This site has moved to
The posts below are backup copies from the new site.

October 1, 2012

Latest Posts from Economist's View

Latest Posts from Economist's View

Paul Krugman: Europe’s Austerity Madness

Posted: 28 Sep 2012 01:25 AM PDT

A false portrayal of the nature of the problems in Europe may undermine the ability of the ECB to do what's necessary to save the euro:

Europe's Austerity Madness, by Paul Krugman, Commentary, NY Times: ...Just a few days ago, the conventional wisdom was that Europe finally had things under control. The European Central Bank, by promising to buy the bonds of troubled governments if necessary, had soothed markets. All that debtor nations had to do ... was agree to more and deeper austerity — the condition for central bank loans — and all would be well.
But the purveyors of conventional wisdom forgot that people were involved. Suddenly, Spain and Greece are being racked by strikes and huge demonstrations. The public in these countries is, in effect, saying that it has reached its limit: With unemployment at Great Depression levels..., austerity has already gone too far. And this means that there may not be a deal after all.
Much commentary suggests that the citizens of Spain and Greece are just delaying the inevitable... But ... the protesters are right. More austerity serves no useful purpose...
Consider Spain's woes. What is the real economic problem? Basically, Spain is suffering the hangover from a huge housing bubble... Spain didn't get into trouble because its government was profligate. ... Spain actually had a budget surplus and low debt. Large deficits emerged when the economy tanked...
Spain doesn't need more austerity..., savage cuts to essential public services, to aid to the needy, and so on actually hurt the country's prospects for successful adjustment. Why, then, are there demands for ever more pain?
Part of the explanation is that ... a significant part of public opinion in Europe's core — above all, in Germany — is deeply committed to a false view of the situation. Talk to German officials and they will portray the euro crisis as a morality play, a tale of countries that lived high and now face the inevitable reckoning. ...
Worse yet, this is also what many German voters believe, largely because it's what politicians have told them. And fear of a backlash from voters who believe, wrongly, that they're being put on the hook for ... southern European irresponsibility leaves German politicians unwilling to approve essential emergency lending to Spain and other troubled nations unless the borrowers are punished first. ...
And it's long past time to put an end to this cruel nonsense.
If Germany really wants to save the euro, it should let the European Central Bank do what's necessary to rescue the debtor nations — and it should do so without demanding more pointless pain.

Links for 09-28-2012

Posted: 28 Sep 2012 12:06 AM PDT

'There Aren’t That Many Takers in America'

Posted: 27 Sep 2012 06:38 PM PDT

I was checking my rss feed after class today, and for some reason -- I don't know what came over me -- I clicked through to a Washington Times article by Ted Nugent:

Mitt Romney was right about the 47 percent

It contains just what you'd expect from both the paper and the writer, things like:

Mitt Romney hit the bull's-eye with his comments regarding the 47 percent of Americans who do not have any skin in the game as it pertains to paying federal income tax. Facts are facts.

Romney did hit a bull's-eye, I'll agree with that, but he scored for the wrong team. Anyway:

Mr. Romney is not backing down. Good. The truth is the truth and it's long past time someone said it.
As I've written before, for at least the past 50 years the Democratic Party has intentionally engineered a class of political "victims" who have been bamboozled into being dependent on the federal government for their subsistence, including food, housing and now health care. They get this without paying any federal income taxes, and that's wrong. Something for nothing is always a scam. This is how you buy votes, plain and simple. ...
The Democratic Party exists because it promotes the creation of dependence on Fedzilla. ... No able-bodied American should get anything for free while doing nothing to earn it. ...

Good advice Ted, I hope Romney follows it. Tell the 47% off but good!

Fortunately, the next thing I read was this (see the full post for the calculations being the numbers presented below):

There Aren't That Many Takers in America, by  Nathan Kelly: ...Mitt Romney said...:"... there are 47% ... who are dependent upon government, who believe that they are victims, who believe that government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you name it."
The ... discussion of dependence on government is at the heart of the Republican case against Democrats... I attempt to gain some empirical leverage on this question using information ... from 2011 Current Population Survey March Supplement microdata.
Creating a working definition of takers is tricky. ... It's not a sliding scale. Either you're a maker or you're a taker. Since the rhetoric is dichotomous, my strategy for identifying takers will be dichotomous as well.
So who should we count as a pure taker? ... Of the 24.7% of Americans who did not work and received government benefits in 2010, more than 70% are either disabled or retired. 7.7% are not working in order to care for home or family – not a group that family values conservatives typically malign. 12.8% are going to school, which likely indicates at least a degree of taking responsibility for oneself. ...
The bottom line here is that there aren't that many takers in America. The most restrictive definition pegs the percentage of takers at 2.4%. If we're willing to include people in households with at least one earner, that number increases to 5.2%. ... But these numbers simply don't line up with the rhetoric of a massive class of lazy people taking advantage of the rest of us while eating solely at the trough of government.
Finally, it's worth pointing out that these are really upper-bound estimates. Being a taker involves motives as well as work and benefit status. Takers, so the argument goes, feel no responsibility for themselves and believe that they are entitled "to you name it." The CPS data don't allow us to examine motives, but if we could, we would likely find even fewer takers.

Workers have not received their fair share of output in recent decades -- wages have lagged behind increased productivity -- so other groups must have received more than their share. Another definition of "takers" would ask who it was that received more than they contributed, and I think it's pretty clear who that group is. Mitt carries their torch.

'Paul Ryan’s Magic Budget Caps'

Posted: 27 Sep 2012 11:11 AM PDT

Ezra Klein on budget caps:

Paul Ryan's magic budget caps, by Ezra Klein: I've gotten some confused e-mails over David Rogers' report on Paul Ryan's ... decision to cap the growth of Medicare spending at GDP+0.5 percentage points (a rate that is slower than health-care costs typically grow) to make the rest of his budget numbers add up. ...
Ryan needs these caps because there's no good evidence that any of his premium support plans will actually save much money in Medicare. ... So he includes these caps and tells the CBO that if his premium support plan fails, he'll save the money in a different way. In his 2011 budget proposal, that's through shifting costs to seniors. In Ryan's most recent budget, it's left blank. But the CBO has no choice. They have to assume Congress will abide by the cap.
This isn't a trick unique to Paul Ryan. President Obama's budget proposal also includes a GDP+0.5 percentage point cap on Medicare's spending growth. ... The Simpson-Bowles plan is also thick with spending caps. ...
One of our worst tendencies in Washington is to debate budget plans ... dependent on these kinds of caps. The question ... isn't whether it says it will save money, but whether the policies in it will actually save money. If Ryan's fond hopes for premium support don't pan out, then his budget has no chance of meeting its targets. Similarly, if Medicare proves incapable of saving money by paying for quality, Obama's numbers aren't going to happen. And for all that you hear about how Congress should "just pass Simpson-Bowles," if Congress can't figure out the right mix of policies to hit those caps, then Simpson-Bowles won't solve our deficit problems. 
These questions, in the end, require a judgment about what's actually the best way to save money in the health-care system, how we can raise more tax revenue, or what will move the needle on growth. But too often, when we say we're debating budget policy, we're actually just debating budget caps. And budget caps don't work if the underlying policies fail.

From a footnote that shouldn't be overlooked, more on Paul Ryan's budget wonkery (or maybe it should be wankery):

Ryan also caps other forms of spending, and his most recent budget implausibly assumes that all non-entitlement spending will fall from 12.5 percent of GDP today to 3.75 percent of GDP in 2050. This is more important to his numbers than his Medicare plan, and it's also a complete joke. See page 13 of the CBO report for more.

I think people take the budget promises issued in campaigns with a grain of salt. It's the underlying philosophy behind the promises that's important. Who are the winners and losers under each of the plans? That's one thing I'd like to see the press pay more attention to. But even more important, I think, is for the press to stop playing along with fear-mongering over the deficit designed to force cuts to programs that will do little to address the long-run problem. We do have debt problems, but do people understand the precise nature of the problem, when the big budget problems are likely to arise, and why? How many people think our long-run budget problem has something to do with the stimulus package, for example, when that is simply not the case? I'm all for more precision in the discussion of budget plans, and for being clear about credible versus non-credible assumptions that the CBO must honor. But I also think the public needs a much better understanding of the problem before they can evaluate the efficacy of proposed solutions.

Green Shoots and the Gardeners at the Fed

Posted: 27 Sep 2012 08:34 AM PDT

David Altig says monetary policymakers are better described as gardeners than engineers, and that "when it comes to policymakers, I'll take a green thumb any day." But I can't help thinking of Bernanke's statement in 2009 that he was seeing "green shoots" and renewed confidence, but those green shoots soon withered. It's true that the "gardener cannot make the sun shine," but many of us thought more needed to be done at the time so that "growing conditions are the best that they can be," and have been pushing the Fed to do more ever since:

Scientists? Engineers? How about Gardeners?, by David Altig: In the past few days Simon Wren-Lewis (at Mainly Macro) and Noah Smith (at Noahpinion) have revisited some past musings by Greg Mankiw on whether we should think of macroeconomists as scientists or engineers. The separation between the two in Mankiw's telling occurs at the point where macroeconomics meets policy—when macroeconomists leave the academic cloister and take up the causes of the real world. In Mankiw's original words:

God put macroeconomists on earth not to propose and test elegant theories but to solve practical problems.

Wren-Lewis and Smith each have their own issues with the scientist/engineer taxonomy, but both seem to more or less buy into the notion of macroeconomist cum policymaker as an engineer.

For my part, I'm not a fan of the engineer metaphor. It seems a little—well, immodest. Consider these comments, to take just a select few, from Federal Reserve officials following the decision of the most recent Federal Open Market Committee (FOMC) meeting. First, from Fed Chairman Ben Bernanke (via Econbrowser):

The policies that we have undertaken have had real benefits for the economy in that they have provided some support, that they have eased financial conditions and helped reduce unemployment. All that being said, monetary policy, as I've said many times, is not a panacea, it is not by itself able to solve these problems. We are looking for policymakers in other areas to do their part. We will do our part and we will try to make sure that unemployment moves in the right direction, but we can't solve this problem by ourselves.

And this, from a September 18 speech by Chicago Fed President Charles Evans:

Given the slow and fragile recovery, the large resource gaps that still exist, and the large risks we face, it remains clear that we needed a more resilient economy that can withstand the headwinds that might come its way. Last week the FOMC provided a more accommodative monetary policy that can help us achieve such resilience.

Or this, from a September 21 speech by Atlanta Fed President Dennis Lockhart:

The core rationale of my support [for the FOMC decision] was to better assure that the economy remains on a growth trajectory sufficient to steadily, if gradually, reduce the rate of national joblessness. I am not expecting miracles.

I think the action recently taken by the committee has improved the country's economic prospects by reducing the potential downside apparent in the incoming data. In this sense, the policy action was a preventative. But I expect policy will do more than just prevent backsliding.

To be sure, each of the three express confidence that the FOMC's actions will yield better outcomes than would otherwise occur. I guess you could say "engineer" better outcomes, if you like. But I am struck by some of the other ideas expressed in these comments, related to reducing downside potential, promoting resilience, and providing some support.

I credit my colleague Mike Bryan (who credits former Cleveland Fed President Jerry Jordan, our mutual former boss) for suggesting that these types of motivations are better associated with gardening than engineering science. The good gardener does not presume to create growth, but knows that he or she can play a part by ensuring that growing conditions are the best that they can be. The gardener cannot make the sun shine by applying scientific knowledge, but can take measures to promote resilience and support until it does.

Science and engineering are important, without doubt. But when it comes to policymakers, I'll take a green thumb any day.

No comments: