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August 25, 2012

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Latest Posts from Economist's View


Posted: 24 Aug 2012 12:33 AM PDT
Paul Ryan appears to have mooched his economic ideas from Ayn Rand:
Galt, Gold and God, by Paul Krugman, Commentary, NY Times: ...Paul Ryan, the presumptive Republican nominee for vice president,... is a man of many ideas, which would ordinarily be a good thing.
In his case, however, most of those ideas appear to come from works of fiction, specifically Ayn Rand's novel "Atlas Shrugged." ... True, in recent years, he has tried to downplay his Randism, calling it an "urban legend." It's not hard to see why: Rand's fervent atheism — not to mention her declaration that "abortion is a moral right" — isn't what the GOP base wants to hear.
But Mr. Ryan is being disingenuous. In 2005, he told the Atlas Society ... that she inspired his political career: "If I had to credit one thinker, one person, it would be Ayn Rand." He also declared that Rand's work was required reading for his staff and interns.
And the Ryan fiscal program clearly reflects Randian notions..., he is deadly serious about cutting taxes on the rich and slashing aid to the poor, very much in line with Rand's worship of the successful and contempt for "moochers." ... He's... quite explicitly trying to make life harder for the poor — for their own good. In March, explaining his cuts..., he declared, "We don't want to turn the safety net into a hammock that lulls able-bodied people into lives of dependency and complacency..."
Somehow, I doubt that Americans forced to rely on unemployment benefits and food stamps in a depressed economy feel that they're living in a comfortable hammock.
But wait, there's more: "Atlas Shrugged" apparently shaped Mr. Ryan's views on monetary policy,... he declared that he always goes back to "Francisco d'Anconia's speech on money" when thinking about monetary policy. Who? Never mind. That speech ... is a case of hard-money obsession gone ballistic. Not only does the character in question, a Galt sidekick, call for a return to the gold standard, he denounces the notion of paper money and demands a return to gold coins. ...
Does any of this matter? Well, if the Republican ticket wins, Mr. Ryan will surely be an influential force in the next administration — and... he would, as the cliché goes, be a heartbeat away from the presidency. So it should worry us that Mr. Ryan holds monetary views that would, if put into practice, go a long way toward recreating the Great Depression.
And, beyond that, consider the fact that Mr. Ryan is considered the modern GOP's big thinker. What does it say about the party when its intellectual leader evidently gets his ideas largely from deeply unrealistic fantasy novels?
Posted: 24 Aug 2012 12:24 AM PDT
Tim Duy:
Dueling Fed Presidents, by Tim Duy: Blogging tonight from Joseph, Oregon, on my way for a few days of camping in the Wallowa Mountains. Hopefully I will be able to get some pictures up over the weekend, but I haven't had much luck with the Typepad ap on 3G service.
For those of us tracking the odds of QE3 in September, two regional Fed presidents - both non-voting participants - offered opposite views today. Neither was terribly surprising. Chicago Federal Reserve President Charles Evans reiterated his support for additional easing. Via Reuters:
"The (July) employment data was a little better than expected," said Evans, one of the Fed's most dovish policymakers and who has led the most recent calls for active easing of monetary policy.
"It is still not nearly good enough," he added. "We need 300,000 to 400,000 (new jobs) a month to get to where we should be."...
...Evans reiterated that he thought current economic conditions already warranted action, adding that this was the third successive summer slowdown seen in the United States, and that as the Fed had acted to boost activity in the previous two downturns, there was every reason to be prepared to act this time.
Of course, Evans has been pushing this story for awhile, to no avail so far. I think that had he been a voting member, he would have dissented at the last three FOMC meetings. On the other side of the coin is St. Louis Federal Reserve President James Bullard. Again, via Reuters:
"I do think that the minutes are a bit stale because we have some data since then that has been somewhat stronger," Bullard, who will be a voting member of the policy-setting committee next year, said in an interview.
This is similar to the concern I mentioned yesterday. To what extent have the FOMC minutes been overtaken by events, particularly better US data? Bullard further downplayed the tone of the minutes:
"The tone of the discussions, for me anyway, was 'gosh things are not as good as we thought and it if continues to decelerate here, we're going to have to do something'," he said.
Still, he believed the probability of another round of easing was less than had been reflected in the pricing seen in financial markets over the summer.
"Going along at this slow pace is not enough to justify gigantic action," he said. "I'd like to see...some deterioration or indication we're going to slide down further," in order to support additional easing.
Trouble is that we haven't decelerated further, at least according to recent data. That said, sometimes we hear what we want to hear, and Bullard wants to hear things that don't sound like QE3 is imminent. Indeed, he doesn't have high expectations for the economy to begin with:
"If we were to resume, which I think we will, 2 percent growth, maybe a bit stronger than that, unemployment ticks down ... that is not a great outcome, but to me that is a good enough outcome to keep us on hold," Bullard said.
That's a pretty low bar for growth, which is the same thing as a high bar for QE3.
Bottom Line: Two Fed presidents at opposite ends of the spectrum. I tend to think that the middle ground will be pulled by recent data in the direction of Bullard, which is why I see QE3 as less of a slam-dunk than the minutes seemed to imply. Evans pushed his usual agenda; I would expect nothing less from him. He wanted more action before this summer's signs of slowing. No reason to expect the most recent data would change his view.
Posted: 24 Aug 2012 12:06 AM PDT
Posted: 23 Aug 2012 02:57 PM PDT
In response to this report:
Republicans eye return to gold standard, by Robin Harding and Anna Fifield, FT: The gold standard has returned to mainstream US politics for the first time in 30 years, with a "gold commission" set to become part of official Republican party policy.
Drafts of the party platform, which it will adopt at a convention in Tampa Bay, Florida, next week, call for ... a commission to look at restoring the link between the dollar and gold.
Let me repost this piece from Paul Krugman (from Slate 1996). As he notes, "Very few economists think this would be a good idea," including, I presume, all of the economists who have recently signed a petition backing Mitt Romney's Republican agenda (they are trying to have it both ways, appoint a commission to look into it to satisfy the gold bugs, while at the same time allowing those who know this is crazy to assume the commission would never actually do this -- kind of like what they've done with their budget plan):
The Gold Bug Variations, by Paul Krugman, Slate, 1996: The legend of King Midas has been generally misunderstood. Most people think the curse that turned everything the old miser touched into gold, leaving him unable to eat or drink, was a lesson in the perils of avarice. But Midas' true sin was his failure to understand monetary economics. What the gods were really telling him is that gold is just a metal. If it sometimes seems to be more, that is only because society has found it convenient to use gold as a medium of exchange--a bridge between other, truly desirable, objects. There are other possible mediums of exchange, and it is silly to imagine that this pretty, but only moderately useful, substance has some irreplaceable significance.
But there are many people--nearly all of them ardent conservatives--who reject that lesson. While Jack Kemp, Steve Forbes, and Wall Street Journal editor Robert Bartley are best known for their promotion of supply-side economics, they are equally dedicated to the belief that the key to prosperity is a return to the gold standard, which John Maynard Keynes pronounced a "barbarous relic" more than 60 years ago. With any luck, these latter-day Midases will never lay a finger on actual monetary policy. Nonetheless, these are influential people--they are one of the factions now struggling for the Republican Party's soul--and the passionate arguments they make for a gold standard are a useful window on how they think.
There is a case to be made for a return to the gold standard. It is not a very good case, and most sensible economists reject it, but the idea is not completely crazy. On the other hand, the ideas of our modern gold bugs are completely crazy. Their belief in gold is, it turns out, not pragmatic but mystical.
The current world monetary system assigns no special role to gold; indeed, the Federal Reserve is not obliged to tie the dollar to anything. It can print as much or as little money as it deems appropriate. There are powerful advantages to such an unconstrained system. Above all, the Fed is free to respond to actual or threatened recessions by pumping in money. To take only one example, that flexibility is the reason the stock market crash of 1987--which started out every bit as frightening as that of 1929--did not cause a slump in the real economy.
While a freely floating national money has advantages, however, it also has risks. For one thing, it can create uncertainties for international traders and investors. Over the past five years, the dollar has been worth as much as 120 yen and as little as 80. The costs of this volatility are hard to measure (partly because sophisticated financial markets allow businesses to hedge much of that risk), but they must be significant. Furthermore, a system that leaves monetary managers free to do good also leaves them free to be irresponsible--and, in some countries, they have been quick to take the opportunity. That is why countries with a history of runaway inflation, like Argentina, often come to the conclusion that monetary independence is a poisoned chalice. (Argentine law now requires that one peso be worth exactly one U.S. dollar, and that every peso in circulation be backed by a dollar in reserves.)
So, there is no obvious answer to the question of whether or not to tie a nation's currency to some external standard. By establishing a fixed rate of exchange between currencies--or even adopting a common currency--nations can eliminate the uncertainties of fluctuating exchange rates; and a country with a history of irresponsible policies may be able to gain credibility by association. (The Italian government wants to join a European Monetary Union largely because it hopes to refinance its massive debts at German interest rates.) On the other hand, what happens if two nations have joined their currencies, and one finds itself experiencing an inflationary boom while the other is in a deflationary recession? (This is exactly what happened to Europe in the early 1990s, when western Germany boomed while the rest of Europe slid into double-digit unemployment.) Then the monetary policy that is appropriate for one is exactly wrong for the other. These ambiguities explain why economists are divided over the wisdom of Europe's attempt to create a common currency. I personally think that it will lead, on average, to somewhat higher European unemployment rates; but many sensible economists disagree.
So where does gold enter the picture?
While some modern nations have chosen, with reasonable justification, to renounce their monetary autonomy in favor of some external standard, the standard they choose these days is always the currency of another, presumably more responsible, nation. Argentina seeks salvation from the dollar; Italy from the deutsche mark. But the men and women who run the Fed, and even those who run the German Bundesbank, are mere mortals, who may yet succumb to the temptations of the printing press. Why not ensure monetary virtue by trusting not in the wisdom of men but in an objective standard? Why not emulate our great-grandfathers and tie our currencies to gold?
Very few economists think this would be a good idea. The argument against it is one of pragmatism, not principle. First, a gold standard would have all the disadvantages of any system of rigidly fixed exchange rates--and even economists who are enthusiastic about a common European currency generally think that fixing the European currency to the dollar or yen would be going too far. Second, and crucially, gold is not a stable standard when measured in terms of other goods and services. On the contrary, it is a commodity whose price is constantly buffeted by shifts in supply and demand that have nothing to do with the needs of the world economy--by changes, for example, in dentistry.
The United States abandoned its policy of stabilizing gold prices back in 1971. Since then the price of gold has increased roughly tenfold, while consumer prices have increased about 250 percent. If we had tried to keep the price of gold from rising, this would have required a massive decline in the prices of practically everything else--deflation on a scale not seen since the Depression. This doesn't sound like a particularly good idea.
So why are Jack Kemp, the Wall Street Journal, and so on so fixated on gold? I did not fully understand their position until I read a recent letter to, of all places, the left-wing magazine Mother Jones from Jude Wanniski--one of the founders of supply-side economics and its reigning guru. (One of the many comic-opera touches in the late unlamented Dole campaign was the constant struggle between Jack Kemp, who tried incessantly to give Wanniski a key role, and the sensible economists who tried to keep him out.) Wanniski's main concern was to deny that the rich have gotten richer in recent decades; his letter is posted on the Mother Jones Web site, and makes interesting reading.
But, particularly noteworthy was the following passage:
First let us get our accounting unit squared away. To measure anything in the floating paper dollar will get us nowhere. We must convert all wealth into the measure employed by mankind for 6,000 years, i.e., ounces of gold. On this measure, the Dow Jones industrial average of 6,000 today is only 60 percent of the DJIA of 30 years ago, when it hit 1,000. Back then, gold was $35 per ounce. Today it is $380-plus. This is another way of saying that in the last 30 years, the people who owned America have lost 40 percent of their wealth held in the form of equity. ... If you owned no part of corporate America 30 years ago, because you were poor, you lost nothing. If you owned lots of it, you lost your shirt in the general inflation.
Never mind the question of whether the Dow Jones industrial average is the proper measure of how well the rich are doing. What is fascinating about this passage is that Wanniski regards gold as the appropriate measure of wealth, regardless of the quantity of other goods and services that it can buy. Since the dollar was de-linked from gold in 1971, the Dow has risen about 700 percent, while the prices of the goods we ordinarily associate with the pursuit of happiness--food, houses, clothes, cars, servants--have gone up only about 250 percent. In terms of the ability to buy almost anything except gold, the purchasing power of the rich has soared; but Wanniski insists that this is irrelevant, because gold, and only gold, is the true standard of value. Wanniski, in other words, has committed the sin of King Midas: He has forgotten that gold is only a metal, and that its value comes only from the truly useful goods for which it can be exchanged.
I wonder whether the gods read Slate. If so, they know what to do.
Posted: 23 Aug 2012 02:03 PM PDT
A useful reminder from Ezra Klein:
The real Romney-Ryan budgets cuts aren't to Medicare. They're to programs for the poor., by Ezra Klein: I was pretty sure that when Paul Ryan got tapped to be Robin to Mitt Romney's Batman, it meant we were in for some serious budget talk. Which was great! I love budget talk.
Instead, it's actually meant we've spent a lot of time talking about Medicare. Which is odd. Because Paul Ryan's budget isn't that focused on Medicare. And that's even truer for Mitt Romney's budget...
But here's the thing. Ryan says his budget cuts more than $5 trillion in the next decade. Less than a trillion of that is coming from Medicare. Romney says his budget cuts about $7 trillion from the budget over the next decade and not a dollar of that comes from Medicare. And neither Romney nor Ryan want to cut Social Security and both increase spending on defense.
If you're not cutting Medicare or Social Security or defense you've already taken more than half of the federal budget off the table. And you know what's mainly left, the big pot of money you can still cut? Programs for poor people.
And so, if you look at Ryan's specific cuts, most of them are programs for poor people. In fact, the Center for Budget and Policy Priorities estimates that more than six of every 10 dollars Ryan cuts from the federal budget is coming from programs for the poor. ... Moreover, everything we know suggests Romney's on the same page as his running mate. ... To make Romney's numbers add up, you have to assume that by the end of his presidency, Romney will have cut every federal program that's not Medicare, Social Security or defense spending by 57 percent. ...
Posted: 23 Aug 2012 11:18 AM PDT
Transfer pricing is a "tax problem":
Top U.S. tax expert in savage attack on transfer pricing rules, Tax Justice Network: Lee Sheppard of Tax Analysts is one of the world's top experts in international tax... She has just issued one of the most devastating critiques ever made of the prevailing system for taxing multinational corporations, in a nine-page document entitled Is Transfer Pricing Worth Salvaging? Tax Analysts have kindly given us permission to republish it.
What is the tax problem?, Sheppard asks, in her (fairly U.S.-focused) article.
"In a nutshell, developments in law and planning have enabled U.S. multinationals to deprive the United States of tax revenue..."
And the main way they do this is through transfer pricing. ...
Posted: 23 Aug 2012 10:39 AM PDT
Via Money Supply at the FT, who benefits from QE?:
The rich. That's according to a Bank of England study, out today, on the distributional effects of quantitative easing.
This from the research:
By pushing up a range of asset prices, asset purchases have boosted the value of households' financial wealth held outside pension funds, but holdings are heavily skewed with the top 5 per cent of households holding 40 per cent of these assets.
This is not a piece of research that the Bank will have welcomed having to publish, keen as it is to avoid criticism for favouring one group of society over another. But it has been forced to by a fierce debate ... about the impact of the Bank's money-printing on pensioners and those who are just about to retire. ...
The Bank acknowledges that by pushing down on gilt yields, QE has reduced the annuity rate. However, it also claims the policy has raised the value of bonds and equities held in pension pots. Home-owning pensioners – especially the wealthier among them – are among the big winners from QE and the Bank's ultra-low interest rates. It is the young and others with few assets who have gained the least from the Monetary Policy Committee's money printing.
It trickles down, right?
Posted: 23 Aug 2012 08:42 AM PDT
Chris Dillow:
"Nothing to fear"?, by Chris Dillow: Here's the latest Tory idiocy. Dominic Raab says the "talented and hard-working have nothing to fear" from a scrapping of "excessive protections" for workers.
Let's ignore the fact that the UK has some of the weakest job protection laws in the world. Let's also ignore the fact that there's no evidence that scrapping employment protection would create new jobs. And let's also ignore the fact that employment protection is of only marginal concern to small businesses, and that even a former director-general of the CBI has mocked the idea of abolishing the few protections workers have.
Is Raab right that the best workers have nothing to fear?
No. ...[explains why]... I'm pretty sure, then, that Raab is talking rot. What I'm not so sure about is why. One possibility is that he's so blinded by free market ideology and by romantic ideas about entrepreneurs and managers that he just cannot see that some free market reforms are of negligible benefit and that some bosses are less than heroic.
But you'd have thought that the experience of the crisis - which has seen bankers get multi-million bonuses whilst good workers lose their jobs - would have disabused anyone of the just world theory that capitalism rewards talent and effort. There's comes a point when a cognitive bias shades into a psychiatric disorder.
This leaves another possibility. It's that Raab is simply taking sides in a class war. He wants to further empower bosses to bully workers, even if this has no macroeconomic benefit.

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