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August 7, 2012

Latest Posts from Economist's View

Latest Posts from Economist's View

Posted: 14 Jun 2012 12:42 AM PDT
Robert Reich says there's still hope even if the Supreme Court strikes down the individual mandate in the Affordable Care Act:
A Back Door to the Public Option, by Robert Reich: Any day now the Supreme Court will issue its opinion on the constitutionality of the Accountable Care Act, which even the White House now calls Obamacare.
Most high-court observers think it will strike down the individual mandate in the Act that requires almost everyone to buy health insurance,... but will leave the rest of the new healthcare law intact.
But the individual mandate is so essential to spreading the ... cost of health care over the whole population, including younger and healthier people, that some analysts believe a Court decision that nixes the mandate will effectively spell the end of the Act anyway.
Yet it could have exactly the opposite effect. If the Court strikes down the individual mandate, health insurance company lobbyists and executives will swarm Capitol Hill seeking to have the Act amended to remove the requirement that they insure people with pre-existing medical conditions. They'll argue that without the mandate they can't afford to cover pre-existing conditions.
But the requirement to cover pre-existing conditions has proven to be so popular with the public that Congress will be reluctant to scrap it. This opens the way to a political bargain. Insurers might be let off the hook, for example, only if they support allowing every American, including those with pre-existing conditions, to choose ... something very much like Medicare. In effect, what was known during the debate over the bill as the "public option." ...
The fact is, there's enough the public likes about Obamacare that if the Court strikes down the individual mandate that won't be the end. It will just be the end of the first round.
I'd like to think he's right, but hard for me to see this happening. [Here's an old post explaining why an individual mandate is needed.]
Posted: 14 Jun 2012 12:06 AM PDT
Posted: 13 Jun 2012 05:52 PM PDT
Just a quick note to reinforce what Tim Duy said here. Many policymakers at the Fed would like to provide more help for the economy, but fear of inflation among other members of the monetary policy committee -- enough to matter -- makes it unlikely that the Fed will expand the size of its balance sheet (as another round of QE would do). The way around this is to enact or suggest policies such as "forward guidance," "Operation Twist," and "sterilization" that attempt to ease policy without changing the size of the balance sheet. Forward guidance, for example, tries to adjust inflationary expectations -- there is an implicit promise of future action to maintain low rates, but it does not require any action when it is announced (and Fed members are denying it was an explicit promise in any case), while Operation twist and sterilization both exchange short-term for long-term assets (sell short-term, purchase long-term) in an attempt to force long-term interest rates even lower than they already are (and hopefully stimulate investment and the consumption of durables).
If the Fed is inclined to ease more, its instinct will be to look at these types of policies first, policies that try to help the economy without increasing the risk of inflation. But as we've seen recently, these types of policies are also limited in their effectiveness precisely because of their cautious nature.
Of course, if Europe falls apart, all bets are off -- in that case the Fed may get more aggressive. But for now I expect the Fed to continue to try to find clever ways of doing something without really doing anything at all.
Posted: 13 Jun 2012 02:28 PM PDT
Via an email, more on inequality and crises:
Does Inequality Lead to a Financial Crisis?, by Michael D. Bordo and Christopher M. Meissner: Abstract: The recent global crisis has sparked interest in the relationship between income inequality, credit booms, and financial crises. Rajan (2010) and Kumhof and Rancière (2011) propose that rising inequality led to a credit boom and eventually to a financial crisis in the US in the first decade of the 21st century as it did in the 1920s. Data from 14 advanced countries between 1920 and 2000 suggest these are not general relationships. Credit booms heighten the probability of a banking crisis, but we find no evidence that a rise in top income shares leads to credit booms. Instead, low interest rates and economic expansions are the only two robust determinants of credit booms in our data set. Anecdotal evidence from US experience in the 1920s and in the years up to 2007 and from other countries does not support the inequality, credit, crisis nexus. Rather, it points back to a familiar boom-bust pattern of declines in interest rates, strong growth, rising credit, asset price booms and crises.
Posted: 13 Jun 2012 02:28 PM PDT
Part 2 of this series promised to establish a causal link between inequality and the crisis. Once again, this relies upon middle and lower income consumers accumulating excessive debt as they attempt to keep up with their wealthier neighbors:
Inequality, the crash and the crisis. Part 2: A model of capitalism that fails to share the fruits of growth, by Stewart Lansley: The driving force behind the widening income gap of the last thirty years has been a shift in the distribution of "factor shares" – the way the output of the economy is divided between wages and profits. ...
This process of decoupling wages from output has led to a growing "wage-output gap", with a very profound, and negative, impact on the way economies function. This is for three key reasons. First, by cutting the purchasing power needed to buy the extra output being produced, the long wage squeeze brought domestic and global deflation. Consumer societies started to lose the capacity to consume.
The solution to this problem – which would have brought a prolonged recession much earlier – was to allow an explosion in private debt to fill the demand gap. ... In the US, debt reached a third more than national income by 2008. This helped to fuel a domestic boom from the mid-1990s but was never going to be sustainable. Far from preventing recession, it just delayed it.
The same factors were at work in the 1920s. The 1929 Crash was preceded by a sharp rise in inequality with the resulting demand gap also filled by an explosion in private debt. In 1920s America, the ratio of household debt to national income rose by 70 per cent in less than a decade.
Second, the intensified concentration of income led to the growth of a tidal wave of global footloose capital – a mix of corporate surpluses and burgeoning personal wealth. According to the pro-inequality theorists, these growing surpluses should have led to a boom in productive investment. Instead, they ended up fuelling commodity speculation, financial engineering and hostile corporate raids, activity geared more to transferring existing rather than creating new wealth and reinforcing the shift towards greater inequality.
Little of this benefitted the real economy. ... Again there are striking parallels with the 1920s...
Third, the effect of these trends has been to intensify the concentration of power with wealth and economic decision-making heavily concentrated in the hands of a tiny minority. ... A new elite has been able to exercise their muscle to ensure that economic policies work in their interest. Hence the inaction on tax havens, the blind-eye approach to tax avoidance and the scaling back of regulations on ... Wall Street, policies that have simultaneously accentuated the risk of economic failure. ...
The economic thrust of the last thirty years – greater reliance on markets, the weakened bargaining power of labour and hiked fortunes at the top – was aimed at dealing with the crisis of the 1970s, a mix of "stagflation" (stagnation and rising inflation ) and falling productivity. It succeeded in squeezing out inflation but replaced these fault lines with an equally toxic mix – global deflation, rising indebtedness and booming asset prices – that eventually brought economic collapse.
Posted: 13 Jun 2012 10:51 AM PDT
Tim Duy:
Is Anyone Answering the Phones at the ECB?, by Tim Duy: As of today, the Spanish bank bailout remains a phenomenal policy failure. Spanish bond yields continue to rise, with the impact of the ECB's LTRO operations now effectively negated:
Worse, this policy disaster extends now into Italy, with short term debt now taking a hit:
The Rome-based Treasury sold the one-year bills at 3.972 percent, 1.63 percentage points more than the 2.34 percent at the previous auction on May 11. Investors bid for 1.73 times the amount offered, down from 1.79 times last month.
And long-term yields in Italy are heading higher as well:
The only player left on the field that can move fast enough and with enough firepower to pull Europe back from the brink is the ECB, and the pressure is on them to act. From Bloomberg:
Spanish Prime Minister Mariano Rajoy said today he'll "battle" central bankers refusing to buy debt from peripheral nations. Rajoy published a letter to European Union leaders calling for the European Central Bank to buy debt from the countries struggling to shore up their finances.
"That is the battle we have to wage in Europe," Rajoy told the Spanish parliament in Madrid today. "I am waging it." His Italian counterpart, Mario Monti, told lawmakers in Rome Europe faces a "crucial" moment.
The leaders of southern Europe's biggest economies went on the offensive as bond yields jumped following the announcement of a bailout for Spanish banks that was intended to quell concern over the countries' finances. The decline wiped out the effects of 1 trillion euros in ECB loans for euro-region banks that had held yields in check since December.
Truly desperate pleas, but will they fall on deaf ears? For their part, the ECB seems content build upon the policy inaction at the last policy meeting and continue to do nothing:
Bundesbank board member Andreas Dombret this week said the ECB won't buy more government bonds to ease the market tensions while Swedish central bank governor Stefan Ingves today said it's hard to see what else the ECB could do for Spanish lenders.
"We have done our part," Dombret said in a June 11 interview in London. "Now it's up to the political leaders to deliver on the fiscal and structural policy side."
It is never a good sign when the monetary authority - the lender of last resort - is no longer willing to buy your bonds. If the ECB sees only risk at these rates, why should private investors jump into the pool?
Honestly, I find it incomprehensible to believe that the ECB will not soon come to the aid of Spain and Italy with additional bond purchases. Only the most irresponsible policy body would take such a risk. To not do so almost guarantees the destruction of the Eurozone and a deepening recession if not depression throughout Europe. They cannot possibly believe that fiscal and structural reforms will bear sufficient fruit in any reasonable time frame. Nor can they possibly believe that Spain and Italy can implement a IMF-type structural reform program in the absence of the competitive boost provided by currency devaluation.
Or can they? If they do believe these things - that they can do no more, the job is entirely on the shoulders of fiscal policymakers - then we all need to be afraid, very afraid. Because when the ECB fully abdicates its role as a provider of financial stability for the Eurozone, all Hell is going to break loose.
Posted: 13 Jun 2012 10:24 AM PDT
I recently questioned the strength of the evidence supporting the hypothesis that income inequality caused the Great Recession. Till van Treeck explains why we should believe its causal:
How income inequality contributed to the Great Recession, by Till van Treeck, Commentary, The idea that the Great Recession of 2008 may have been caused not just by careless banking but also social inequality is currently all the rage among macroeconomists.
Much of the impetus for the current debate stems from the widely discussed 2010 book Fault Lines, written by Raghuram Rajan... Rajan argues that many lower- and middle-class consumers in the United States have reacted to the stagnation of their real incomes since the early 1980s by reducing saving and increasing debt. This has temporarily kept private consumption and thus aggregate demand and employment high, but also contributed to the creation of the credit bubble which eventually burst.
In Rajan's view, a large portion of the blame for this falls on misguided government policies, which promoted the expansion of credit to households. ...
In 1996, Alan Greenspan, then chairman of the Federal Reserve Bank, noted in response to growing concerns about rising inequality that "wellbeing is determined by things people consume [and] disparities in consumption … do not appear to have widened nearly as much as income disparities". In a similar vein, Fabrizio Perri and Dirk Krueger suggested in an influential scholarly article published in 2006 that "consumers could, and in fact did, make stronger use of credit markets exactly when they needed to (starting in the mid-1970s), in order to insulate consumption from bigger income fluctuations". ...
There is ample evidence that, especially in the US, households reacted to higher inequality by working longer hours, lowering savings, and increasing debt in an attempt to maintain their relative consumption status. Up to a point this allowed them to pay for medical bills, the ever-increasing costs of children's college education and a house; but eventually the bubble burst. ...
The renewed interest among economists in inequality as a macroeconomic risk is highly encouraging. Undoubtedly more research is needed to pin down the macroeconomic implications of inequality under different country-specific circumstances. But it should be clear that, in hindsight, the dominant textbook economic theories of consumption look almost as toxic as some of the credit products that ultimately caused the crisis.
A couple of things. First, new evidence suggests that consumption inequality has been just as bad as income inequality. That casts doubt on stories that rely upon consumers using debt to finance consumption growth while income remained stagnant. Second, the story is more consistent with a general credit bubble than a bubble in housing in particular. Third, I have pushed back strongly against stories that say the crisis was caused by government support of housing programs to lower income households. The evidence for this simply isn't there.
Again, I am not saying that the evidence stacks up against the idea that inequality contributed to the recession, it could very well be true. What I'm saying is that the evidence I'm aware of doesn't tell us much one way or the other. (And I certainly don't want to imply that there are no problems associated with rising inequality beyond the risk of credit bubbles.)

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