that the consumption inequality implied by savings behavior largely tracks income inequality between 1980 and 2007. Second, we use a demand system to correct for systematic measurement error in the CE's expenditure data. Specifically, we consider trends in the relative expenditure of high income and low income households for different goods with different income (total expenditure) elasticities. Our estimation exploits the difference in the growth rate of luxury consumption inequality versus necessity consumption inequality. This "double-differencing,'' which we implement in a a regression framework, corrects for mis-measurement that can systematically vary over time by good and income group. This second exercise indicates that consumption inequality has closely tracked income inequality over the period 1980-2007. Both of our measures show a significantly greater increase in consumption inequality than what is obtained from the CE's total household expenditure data directly.

Why is this important? (see also "Is Consumption the Grail for Inequality Skeptics?"):

An influential paper by Krueger and Perri (2006), building on related work by Slesnick (2001), uses the CE to argue that consumption inequality has not kept pace with income inequality.

And these results have been used by some -- e.g. those who fear corrective action such as an increase in the progressivity of taxes -- to argue that the inequality problem is not as large as figures on income inequality alone suggest. But the bottom line of this paper is that:

The ... increase in consumption inequality has been large and of a similar magnitude as the observed change in income inequality.

links for 2011-02-24

Posted: 24 Feb 2011 10:01 PM PST

Frankel: Democrats Should not Rise to the Bait of "Fiscal Conservatives"

Posted: 24 Feb 2011 10:35 AM PST

Jeff Frankel is unhappy with the accepted framing of the budget issue:

Democrats should not rise to the bait of "fiscal conservatives", by Jeff Frankel: I never cease to be frustrated that the current public policy debate is described as a contest of ideas: fiscal conservatives versus liberals. It is not just Republicans or Tea Partiers who believe that they are fiscal conservatives... Democrats and liberals seem to accept this characterization at face value, as does most of the media.
The problem is that a heavy majority of the supposed fiscally conservative congressmen, although passionate about cutting government spending in the abstract, are in truth no better able to find specific dollars of budget cuts that they can support or defend to their constituents than are the Democrats. Factoring in their immutable desire to cut taxes, I believe that if the Republicans were in full control, we would have larger budget deficits in the coming years than if the Obama crowd retained power. This is what happened in a big way when Presidents Reagan and GW Bush took office promising to cut the debt while also cutting taxes. Spending, deficits, and debt soared during their terms, relative to their respective Democratic predecessors. There is no reason to think anything has changed.
The first thing the Republicans did after their congressional victories in the November election was achieve their precious extension of the Bush tax cuts for the wealthy. This extension will raise the budget deficit by more than all the domestic spending cuts that all of the Congressional freshmen have identified put together.
Next they turned to their campaign to kill Obamacare. It ... is ... surprising that the conservatives can continue to get away with simultaneously tarring the reform as "death panels" while refusing to acknowledge that it will cut costs. Their plans for going back to our previous health care system include suspending their own rule that bills that would increase spending ... must be paid for.
The zeal to cut funding for such tiny programs as the National Endowment for the Humanities and Planned Parenthood is accepted as evidence of the sincerity of the fiscal conservatives. I wish the Democrats would not fall for that bait. Their anguish over such cuts, while understandable, plays into the old narrative of big versus small government. ... The Right reacts to such liberal anguish with glee, while the Center infers ... that such cuts are part of a painful but necessary fiscal adjustment. Losing the center is no way to put together a political majority.
Yes, fiscal adjustment is necessary. I might even think that such cuts would be a price worth paying, if they were a proportionate component of a comprehensive plan to address the long-run fiscal situation. But they are nothing remotely like that. Rep. Paul Ryan's supposedly tough long-term plan to cut spending doesn't balance the budget until 50 years from now and runs up another $62 trillion in national debt in the meantime... Moreover..., the cuts that the House passed last week are not going to take effect anyway: the Senate and the presidential veto render them all but irrelevant. As usual, it is all about perceptions. I don't think the perception should be that Democrats stand in the way of fiscal responsibility. So I would prefer to divert the narrative from the unenlightening and sterile debate of small versus big government, to the realities of arithmetic and history.

The White House has also played into this by proposing measures such as a government discretionary spending freeze that do little to change the long-run problem. These cuts give the impression that cutting the fat out of the budget is all it will take to bring it into balance when the problem is much larger than that and due mainly to expected health care cost increases. It also gives the impression that these measures are in response to pressure from Republicans further advancing the myth discussed above. The White House has not framed the budget debate in a way that takes control of the debate and points to the true problem. Instead, it has allowed the myth to persist that the problem is Democrats standing in the way of thrifty Republicans. Republicans aren't thrifty for the most part, they are ideological and this is a chance to pursue ideological goals of smaller government through a reduction in social programs. They do not intend to allow the budget deficit brought about by the crisis to go to waste -- this is a golden opportunity to eliminate or reduce programs they've wanted to get rid of for years. The White House needs to stop playing into this, and instead show leadership that reframes the problem in term that do not endanger programs that have little to do with our long-run problem. Unfortunately, instead of trying to change public opinion through leadership, opinion shaped by years of misleading rhetoric from the other side, they are taking perceptions of the budget problem as given and shaping their policies accordingly. That may win the next presidential election, but it's far from the best way to proceed.

February 24, 2011

Latest Posts from Economist's View

Latest Posts from Economist's View

Bhagwati: Fallacies of the Crisis

Posted: 24 Feb 2011 01:44 AM PST

Jagdish  Bhagwati:

Four Fallacies of the Crisis, by Jagdish Bhagwati, Commentary, Project Syndicate: The current twin crises in finance and the real economy..., and the interminable discussions about financial reform and the prospects for economic recovery, have spawned several fallacies that need to be addressed and dismissed. ...
Fallacy 2: Through monetary expansion, the US is manipulating the dollar's exchange rate in the same way that it accuses China of manipulating the renminbi's exchange rate.
The two cases are dissimilar. If one grants the premise that there is an insufficiency of aggregate global demand, the alleged Chinese undervaluation of the renminbi can, indeed, be seen as a beggar-thy-neighbor policy, which diverts inadequate world demand to Chinese goods at the expense of other countries.
On the other hand, the dollar's weakening is a side-effect of US monetary expansion, undertaken after countries like China and Germany refused to spend more to increase world demand, and after no room remained for further fiscal stimulus. This is altogether different from a policy of weakening the dollar to divert inadequate world demand to American goods. ...
Fallacy 4: Forget about Keynesian demand management.
Some critics of Obama's Keynesian stimulus spending, among them the economist Jeffrey Sachs, claim that what the US needs is "long-term" productivity-enhancing spending. But this is a non sequitur. As a Keynesian, I believe that the state paying people to dig holes and then fill them up would increase aggregate demand and produce more income. But Keynes was no fool. He understood that the government could eventually get huge returns if the money was spent on productivity-enhancing investments rather than on "directly wasteful" expenditure-increasing activities. The question, then, is simple: which investments offer the greatest economic payoffs? ...

When the government is deciding how to spend a given amount of stimulus money, a goal of maximizing long run economic growth would result in a different set of projects than a goal of keeping employment as high as possible until the economy recovers. The projects that increase growth the most five or ten years from now are not necessarily the same as the projects that provide the most employment support in the short-run.

We weighed stimulus projects mainly on their long-run growth potential, and the ability of a project to enhance long-run growth should certainly be part of the decision of which projects to pursue. But short-run employment support is a worthy goal as well, and this did not play a large enough role in the choice 0f how to spend the stimulus money.

Median Duration of Unemployment

Posted: 24 Feb 2011 01:17 AM PST


Just a reminder.

'Higher' Things May Have to Wait?

Posted: 24 Feb 2011 12:42 AM PST

How do Americans view "crude materialism"?:

Money and character, by Claude Fischer: One of the criticisms that foreigners (and many of us, too) have long had about Americans, going back to the earliest years, is how materialist and money-grubbing we are. ...
What appears to have changed historically is the growing distaste for open cash or crude materialism. It seems that, as Americans became more affluent over the last two centuries, as the middle class expanded, and as bourgeois sentimentality developed..., Americans became more uncomfortable with naked money, especially with mixing cold cash and warm relations. ... Some scholars have written about a "post-materialist" sensibility. As people became wealthier over several generations, they shifted their focus to "higher" things, like environmentalism, self-expression, and nurturing relationships. ...
Some observers suggest, however, that this post-materialist trend may have recently stalled or reversed. There are survey data indicating that American adults and American college students, in particular, have increasingly focused on money and material things since around 1970. One explanation — assuming that this change is real — is the increasingly visible widening of economic inequality since the '70s. ... Another explanation is that growing economic insecurity among middle class (and poorer) Americans since the 1970s — requiring, for example, more work hours from mothers — has necessarily and pragmatically re-focused Americans' attention to money matters. "Higher" things may have to wait. ...

links for 2011-02-23

Posted: 23 Feb 2011 10:01 PM PST

"The Most Dangerous Union in the World"

Posted: 23 Feb 2011 10:51 AM PST

Michael Perelman:

The Most Dangerous Union in the World, by Michael Perelman: Several commentators have remarked about the sudden outbreak of class struggle in the United States. I see the brutal behavior of the state and federal governments as an indication of the failure of class struggle.
Let me explain. Back in the 1960s, when United States was enjoying the so-called Golden of economic prosperity, profits were weakening. By the late 1960s, the organized right wing began to harness the energy of the tea party of the day, which took hold with the defeat of Barry Goldwater. Using its almost unlimited source of funding, wealthy businesspeople and corporations began to create a solid network of organizations to remake the country by undoing the gains made during the and New Deal, and even emulating the political landscape of the late 19th century. The Cato Foundation, the Heritage Foundation, right wing legal offices, and a host of other activist operations led a systematic assault on anything and anybody who seem to know represent a barrier to profit maximization.
This movement was extraordinarily successful, so much so that they even co-opted the Democratic Party, which had previously offered a meek resistance to business demands. By the 1990s, the results were clear to anybody who bothered to take notice of the economy. On the eve of the Great Recession, the results were so obvious that only the most stubborn ideologues could fail to see that virtually all of the economic growth since 1970 had been captured by a very small elite. I told this story in a book entitled The Confiscation of American Prosperity: From Right-Wing Extremism and Academic Economics to the Next Great Depression, published in 2007, just as the stock market peaked.
The ideological justification of this confiscation was that business prosperity would create a tsunami of productivity by following the right-wing regimen. The entire population would benefit.
Productivity did increase — not spectacularly — but which is still stagnated. Job security eroded. Protections previously guaranteed by regulatory agencies or the law quickly disappeared.
Despite the idea that the economy somehow suffered from an over burden of taxes and regulations, the more these hindrances to prosperity fell by the wayside, the worse the economy performed. Profits became concentrated in the financial sector, but much of the rest of the economy faltered.
Scapegoats had to be found. Already, during the Nixon administration, the right wing became adept at recruiting working-class support, using racism and cultural discomfort as fuel. Ironically, one of the first groups successfully recruited were craft unions, a minority of whose members attacked antiwar demonstrators. A parade of scapegoats march across the political landscape. Braless hippies, Blacks, unwed teenage mothers, welfare recipients, immigrants, and now public workers, especially teachers.
The results were always the same. The right would win more victories. The overall economy would still perform sluggishly. And the next scapegoat would step forward. Even when the culprit is obvious, scapegoats still must be found. For example, with the collapse of the financial scams in 2007, blame was shifted to Fannie Mae and Freddie Mac, and even more ridiculously to an obscure rule that had been passed two decades earlier.
Private-sector unions became virtually powerless on the national scene. In this environment, jobs disappeared. Disappointed union members would be vulnerable to the relative prosperity of public sector workers, who had pensions and medical coverage. Similarly, people who had lost their pensions to fraudulent banking schemes often became more upset with the relatively comfortable conditions of public sector workers.
One union stood out by its successes. It is not generally called a union, but so long as we can abuse reality by calling corporations people, we can call the Chamber of Commerce a union. This union is so powerful that the present United States must come before it as a humble supplicant. This union was at the forefront of the deconstruction of the New Deal.
The time has come to stop blaming the victim. Somehow, we have to learn to fight back in this one-sided class warfare. We have to learn to explain that more of the same medicine that made us sick is not going to cure us. We have to learn to identify the architects of this disaster — the political manipulators, the right wing foundations and their benefactors, and if we want to begin a legitimate fight against unions, let's start with the Chamber of Commerce.