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September 5, 2012

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Posted: 04 Sep 2012 12:06 AM PDT

'The Decline of the Middle Class'

Posted: 03 Sep 2012 03:48 PM PDT

Barry Ritholtz presents several graphs showing "critical evidence on the decline of the middle class" in recent years, and then remarks:

One final note: Despite the overwhelming data, some people dispute that the middle class has been struggling or that they have suffered any sort of set back in income or purchasing power.
The Brookings Institution's Scott Winship maintains that "conventional accounts of how the broad middle is doing systematically overstate economic insecurity." If one wants to argue exactly how far the Middle Class has fallen behind, and make the claim that the MSM has overstated it, well, that is a legitimate debate. I think its a losing argument, but, hey, its hardly incredible to say conventional wisdom overstates something.
On the other hand, the American Enterprise Institute fallaciously makes the less than credible or honest claim that there has been "considerable improvement in material well-being for both the middle class and the poor … over the past three decades."
This is the sort of statement that you expect from a group that has given up any pretense towards reality. The AEI has moved from intellectually bankrupt to utterly dishonest, and I assume anything I read from them, on any subject, are willful lies, misinformation and propaganda.
As an asset manager, I cannot risk falling into an alternative universe that diverges form reality. That is the sand box AEI plays in. As such, I have been forced to SEQUESTER their nonsense, as their detachment from the real world is an expensive and potentially dangerous money loser for anyone who reads their foolishness. I mostly ignore their idiocy, and suggest you do the same.

Kenworthy: We’re All Dependent On Government, and It Has Long Been Thus

Posted: 03 Sep 2012 03:26 PM PDT

Lane Kenworthy has an important rebuttal to Nicholas Eberstadt's "A Nation of Takers":

We're all dependent on government, and it has long been thus, by Lane Kenworthy: Nicholas Eberstadt's "A Nation of Takers" argues that too many Americans have become dependent on government benefits. Over the past half-century, he notes, the share who receive a government cash transfer and/or public health insurance — Social Security, Medicare, Medicaid, unemployment compensation, and so on — has grown steadily. The United States, according to Eberstadt, is now "on the verge of a symbolic threshold: the point at which more than half of all American households receive, and accept, transfer benefits from the government."
Eberstadt doesn't contend that this has weakened our economy. His concern is moral. He believes reliance on government for help is undermining Americans' "fierce and principled independence," our "proud self-reliance."
In Eberstadt's way of seeing things, we are either givers or takers — taxpayers or benefit recipients. This is mistaken. Every American who doesn't live entirely off the grid pays some taxes. Anyone who is an employee pays payroll taxes, and anyone who purchases things at a store pays sales taxes. Likewise, every American receives benefits from government. If you or your kids attended a public school, if you've driven on a road, if you've had a drink of tap water or taken a shower in your dwelling, if you've deducted mortgage interest payments or a business expense from your federal income taxes, if you haven't been stricken by polio, if you've never had a band of thugs remove you from your home at gunpoint, if you've visited a park or lounged on a beach or hiked a mountain trail, if you've used the internet….
Eberstadt seems to think receipt of a government cash transfer or health insurance somehow renders people less self-reliant than does receipt of the myriad public goods, services, and tax breaks that government provides. But he doesn't say why.
Once upon a time public safety was ensured by individuals and privately-organized militias. Then we shifted to government police forces and armies. At one point humans got water and disposed of waste individually. Then we created public water and sewage systems. Education of children was once a family responsibility. Then it shifted to schools. There's a good reason for this: government provision offers economies of scale and scope, which enables the good or service to be provided to many people who either couldn't or wouldn't do it on their own. Did Americans' character or spirit diminish when these changes occurred? Is there something qualitatively different about the more recent shift from individual to government responsibility in how we deal with retirement saving, health care, unemployment, and other risks? Here too Eberstadt is silent. ...
At the end of his essay, Eberstadt shifts his concern from the moral cost of government to the financial cost. Rising government expenditures on transfers and health care will require, he says, that we cut military spending, sell off public assets (land, buildings, art), or dump the burden onto future generations by running up government debt. None of these options is attractive. But there is, of course, another option: increases taxes. As we've transferred various functions from individuals to government over the course of our nation's history, we've (usually) paid for it by asking Americans to contribute more. In many other rich nations governments provide more services and transfers than ours does, and they (usually) fund this by collecting more in taxes than we do. ...Eberstadt ignores this option...
Growth of government spending is not, for the most part, a consequence of rent-seeking special interests or narrow-minded bureaucrats looking to expand their turf. It's a product of affluence. As people and nations get richer, they tend to be willing to allocate more money for insurance (protection against risks) and for fairness (extension of opportunity and security to those who are less fortunate). Rather than lamenting an imagined shift from self-reliance to dependence, or claiming that we can't afford more security and fairness, the American right would do better to focus its energy and creativity on devising alternative ways of pursuing these goals. Government doesn't always do things best; and even when it does, there almost always is room for improvement.
Nicholas Eberstadt's essay is emblematic of the backward-looking orientation that has dominated America's right for the past three decades. It's an orientation that in my view has long since outlived its usefulness. The country will benefit when more smart minds on that side of the spectrum turn their gaze forward.

Stiglitz: Mitt Romney’s Fair Share

Posted: 03 Sep 2012 03:06 PM PDT

Mitt Romney, and others like him, are weakening "the bonds that hold a society together":

Mitt Romney's Fair Share, by Joseph Stiglitz, Commentary, Project Syndicate: Mitt Romney's income taxes have become a major issue... Is this just petty politics, or does it really matter? In fact, it does matter... Economies in which government provides ... public goods perform far better than those in which it does not. But public goods must be paid for, and ... those at the top of the income distribution who pay 15% ... clearly are not paying their fair share. ...
Democracies rely on a spirit of trust and cooperation in paying taxes. If every individual devoted as much energy and resources as the rich do to avoiding their fair share of taxes, the tax system either would collapse, or would have to be replaced by a far more intrusive and coercive scheme. Both alternatives are unacceptable.
More broadly, a market economy could not work if every contract had to be enforced through legal action. But trust and cooperation can survive only if there is a belief that the system is fair. ... Yet, increasingly, Americans are coming to believe that their economic system is unfair; and the tax system is emblematic of that sense of injustice. ...
Romney may not be a tax evader; only a thorough investigation by the US Internal Revenue Service could reach that conclusion. But, given that the top US marginal income-tax rate is 35%, he certainly is a tax avoider on a grand scale. And, of course, the problem is not just Romney; writ large, his level of tax avoidance makes it difficult to finance the public goods without which a modern economy cannot flourish.
But, even more important, tax avoidance on Romney's scale undermines belief in the system's fundamental fairness, and thus weakens the bonds that hold a society together.

On the unfairness, beyond taxes Stiglitz also notes that:

...much of the money that accrues to those at the top is what economists call rents, which arise not from increasing the size of the economic pie, but from grabbing a larger slice of the existing pie. Those at the top include a disproportionate number of monopolists who increase their income by ... anti-competitive practices; CEOs who exploit deficiencies in corporate-governance laws to grab a larger share of corporate revenues for themselves (leaving less for workers); and bankers who have engaged in predatory lending and abusive credit-card practices (often targeting poor and middle-class households). It is perhaps no accident that rent-seeking and inequality have increased as top tax rates have fallen, regulations have been eviscerated, and enforcement of existing rules has been weakened: the opportunity and returns from rent-seeking have increased.

To the extent that this is true, those at the top are receiving income they didn't earn through their contributions to GDP. It is the result of rent-seeking -- they didn't "build that"  -- and clawing back those gains through taxes is not unfair, and it does not distort economic activity. Instead it reverses existing distortions that send income to the top of the income distribution instead of to the working class as a reward for their increased productivity.

Fed Watch: Quick Data Notes

Posted: 03 Sep 2012 02:54 PM PDT

When you put up a post you wish you hadn't, one thing you can do is bury it with new ones. So here's another post from Tim Duy:

Quick Data Notes, by Tim Duy: Just a couple of data notes floating around my computer. First, based on dismal new orders for nondefense, nonaircraft capital goods, I am not expecting an upside surprise in tomorrow's ISM report:

Manufac

In the past, such weakness has been met with Fed easing. Also supporting Fed easing was the read on PCE inflation:

Corehead

Headed south, exactly the opposite of the expectations of the Fed hawks. Note that recent trends in core-inflation tend to confirm the decline in headline:

3mcore

In such a context, I am not particularly worried about the rise in gas prices, which has tended to weigh on spending rather than trigger runaway inflation:

Gas

Overall, we look to be heading decisively below the FOMC's expected price path:

Pricetredn

Even if the Fed put no weight on the employment mandate, they should be easing on the basis of the price stability mandate alone. The employment mandate could really be viewed as simply icing on the cake to justify an expansion of the balance sheet.
Initial claims continue to move sideways, much like we saw last summer:

Claims

Last year, claims didn't turn south until the fall. Presumably, this is the kind of thing that prompts some policymakers to want to wait for more data before easing further. It is not clear that Federal Reserve Chairman Ben Bernanke is willing to wait much longer. Friday's employment report could be decisive in determining the outcome of the next FOMC meeting. A very weak report should ramp up the odds that the Fed takes action later this month.
On a brighter note, consumer spending was up for in July, a good start for the quarter:

Spend

The hawks will take this as evidence not to take further action; the doves will take this as evidence that the underlying economy continues to track along a suboptimal path, and the failure of growth to accelerate beyond that path in an environment of falling inflation is reason to take further action. Simply put, the economy could be doing better in the context of the dual mandate.
Bottom Line: The manufacturing data suffers from the weight of the global slowdown. In general, the remaining data confirms neither runaway growth nor imminent collapse. Instead, more of the same low growth that we have become accustomed to. That same low growth looks consistent with inflation drifting below the Fed's mandate, providing the Fed with plenty of justification to act. This is especially case given the downside risks posed by the global environment and fiscal policy. Of course, that was the case three meetings ago. But each meeting has brought us closer and closer to a new round of easing, and we may finally have crossed the line.

Clive Crook on Supposed Fact Checker Glenn Kessler: Fire His Ass

Posted: 03 Sep 2012 11:05 AM PDT

Wow. Clive Crook sees the light!

Update: Not he doesn't. I'm an idiot -- this was intended as parody. I was soooooo anxious for someone to actually see the light, I missed the joke -- which ended up being on me:

Glenn Kessler's Shameless Lie, by Clive Crook: The other day I said I thought Paul Ryan's convention speech was politics as usual--evasions and misdirections rather than outright lies. Once, I'd have said the same thing about Romney's speech too. I've changed my mind. I'm convinced that Republicans have crossed a line... People are angry about this and I see now they're right to be. From here on it's zero tolerance for dishonesty wherever I see it. And I promise to amp up the indignation.
So I've got just one thing to say about Glenn Kessler. Fire his ass.
Of course I could criticize Kessler without calling him the filthy liar that he is. You know, exercise a little "restraint". On the one hand, on the other hand, all that crap. But leading scholars have taught us that in politics things aren't complicated, and when somebody builds a career on a lie, we need to say so. ...
Kessler's foundational lie--the stinking lie on which his whole corrupt operation is based--is that he's "fact-checking". Untrue! ... Kessler isn't confining himself to checking facts, he's contesting one interpretation of the facts with his own interpretation. Whatever the merits of the rival interpretations, that's not fact-checking, it's commentary. ...
When a fact is wrong, it's not some number of Pinocchios, it's just wrong. All you sniveling false-balance types, you know what you can do with your middle way. Mickey Kaus, screw your efforts to look at the welfare controversy more "carefully". Don't bore me with your "nuanced" examination of Kessler and his ilk. That's all beside the point.
All you need to know is this. Kessler's just another pundit. By calling himself The Fact-Checker he claims the superior authority derived from the special property of a fact--that it's capable of being simply true or false. To do this is a Very Great Lie. ... Angry? You bet I'm angry. ... We don't tolerate people who torture small children and we shouldn't tolerate atrocities like this. I can't think of a penalty too severe.
I know ... calling him a brazen liar ... isn't going to open any channels of communication between us. Good. That's just how I want it. You can be "civil" and have your nice debates, and that's all fine and dandy if you want to be a filthy traitor in the war of ideas. But when you engage with liars, you validate their lies--lies, lies, lies--and you're no better than they are.
Fire his ass.

Fed Watch: Did the Republicans Force Bernanke's Hand?

Posted: 03 Sep 2012 10:30 AM PDT

Tim Duy:

Did the Republicans Force Bernanke's Hand?, by Tim Duy: To what extent is the Fed responding to political pressures? Of course, Federal Reserve officials like to believe they are above the fray, and vehemently deny that political considerations play any role in their decision-making process. They must be above the fray, otherwise the cherished independence would be broken.

I know this is what I am supposed to believe. Doesn't every Fed watcher? Yet I can't help but think that it would be naive to believe that any institution in Washington is above politics. It is simply not that kind of town. The degree that you have the illusion of independence depends upon your ability to have a substantial block of fiscal policymakers that believe you are doing your job. And not "your job" as you define it, but as they define it, whether or not their definition makes any sense. Such is Washington.

Which brings me to Pedra da Costa's Reuters piece this morning:

Increasing political encroachment on the Federal Reserve, particularly from the Republican Party, could threaten the central bank's hard-won independence and undermine confidence in the nearly 100-year old institution.

That was the pervasive sentiment among economists gathered at the Fed's annual monetary policy symposium in Jackson Hole, Wyoming. Against the dramatic backdrop of the Grand Teton mountain, many said a closely-contested presidential race has turned the monetary authority into a political football.

It has always been feared that political independence would be threatened from the left, with the ultimate result of hyperinflation. Not so anymore:

"I do fear for it a bit if the election comes out that way, especially if some of the more radical voices, that happen to be Republican voices nowadays, get reelected," said Alan Blinder, Princeton economics professor and a former Fed vice chairman, adding that historically opposition to the U.S. central bank had come predominately from the left.

"There's a lot of hostility," said Blinder, who was appointed to the Fed by former president Bill Clinton.

Of course, some believe that political pressure is already having an impact:

For some observers, that pressure is already affecting the Fed's behavior, preventing it from pushing more aggressively for stronger economic growth following the sharp blowback received back in 2010, when policymakers announced their last large scale bond purchase program.

If in fact this is true, then Federal Reserve Chairman Ben Bernanke made a disastrous tactical error. By not responding even more aggressively, as he now appears to be headed, he opened the Fed up to additional attacks because monetary policy looked ineffective at supporting the economy. As they say, the best defense is a good offense. If the economy looked to be returning to the pre-recession path of nominal GDP, the Fed's detractors from both the left and the right would have less ammunition for criticizing monetary policymakers.

That, however, is not the world we are living in. Instead, we are now in a world in which the ideas gaining traction within the Republican party include an audit of the Fed, the elimination of the dual mandate in favor of only an inflation target, and, incredibly, a return to a gold standard. Moreover, even if such efforts ultimately prove fruitless, we have seen that the confirmation process for Fed governors turn increasingly political. It would not take much to believe that a Republican-controlled Senate with Mitt Romney as President would seek to pack the Fed with clones of Dallas Federal Reserve President Richard Fischer.

In essence, the time for more monetary accommodation may be growing short. Bernanke must assess the nontrivial possibility of a Romney Administration, the candidate who has already promised to fire the Fed chair. Obviously, Bernanke then has no reason to forestall additional easing in hopes of retaining his job in a Romney Administration. Bernanke must also assess the nontrivial possibility that the odds of political pressure on the Fed only increases, and that pressure will continue to come from the right. If such events do unfold, the odds are that policy will turn tighter earlier than it should, with what he likely believes would be disastrous consequences to the economy.

In other words, if the Federal Reserve is to deliver more easing, it needs to be sooner than later. It will only become harder in the days ahead.

Bottom Line: Based on the current mode in Washington, it is difficult to believe that political pressure from the right on the Federal Reserve does anything but intensify. Interestingly, to the extent that the Fed is not immune to political pressure, one could argue we are at a point where such pressure induces the Fed to do more, not less. Rather than resisting taking more action because he fears the political consequences, Bernanke might look into the future and conclude he can wait no longer as Congress is unlikely to react to his calls for fiscal help while the "hard money" crowd continues to make gains within the Republican party. While I think the state of the economy should have forced the Fed's hand long before now, the possibility that they might only get one more bite at the apple should be extra inducement to act.

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