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June 30, 2011

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"Barack Obama Fail Department"

Posted: 30 Jun 2011 12:33 AM PDT

This is in the mid-range of the Brad DeLong Shrill-O-Meter, but I think it's safe to conclude that he's not happy with the president's remarks in yesterday's press conference:

This Is Very Bad: Barack Obama Fail Department, by Brad DeLong: Can't anybody in the White House play this game?

Barack Obama:

Transcripts: There are a lot of folks out there who are still struggling with the effects of the recession. Many people are still looking for work or looking for a job that pays more. ...

But there are ... steps that we can take right now that would help...

Of course, one of the most important and urgent things we can do for the economy is something that both parties are working on right now, and that's reducing our nation's deficit...

No. No. No. No. No. No. NO. NO!!!!!!!!!

Absolutely the last thing, the last thing, the country needs is to cut federal spending or raise taxes in fiscal 2011, 2012, and it is now looking like fiscal 2013 as well.

Absolutely the last thing the country needs.

It gets worse. Obama:

[B]ecause of the work that's been done, I think we can actually bridge our differences. ... Nobody wants to put the creditworthiness of the United States in jeopardy. Nobody wants to see the United States default. ...

Does Obama read? There are some people who are looking forward to a default. And some of them are in the Republican legislative caucus--or so John Bresnehan and Jake Sherman claim:

"Who has egg on their face if there is a sovereign debt crisis, House Republicans or the president?" said another senior GOP lawmaker.

We have Republicans threatening to default on the debt and blow up the economy if they aren't allowed to put the economy at risk in another way -- through immediate deficit reduction -- and a president selling the demands from the other side as a jobs package. To make it worse, some Republicans seem eager for default to happen based upon the false belief that they'll somehow gain political advantage for wrecking the economy. No wonder the economic outlook is so grim.

With the economy struggling to get back on its feet, "Absolutely the last thing, the last thing" we should be doing right now is making threats or enacting policies that increase the risks of an economic setback. I think it's important to realize that the threat to default on the debt puts the economy at risk even if it is never acted upon, especially as the critical date to lift the debt ceiling draws closer. Republicans aren't just threatening to put the economy at risk in the future if they don't get their way, they are already doing so. If this continues there will likely come a point when markets get the jitters, and if that happens, watch out.

Fed Watch: The Lost Jobs Opportunity

Posted: 30 Jun 2011 12:15 AM PDT

Tim Duy:

The Lost Jobs Opportunity, by Tim Duy: This kind of chart has always bothered me:

It is not the content or format that worries me. And, to be sure, the magnitude of the labor market damage wrought by the recession weighs heavily on my mind. Moreover, the length of time to recovery seems immense. And, on top of both of these, we effectively reduce our expectations of "recovery" with this chart - recovery should be about capturing the previous trend, not the previous peak.

Despite all this, it has always seemed to me that I was missing some even darker point. I think I finally identified that issue. Consider that the US economy remains about 7 million jobs shy of the previous peak of nonfarm payrolls. At 200k jobs a month - a seemingly optimistic forecast at this point - we regain the peak in about 35 months. We are already (believe it or not) 23 months into the expansion, which means that we recover the jobs lost in this cycle after a 57 month expansion.

Now consider this: The average post-WWII expansion is only 59 months.

If this expansion is typical, then we can expect just 2 months of job growth beyond the previous peak before the next recession hits.

Now suppose that job growth limps along at a monthly average of 150k a month. Then we are 46 months away from the payroll peak, or an expansion time of 69 months. Ten months shorter than the post-WWII average. In other words, even without resorting to an immediate double-dip scenario, we could very well be in recession prior to regaining the jobs peak.

Perhaps we should take some comfort in the fact that the average of the past three expansions is 95 months - which provides some room to grow jobs beyond the peak, but not much in historical perspective. Moreover, given the likelihood that the Fed begins a tightening cycle well before the payroll peak is in sight, and that fiscal policy looks poised to turn contractionary very soon, I have trouble thinking this recovery will be more like the past three (one of which included massive technological change) than the entire post-WWII average. That said, hope springs eternal.

The very real possibility that we will slip into recession prior to regaining the previous jobs peak casts the current situation in an even darker light than that of Federal Reserve Governor Sarah Raskin. Not only is the depth and duration of the unemployment crisis immense, but so too are the long-term consequences. The failure to design a coordinated package of monetary and fiscal policy to engineer a V-shaped employment recovery looks increasingly like a massive lost opportunity. And with that opportunity now lost, a return to even something sort of like the pre-recession jobs trend seems essentially impossible.

links for 2011-06-29

Posted: 29 Jun 2011 10:04 PM PDT

Feldstein: What’s Happening to the US Economy?

Posted: 29 Jun 2011 11:07 AM PDT

Martin Feldstein sounds worried:

What's Happening to the US Economy?, by Martin Feldstein, Commentary, Project Syndicate: The American economy has recently slowed dramatically, and the probability of another economic downturn increases with each new round of data. ...
Monetary and fiscal policies cannot be expected to turn this situation around. The US Federal Reserve will maintain its policy of keeping the overnight interest rate at near zero; but, given a fear of asset-price bubbles, it will not reverse its decision to end its policy of buying Treasury bonds – so-called "quantitative easing" – at the end of June.
Moreover, fiscal policy will actually be contractionary in the months ahead. The fiscal-stimulus program enacted in 2009 is coming to an end, with stimulus spending declining from $400 billion in 2010 to only $137 billion this year. And negotiations are under way to cut spending more and raise taxes in order to reduce further the fiscal deficits projected for 2011 and later years.
So the near-term outlook for the US economy is weak at best. Fundamental policy changes will probably have to wait until after the presidential and congressional elections in November 2012.

Sarah Raskin is also worried, and seems to be one of the few Federal Reserve Board willing to "underscore" the employment part of the dual mandate (though I think Feldstein's right about further easing, that won't happen unless the outlook darkens considerably, and even then there's no certainty the Fed would take action):

Fed's Raskin Paints Grim Picture of Recovery, by Luca Di Leo, Real-Time Economics: Federal Reserve Board governor Sarah Raskin Wednesday painted a grim picture of the U.S. economy and signaled support for the central bank's easy-money policies aimed at boosting jobs.

In a speech to the New America Foundation, Raskin said the jobs market is actually in worse shape than what's indicated by the headline 9.1% unemployment rate. ...Raskin told the audience "we should pause to underscore the promotion-of-maximum-employment imperative of the Federal Reserve's dual mandate." ...

Though statistics show that about 13.9 million Americans were out of work in May, an additional 8.5 million workers had to settle for part-time jobs or were forced to cut back on their work hours, Raskin said.

"It is necessary for the strength of our nation's recovery that low- and moderate-income Americans be able to more fully participate in the economy," the Fed official said. ...

Obama Needs to Fight for Jobs

Posted: 29 Jun 2011 08:46 AM PDT

I'm running a bit late so I don't have time to say as much as I'd like about this, but I don't like this advice at all (I've advocated, for example, proposing job creation policies very publicly, and then forcing Republicans to vote them down):

Obama needs to create jobs, not fight for them, by Ezra Klein: Ron Klain, former chief of staff to both Al Gore and Joe Biden, thinks President Obama needs to make more of a show of fighting for job-creating policies. "The greatest risk to the president will be if the American people believe the administration isn't trying hard enough to tackle the jobs problem," he writes. "That is why it is imperative for the administration to do more — proposing new ideas, initiatives and job-creation programs — and without delay. It may not succeed, but it must get 'caught trying' to do more to spur job creation."
This advice appeals to me. It's what I'd like to see happen. But I also think it's wrong, and if I were advising President Obama, I'd advise him not to take it.
Let's agree that what matters isn't how many jobs you "get caught trying" to create, but how many jobs you actually create. There's virtually no evidence that if Obama makes more speeches on jobs, his poll numbers will go up or the labor market will improve. There's lots of evidence that if he passes policies that create more jobs, his poll numbers will go up and the labor market will improve. The question, then, isn't how Obama can get "caught trying." It's how — or whether — he can succeed.
When presidents take a strong stand for or against policies, they polarize the policies. Under unified control of government — particularly under unified control of government with a filibuster-proof majority — that can make the policies easier to pass, as it consolidates party support. Under divided control of government, it makes them harder to pass, as it creates or hardens minority-party opposition.
A lot of observers wondered why the Obama administration didn't push a payroll-tax cut in the 2010 elections. The reason, insiders said, was simple, if frustrating: If they did that, the Republican Party would publicly oppose it and they wouldn't be able to pass it after the election. By staying quiet on the payroll-tax cut, they made it possible for Republicans to support it as part of the 2010 tax deal.
Recently, the Obama administration has been pushing an expansion of the payroll-tax cut. They want to extend it to employers, not just employees. But they've been more public about it. And sure enough, the GOP is suddenly finding itself opposed to a tax cut on business — man, polarization is a powerful force — and gripped by a sudden and, one imagines, soon-to-be-abandoned belief that tax cuts should be paid for.
All of which suggests that if any further jobs measures are going to pass, they're going to have to start in backroom negotiations and only go public as part of a deal. Taking them public first in the hopes that you can then get them as part of backroom negotiations won't work. So though I agree with Klain that the right political move for Obama is to push harder on jobs, if I were advising the president, I'd tell him to keep any policies that his legislative team thinks could actually pass out of his speeches. Because the right politics, in the end, won't do him much good in November. The right jobs numbers will.

Some very quick thoughts:

1. This is not a one-shot game. You have to make the Republicans pay in terms of eroded public support before they will agree to cooperate at all. Yes, they might walk away, and that might hurt in the short-run, but if they are forced to pay a large cost in terms of public support then next time things will be different. The president in particular has not played a long-run strategy, the Republicans have, and the results reflect this.

2. "Let's agree that what matters isn't how many jobs you "get caught trying" to create." Why should I agree to take as given the point being debated here? We haven't been in this situation before, so past evidence isn't all that relevant. When we need jobs as bad as we do right now, making it clear the other side is standing in the way of that goal, and fighting for the policies you'd like to enact has more value than it did in the past. 

3. Yes, it might cause Republicans to leave the negotiating table, but that's where the lack of public rhetoric really hurts. That's where Republicans must be made to pay for their behavior in the eyes of the public. Otherwise they will control the negotiations as they do now. The payroll tax, for example, was not the  first choice of Democrats, it was chosen because of fear Republicans would walk away from any other proposal. Their public rhetoric had already boxed Democrats in and now Democrats are supposed to be afraid of trying to punch through that box in public. To me, this is about leaders and followers, and the administration is not the one leading policy right now.

4. The other side is not shy about going public, and that was also true when they controlled the White House. If this advice is correct, why didn't it hurt Republicans when they were in power?

5. Yes, jobs at election time would be best. But if the other side is pushing policies that work against that goal so that it is unlikely to be attained, I can't see how making that clear to the public would hurt.

[Again, I wrote this in a rush and am out of time. I'm sure I've left things out, the arguments aren't as clean as I'd like, etc., etc. -- mostly just putting this up for comments. Hopefully all of you can take it a bit further.]

June 29, 2011

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Can Food Prices Be Stabilized?

Posted: 29 Jun 2011 12:42 AM PDT

Jeff Frankel argues that limiting speculators is not the best way to protect against volatility in food prices. I agree:

Can Food Prices Be Stabilized?, by Jeffrey Frankel, Commentary, Project Syndicate: Under French President Nicolas Sarkozy's leadership, the G-20 has made addressing food-price volatility a top priority this year...
It is probably best to accept that commodity prices will be volatile, and to create ways to limit the adverse economic effects – for example, financial instruments that allow hedging of the terms of trade. ...
But the ... policy that Sarkozy evidently has in mind is to confront speculators, who are perceived as destabilizing agricultural commodity markets. ...
But speculation is not necessarily destabilizing. Sarkozy is right that leverage is not necessarily good just because the free market allows it, and that speculators occasionally act in a destabilizing way. But speculators more often act as detectors of changes in economic fundamentals, or provide the signals that smooth transitory fluctuations. In other words, they often are a stabilizing force.
The French have not yet been able to obtain agreement from the other G-20 members on measures aimed at regulating commodity speculators, such as limits on the size of their investment positions. I hope it stays that way. Shooting the messenger is no way to respond to the message.

Unionization and Inequality

Posted: 29 Jun 2011 12:06 AM PDT

Henry Farrell:

Unionization and Inequality, by Henry Farrell: Ramesh Ponnuru argues that the relevant social science suggests that US policy makers should not try to reverse the decline of unions. ... In support of this claim, he refers to work by Henry Farber and Bruce Western.

[The liberal] storyline gets one thing right: Government policy did have a lot to do with the decline of unions. But it wasn't labor law that mattered. In a study of the decline of unions between 1973 and 1988, economist Henry Farber and sociologist Bruce Western found that the chief reason was that nonunionized companies grew faster than unionized ones. Employment at unionized companies dropped by 2.9 percent per year while employment at nonunionized companies rose by 2.8 percent a year. Another paper by the same authors confirms that the union elections overseen by the NLRB were a sideshow: If the NLRB had held no unionization elections since 1972, the percentage of Americans in unions would have dropped by only an additional 1.7 percent. … Government abetted the decline by encouraging competition among companies:

This is a reasonable summation of their findings, although Bruce Western, in a recent paper with Jake Rosenfeld appears to have changed his mind in the intervening years, noting that "an influx of corporate donations influenced policymakers to oppose pro-union reform of labor law in the 1970s" and that "[p]olitical defeats in the 1970s and 1980s yielded an 'enervated' labor law that enabled employers to block organizing campaigns and weaken existing unions." Perhaps more to the point, Western and Rosenfeld provide substantial supporting evidence for the 'immiseration of the middle class' thesis that Ponnuru is seeking to disprove. ...

Nor is inequality, as Ponnuru seems to suggest, the product of more money going to those with higher skills. Western and Rosenfeld's figures suggest that the decline of unions has been just as important a factor as education in explaining the rise of inequality among men. ...

In short, there is good prima facie support for the claim that deunionization has hurt the middle class by contributing to a particularly top-heavy form of increased income inequality, from an author whom Ponnuru cites and presumably takes seriously. Very likely he wasn't aware of this recent work. ...

links for 2011-06-28

Posted: 28 Jun 2011 10:01 PM PDT

Bumblebees Appear to Equate Marginal Costs and Marginal Benefits

Posted: 28 Jun 2011 05:40 PM PDT

Bumblebees "make a clear trade-off between minimizing travel distance and prioritizing high rewards":

How bumblebees tackle the traveling salesman problem, EurekAlert: It is a mathematical puzzle which has vexed academics and travelling salesmen alike, but new research from Queen Mary, University of London's School of Biological and Chemical Sciences, reveals how bumblebees effectively plan their route between the most rewarding flowers while travelling the shortest distances.
The research, led by Dr Mathieu Lihoreau and published in the British Ecological Society's Functional Ecology, explored the movement of bumblebees, Bombus terrestris, as they collected nectar from five artificial flowers varying in reward value.
"Animals which forage on resources that are fixed in space and replenish over time, such as flowers which refill with nectar, often visit these resources in repeatable sequences called trap-lines," said Dr Lihoreau, "While trap-lining is a common foraging strategy found in bees, birds and primates we still know very little about how animals attempt to optimize the routes they travel."
Research into optimizing routes based on distance and the size of potential rewards is reminiscent of the well known Travelling Salesman problem in mathematics, which was first formulated in 1930, but remains one of the most intensively studied problems in optimization.
"The Travelling Salesman must find the shortest route that allows him to visit all locations on his route," explained co-author Dr Nigel Raine, "Computers solve it by comparing the length of all possible routes and choosing the shortest. However, bees solve simple versions of it without computer assistance using a brain the size of grass seed."
The team set up a bee nest-box, marking each bumblebee with numbered tags to follow their behavior when allowed to visit five artificial flowers which were arranged in a regular pentagon.
"When the flowers all contain the same amount of nectar bees learned to fly the shortest route to visit them all," said Dr Lihoreau. "However, by making one flower much more rewarding than the rest we forced the bees to decide between following the shortest route or visiting the most rewarding flower first."
In a feat of spatial judgment the bees decided that if visiting the high reward flower added only a small increase in travel distance, they switched to visiting it first. However, when visiting the high reward added a substantial increase in travel distance they did not visit it first.
The results revealed a trade-off between either prioritizing visits to high reward flowers or flying the shortest possible route. Individual bees attempted to optimize both travel distance and nectar intake as they gained experience of the flowers.
"We have demonstrated that bumblebees make a clear trade-off between minimizing travel distance and prioritizing high rewards when considering routes with multiple locations," concluded co-author Professor Lars Chittka. "These results provide the first evidence that animals use a combined memory of both the location and profitability of locations when making complex routing decisions, giving us a new insight into the spatial strategies of trap-lining animals."

A Tax Holiday for Repatriated Corporate Profits: The Costs Exceed the Benefits

Posted: 28 Jun 2011 11:07 AM PDT

The editors at MoneyWatch asked me to comment on the tax repatration proposal that's been floated as a way to increase investment and create jobs:

A Tax Holiday for Repatriated Corporate Profits: The Costs Exceed the Benefits

"Who Doesn’t Pay Federal Income Taxes"

Posted: 28 Jun 2011 08:37 AM PDT

Bruce Bartlett talks about who does and doesn't pay federal taxes, and notes that "the growth of the non-income-taxpaying population is largely a result of Republican tax policies."

He also notes that:

There are 78,000 tax filers with incomes of $211,000 to $533,000 who will pay no federal income taxes this year. Even more amazingly, there are 24,000 households with incomes of $533,000 to $2.2 million with zero income tax liability, and 3,000 tax filers with incomes above $2.2 million with the same federal income tax liability as most of those with incomes barely above the poverty level.

But, it is the low income households that Republicans complain about, usually something along the lines of:

Those on the right often complain that it is fundamentally undemocratic for such a large percentage of the population to pay nothing to offset the federal government's general operations. After all, everyone benefits from national military spending and other federal programs.

But why is it better to, say, tax the poor $100 and then given them $120 in benefits instead of just sending $20? Why go to all the trouble and cost of collecting the extra $100 and then giving it back? Unless the real argument is that there should be no redistribution to the poor, i.e. that they should get back less than the $100 they paid, certainly no more, I don't see why it's better. One argument is that you can earmark the $100 for particular types of spending, but that seems like the kind of paternalism the right likes to (say) they avoid. I guess the argument is that somehow this makes people aware of the value of what they receive, but it seems like a weak argument to me.

In any case, this is hard to disagree with:

Perhaps the right and left can at least agree that it is unseemly for those in the top 1 percent of income distribution, with incomes at least 10 times the median income, to pay no federal income taxes. It's not socialism to ask them to pay something.

It's also reasonable to ask those at the top to pay their fair share, and to participate in the burden of reducing the long-term deficit through tax increases.

[Update: I should have also pointed to Misconceptions and Realities About Who Pays Taxes.]

June 28, 2011

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links for 2011-06-27

Posted: 27 Jun 2011 10:04 PM PDT

Health Inequality at Birth

Posted: 27 Jun 2011 07:56 PM PDT

An implication of recent research is that "stricter environmental regulation would benefit low-income children in particular":

Born to Lose: Health Inequality at Birth, by Nancy Folbre: In an imaginary world of equal opportunity we would all be free to choose our own economic future. In reality, many children in the United States are born to lose, suffering health disadvantages at birth that reduce their likelihood of economic success.
Epidemiologists and economists have long agreed that low birth weight is an important, albeit approximate, predictor of future health problems. A wealth of new economic research ... shows that it is also an approximate predictor of future earnings problems, with statistical effects almost as strong as children's test scores. ...
In the current American Economic Review, Janet Currie ... summarizes recent findings and points out that children of black mothers who dropped out of high school are three times as likely as children of white college-educated mothers to suffer low birth weight.
Many of the mechanisms that underlie this inequality are linked to characteristics of the physical environment, such as exposure to environmental toxins. ... Professor Currie's research shows that black and Latino children are significantly more likely than white children to be born to mothers living in proximity to such hazards, supporting arguments long made by environmental justice advocates. ...
[An] important policy implication is that stricter environmental regulation would benefit low-income children in particular. Professor Currie has taken part in research showing that reductions in the release of three toxicants (cadmium, toluene, and epichlorohydrin) from 1988 to 1999 account for a 3.9 percent reduction in infant mortality over that time. ...
Yet many children in the United States live, play or go to school in areas with dangerously poor air quality...
Professor Currie herself tends to emphasize the pricing problem. As she put it: "Factories dump toxic releases into the atmosphere but don't pay the cost of pollution. There would be less harm to the children who ingest the toxins if the factories had to bear the cost."
Changes would happen even more quickly if the chief executives of these companies — and their children — had to bear the cost. But these adults are free to choose where to live and what to breathe. And their children are, for the most part, born to win.

"The Strategic Petroleum Reserve Drawdown"

Posted: 27 Jun 2011 12:15 PM PDT

Jim Hamilton analyzes the effects of the International Energy Agency's plans to release 60 million barrels of oil from the strategic reserves held by 28 member countries (the US will contribute about half of this total). I think it would be fair to say he's not impressed with this plan:

The Strategic Petroleum Reserve drawdown, econbrowser

I share his assessment:

...the deed is now done, and the IEA has run an interesting experiment for us in how oil markets function. I would recommend against further SPR sales, regardless of the final outcome of the current effort. The reason is that I see the long-run challenge of meeting the growing demand from the emerging economies as very daunting, and in my mind is the number one reason we're talking about an oil price above $100/barrel in the first place.
A one-time release from the SPR, or even a series of releases until the SPR runs dry, does nothing whatever to address those basic challenges.

It's not clear how much impact this will have on prices, but if prices do drop as a result of the release, some countries may take advantage of the opportunity:

the Chinese might see a temporary drop in prices as an opportunity to add to their own SPR. To the extent that happens, we're getting back to the no-effect scenario

If we had a Strategic Job Reserve to draw upon, or something similar, e.g. an infrastructure bank, that might make a difference. But I don't think this will do much to help.

My guess is that the president is trying to signal that the administration cares about the struggles middle and lower income households face due to the recession and lack of job opportunities. But if that's the goal, there are better ways to go about it. Presently, with the focus on deficit reduction, it's not at all clear that job creation is anywhere near the top of the administration's to do list. Introducing job creation legislation, even if only to force the Republicans to vote it down, would be a much better approach to convincing middle and lower income voters that Democrats do, in fact, care about their troubles and are doing their best to help.

June 27, 2011

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Too Big to Pay for Their Breaches?

Posted: 27 Jun 2011 12:42 AM PDT

If the government won't hold "senior executives and companies responsible for igniting the subprime meltdown" responsible for criminal wrongdoing, then private lawsuits must be used to try to fill the void:

Too Big to Fail or Too Big to Change, by Chad Johnson, Harvard Law Forum on Corporate Governance and Financial Regulation: Two and half years removed from the worst financial crisis since the Great Depression, the investing public has grown increasingly frustrated with the lack of criminal prosecutions of, and absence of truly significant fines levied against, the senior executives and companies responsible for igniting the subprime meltdown ... despite significant evidence of intentional misconduct.
For decades, the public's trust in the integrity of U.S. capital markets was a source of economic stability and unparalleled prosperity. To maintain this trust, investors must believe that they compete on a relatively equal playing field and that the laws governing the markets will be strictly enforced. In furtherance of these goals, violators of federal rules face civil penalties from the SEC or criminal prosecution by the DOJ. ...
Now, more than ever, private lawsuits are needed to supplement the existing regulatory structure, both to ensure that shareholders are adequately compensated for their losses and to send a strong message that fraudulent conduct will not be tolerated. Indeed, institutional investors continue to vigorously prosecute suits against the companies and executives at the heart of the mortgage crisis, well after the SEC and DOJ have shuttered their civil and criminal investigations. ...
Wrongdoers Have Largely Escaped Government Penalties
While the SEC has reached several settlements in connection with misconduct related to the financial meltdown, those settlements have been characterized as "cheap," "hollow," "bloodless," and merely "cosmetic," as noted by Columbia University law professor John C. Coffee in a recent article. Moreover, one of the SEC's own Commissioners, Luis Aguilar, has recently admitted that the SEC's penalty guidelines are "seriously flawed" and have "adversely impact[ed]" civil enforcement actions. ...
The DOJ has faced similar criticism for its lack of prosecutions. ...
The ... recent report from the Financial Crisis Inquiry Commission ("FCIC") makes clear that the mortgage meltdown was an avoidable event born of fraud, as well as of failures in corporate governance and risk management. Significantly, the FCIC explicitly concluded that banks selling mortgage products failed to disclose critical information to investors. ...
Nevertheless, in response to this accumulating evidence, the SEC and the DOJ have remained largely silent. Are large, systemically important institutions and their ilk too big to be threatened with sanctions that approximate the size of the frauds perpetrated against the public? Has "too big to fail" transformed into "too big to challenge?"...
Simply put, without forcing executives to answer for their misconduct, no amount of financial reform will restore public trust in government or the markets.
Regulatory Impediments
While many accuse the SEC and DOJ of being "gun shy" with regard to cases against high profile executives, several commentators note that the SEC and DOJ are significantly underfunded. The funding problem is especially acute at the SEC...
Beyond underfunding, many observers point to the free flow of SEC and DOJ officials between the government and private sector as contributing to lackluster regulatory enforcement. This "revolving door" of personnel fosters "regulatory capture," which aggravates the conflicts of interest that materialize between regulators and the regulated. ...
Further, to the bewilderment of numerous observers,... the SEC's general policy going forward to act as "middle man" between the DOJ and Wall Street financiers and to provide potential defendants with information as to whether the DOJ plans to pursue litigation arising from their alleged misconduct—a procedure that critics have described as conflicting with the SEC's own enforcement manual. Recognizing the inherent conflicts in this practice, Senator Charles Grassley ...  explained that "[a]ll the promises of financial regulatory reform ring hollow if the administration is allowing the top enforcement official at the SEC to relay to potential targets of an investigation exactly what the Justice Department has in store for them." ...
How Institutional Investors are Filling the Void
It has increasingly fallen to institutional investors to hold mortgage lenders, investment banks and other large financial institutions accountable for their role in the mortgage crisis... For example, sophisticated public pension funds are currently prosecuting actions involving billions of dollars of losses against Bank of America, Goldman Sachs, JPMorgan Chase, Lehman Brothers, Bear Stearns, Wachovia, Merrill Lynch, Washington Mutual, Countrywide, Morgan Stanley and Citigroup, among many others. In some instances, litigations have already resulted in significant recoveries for defrauded investors.
Historically, institutional investors have achieved impressive results on behalf of shareholders when compared to government- led suits. Indeed, since 1995, SEC settlements comprise only 5 percent of the monetary recoveries arising from securities frauds, with the remaining 95 percent obtained through private litigation as demonstrated by several examples in the chart at right.
Institutional investors must continue to lead the charge and prosecute fraud to send a strong message that such misconduct will not be tolerated and to guarantee that shareholders are fairly compensated for their losses. ... While originally intended as a supplement to government regulation, recent events demonstrate that institutional investors may now be the entities best positioned to protect investors' rights. Without such protection, and if Wall Street bankers are permitted to profit from their frauds without a proportionate retributive response, we may be fated to repeat the same economic calamity that has defined our generation.

[The full post has many more details.]

We Need to Enhance Our Automatic Stabilizers

Posted: 27 Jun 2011 12:33 AM PDT

I don't always agree with Clive Crook, but I do agree with his call for the US to strengthen its automatice stabilizers (as discussed in the link mentioned a few days ago at the bottom of this post):

A fiscal policy fit for the next crisis, by By Clive Crook, Commentary, Financial Times: ...The fiscal response to a recession is partly automatic (lower revenues and higher transfers as the economy shrinks) and partly discretionary (lower tax rates, infrastructure projects, extra help for states and so on). Two factors weaken automatic stabilizers in the US. First, the government is small, so economic fluctuations, other things being equal, move fiscal quantities less. Second, states are subject to balanced-budget rules. Much of the US government has to follow a pro-cyclical fiscal policy – cutting spending and raising taxes – during a recession.
This puts a great burden on discretionary policy. Extra federal stimulus, and plenty of it, is needed just to offset automatic tightening in the states. To supply net discretionary stimulus requires very aggressive action in Washington. It is much to Barack Obama's credit that he pushed through a big federal stimulus for 2009. ... Nonetheless, severe fiscal tightening in the states would have justified something even bigger.
Unfortunately Mr. Obama lost the battle for public opinion. The country thinks the stimulus has failed – and this could be a lasting reversal for fiscal activism. Discussion now revolves around premature tightening and, equally disturbing, new budget rules to constrain fiscal discretion in future. The government of a country with weak automatic stabilizers is talking about ways to limit its own discretion – as though the current paralysis is not enough. This could be a new calamity in the making. ...
As well as steering clear of that, the US should embrace an explicit goal of strengthening its automatic stabilizers. The aim should be to boost stimulus in downturns and curb it in expansions, with a smaller need for intervention by Congress over the course of the cycle. The less one needs to ask of that broken institution, the better. ...

"No Pain, No Gain?"

Posted: 27 Jun 2011 12:24 AM PDT

In this Slate column from 1999, Paul Krugman discusses (and dismisses) the "pain is good" economic argument from the 1920s, and then says "one hears exactly the same argument now." Twelve years later, not much has changed.

This also buttresses an argument I've made recently. Some people argue that the problem with the economy is mostly structural rather than cyclical, and that monetary and fiscal policy can do little to help. I disagree on both counts. I think most of the problem we face today is cyclical, not structural, and to the extent we do face a structural problem it's still important to institute "short-run palliatives" that allow us to "keep the work force employed":

No Pain, No Gain?, by Paul Krugman, Slate, Jan. 15, 1999: Once upon a time there was a densely populated island nation, which, despite its lack of natural resources, had managed through hard work and ingenuity to build itself into one of the world's major industrial powers. But there came a time when the magic stopped working. A brief, overheated boom was followed by a slump that lingered for most of a decade. A country whose name had once been a byword for economic prowess instead became a symbol of faded glory.
Inevitably, a dispute raged over the causes of and cures for the nation's malaise. Many observers attributed the economy's decline to deep structural factors--institutions that failed to adapt to a changing world, missed opportunities to capitalize on new technologies, and general rigidity and lack of flexibility. But a few dissented. While conceding these factors were at work, they insisted that much of the slump had far shallower roots--that it was the avoidable consequence of an excessively conservative monetary policy, one preoccupied with conventional standards of soundness when what the economy really needed was to roll the printing presses.
Needless to say, the "inflationists" were dismissed by mainstream opinion. Adopting their proposals, argued central bankers and finance ministry officials, would undermine confidence and hence worsen the slump. And even if inflationary policies were to give the economy a false flush of artificial health, they would be counterproductive in the long run because they would relax the pressure for fundamental reform. Better to take the bitter medicine now--to let unemployment rise, to force companies to purge themselves of redundant capacity--than to postpone the day of reckoning.
OK, OK, I've used this writing trick before. The previous paragraphs could describe the current debate about Japan. (I myself am, of course, the most notorious advocate of inflation as a cure for Japan's slump.) But they could also describe Great Britain in the 1920s--a point brought home to me by my vacation reading: the second volume of Robert Skidelsky's biography of John Maynard Keynes, which covers the crucial period from 1920 to 1937. (The volume's title, incidentally, is John Maynard Keynes: The Economist as Savior.)
Skidelsky's book, believe it or not, is actually quite absorbing: Although he was an economist, Keynes led an interesting life--though, to tell the truth, what I personally found myself envying was the way he managed to change the world without having to visit quite so much of it. (Imagine being a prominent economist without once experiencing jet lag, or never taking a business trip where you spent more time getting to and from your destination than you spent at it.) And anyone with an interest in the history of economic thought will find the tale of how Keynes gradually, painfully arrived at his ideas--and of how his emerging vision clashed with rival schools of thought--fascinating. (Click here for an example.)
But the part of Skidelsky's book that really resonates with current events concerns the great debate over British monetary policy in the 1920s. Like the United States, Britain experienced an inflationary boom, fed by real estate speculation in particular, immediately following World War I. In both countries this boom was followed by a nasty recession. But whereas the United States soon recovered and experienced a decade of roaring prosperity before the coming of the Great Depression, Britain's slump never really ended. Unemployment, which had averaged something like 4 percent before the war, stubbornly remained above 10 percent. There is an obvious parallel with modern Japan, whose "bubble economy" of the late 1980s burst eight years ago and has never bounced back.
Almost everyone who thought about it agreed that Britain's long-run relative decline as an economic power had much to do with structural weaknesses: an overreliance on traditional industries such as coal and cotton, a class-ridden educational system that still tried to produce gentlemen rather than engineers and managers, a business culture that had failed to make the transition from the family firm to the modern corporation. (Keynes, never one to mince words, wrote that "[t]he hereditary principle in the transmission of wealth and the control of business is the reason why the leadership of the Capitalist cause is weak and stupid. It is too much dominated by third-generation men.") Similarly, everyone who thinks about it agrees that modern Japan has deep structural problems: a failure to move out of traditional heavy industry, an educational system that stresses obedience rather than initiative, a business system that insulates big company managers from market reality.
But need structural problems of this kind lead to high unemployment, as opposed to slow growth? Is recession the price of inefficiency? Keynes didn't think so then, and those of us who think along related lines don't think so now. Recessions, we claim, can and should be fought with short-run palliatives; by all means let us work on our structural problems, but meanwhile let us also keep the work force employed by printing enough money to keep consumers and investors spending.
One objection to that proposal is that it will directly do more harm than good. In the 1920s the great and the good believed that an essential precondition for British recovery was a return to the prewar gold standard--at the prewar parity, that is, making a pound worth $4.86. It was believed that this goal was worth achieving even if it required a substantial fall in wages and prices--that is, general deflation. To ratify the depreciation of the pound that had taken place since 1914 in order to avoid that deflation was clearly irresponsible.
In modern times, of course, it would, on the contrary, seem irresponsible to advocate deflation in the name of a historical monetary benchmark (though Hong Kong is currently following a de facto policy of deflation in order to defend the fixed exchange rate between its currency and the U.S. dollar). But orthodoxy continues to prevail against the logic of economic analysis. In the case of Japan, there is a compelling intellectual case for a recovery strategy based on the deliberate creation of "managed inflation." But the great and the good know that price stability is essential and that inflation is always a bad thing.
What really struck me in Skidelsky's account, however, was the extent to which conventional opinion in the 1920s viewed high unemployment as a good thing, a sign that excesses were being corrected and discipline restored--so that even a successful attempt to reflate the economy would be a mistake. And one hears exactly the same argument now. As one ordinarily sensible Japanese economist said to me, "Your proposal would just allow those guys to keep on doing the same old things, just when the recession is finally bringing about change."
In short, in Japan today--and perhaps in the United States tomorrow--behind many of the arguments about why we can't monetize our way out of a recession lies the belief that pain is good, that it builds a stronger economy. Well, let Keynes have the last word: "It is a grave criticism of our way of managing our economic affairs, that this should seem to anyone like a reasonable proposal."

links for 2011-06-26

Posted: 26 Jun 2011 10:04 PM PDT

Roll Your Own

Posted: 26 Jun 2011 08:25 AM PDT

As I look around for something to post, let me ask you:

What should we be talking about?

June 26, 2011

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links for 2011-06-25

Posted: 25 Jun 2011 10:01 PM PDT

We Need to Bury the "Shovel-Ready" Objection to Infrastructure Spending

Posted: 25 Jun 2011 12:15 PM PDT

Robert Frank joins the chorus calling for something to be done about unemployment:

The Payroll Tax Needs a Vacation, by Robert Frank, Commentary, NY Times: The federal budget deficit is a distraction. It's important, yes, and must be addressed. But by a wide margin, it's not the nation's most pressing economic problem. That would be the widespread and persistent joblessness...
Almost 14 million people ... were officially counted as unemployed last month. But that's just the tip of the iceberg. There were almost 9 million part-time workers who wanted, but couldn't find, full-time jobs; 28 million in jobs they would have quit under normal conditions; and an additional 2.2 million who wanted work but couldn't find any and dropped out of the labor force.
If the economy could generate jobs at the median wage for even half of these people, national income would grow by more than 10 times the total interest cost of the 2011 deficit (which was less than $40 billion). So anyone who says that reducing the deficit is more urgent than reducing unemployment is saying, in effect, that we should burn hundreds of billions of dollars worth of goods and services in a national bonfire.
We ought to be tackling both problems at once. But in today's fractious political climate, many promising dual-purpose remedies — like infrastructure investments that would generate large and rapid returns — are called unthinkable...
We need to keep posing hard questions to deficit hawks who argue that we shouldn't be hiring unemployed workers to maintain our crumbling roads and bridges, even though postponing such projects will make them much more expensive in the future. These projects don't impoverish our grandchildren. They enrich them.
The important point is that bringing down federal deficits is a long-run problem... But our immediate concern must be getting people back to work.

He also talks about, and favors, a payroll tax as one of the few politically viable options. About that, if we go the payroll tax reduction route, we need to design the policy in a way that protects Social Security financing. Many conservatives will try to make the payroll tax reduction permanent, and then use it to starve the Social Security program. From a previous post:

...for those who want to scale back or eliminate Social Security, this would be seen as an opportunity to starve Social Security of finances, create a crisis, then argue for cutbacks. But there are ways to do this that don't involve cutting the payroll tax per se, so the political optics are different yet amount to the same thing. For example, continue collecting Social Security taxes as before, but give workers a temporary rebate that is clearly designated as temporary, and is independent of Social Security taxes. I'm sure there are better ways to do it, but the point is that we can help workers without interrupting the usual payroll tax flow and putting Social Security at risk.

But back to infrastructure. I can't help but think about all of those people who objected to putting more infrastructure spending into the stimulus package back in late 2008 and the early months of 2009. The argument was that there weren't enough shovel ready projects available. If we tried to do too much of this type of stimulus, the economy would already be recovering by the time we put those projects into place, and it would cause the economy to become overheated. 

Of course it turned out that we actually needed to provide sustained stimulus, the forecasts for a quick end to the recession were way off.

Presently, the spending is ending and creating a drag just as the economy is struggling to turn upward. The forecasts for a quick end to the recession were wrong, and a larger, more sustained stimulus effort was needed (as many of us argued at the time). Having additional projects coming online now would have been very helpful to the recovery effort.

However, when infrastructure projects are suggested now as a way to help the unemployed and our crumbling infrastrucutre at the same time, the same voices tell us that the first round of stimulus spending showed there aren't enough shovel ready projects available. There's no way to get these projects going in time to do much good.

The best response to that argument  -- besides the fact that they were wrong about this before, there was plenty of time to develop projects, and they are wrong again -- is this graph:

Fed Forecast of the Unemployment Rate

Pku

There's plenty of time, plenty of unemployed resources, and interest costs are as low as they'll ever be. And, of course, there's plenty of need for investment in infrastructure so there are large benefits from this type of spending.

But we're too pennywise for this.

[Also posted at MoneyWatch]