- Paul Krugman: Fighting Fiscal Phantoms
- Links for 11-26-2012
- Banking Must not be Left in the Shadows
- Can You Beat the Market?
- Don't Eliminate the Link between Social Security Contributions and Benefits
Posted: 26 Nov 2012 12:24 AM PST
The deficit scolds have been wrong again and again:
Fighting Fiscal Phantoms, by Paul Krugman, Commentary, NY Times: These are difficult times for the deficit scolds who have dominated policy discussion for almost three years. One could almost feel sorry for them, if it weren't for their role in diverting attention from the ongoing problem of inadequate recovery, and thereby helping to perpetuate catastrophically high unemployment.
What has changed? For one thing, the crisis they predicted keeps not happening. Far from fleeing U.S. debt, investors have continued to pile in, driving interest rates to historical lows. Beyond that, suddenly the clear and present danger to the American economy isn't that we'll fail to reduce the deficit enough; it is, instead, that we'll reduce the deficit too much. ...
Given these realities, the deficit-scold movement has lost some of its clout. ... But the deficit scolds aren't giving up. Now yet another organization, Fix the Debt, is campaigning for cuts to Social Security and Medicare, even while making lower tax rates a "core principle." That last part makes no sense in terms of the group's ostensible mission, but makes perfect sense if you look at the array of big corporations, from Goldman Sachs to the UnitedHealth Group, that are involved in the effort and would benefit from tax cuts. Hey, sacrifice is for the little people.
So should we take this latest push seriously? No... As far as I can tell, every example supposedly illustrating the dangers of debt involves either a country that, like Greece today, lacked its own currency, or a country that, like Asian economies in the 1990s, had large debts in foreign currencies. Countries with large debts in their own currency, like France after World War I, have sometimes experienced big loss-of-confidence drops in the value of their currency — but nothing like the debt-induced recession we're being told to fear.
So let's step back for a minute, and consider what's going on here. For years, deficit scolds have held Washington in thrall with warnings of an imminent debt crisis, even though investors, who continue to buy U.S. bonds, clearly believe that such a crisis won't happen; economic analysis says that such a crisis can't happen; and the historical record shows no examples bearing any resemblance to our current situation in which such a crisis actually did happen.
If you ask me, it's time for Washington to stop worrying about this phantom menace — and to stop listening to the people who have been peddling this scare story in an attempt to get their way.
Posted: 26 Nov 2012 12:06 AM PST
Posted: 25 Nov 2012 12:37 PM PST
I agree with Gary Gorton:
Banking must not be left in the shadows, by Gary Gorton, Commentary, Financial Times: ... Addressing the details of the recent financial crisis leaves open the larger question of how it could have happened in the first place. ... One of the findings of the Financial Stability Board report is that the global shadow banking system grew to $62tn in 2007, just before the crisis. Yet we are only now measuring the shadow banking system. ...
Measurement is the root of science. Our measurement systems, national income accounting, regulatory filings and accounting systems are useful but limited. ... Now we need to build a national risk accounting system. The financial crisis occurred because the financial system has changed in very significant ways. The measurement system needs to change in equally significant ways. The efforts made to date focus mostly on "better data collection" or "better use of existing data" – phrases that, at best, suggest feeble efforts. A new measurement system is potentially forward-looking in detecting possible risks.
Another problem is conceptual. Why weren't we looking for the possibility of bank runs before the crisis? The answer is that we did not believe a bank run could happen in a developed economy. ... Why did we think that? For no good reason. But, when an economic phenomenon occurs over and over again, it suggests something fundamental... Another law, we now know, is that privately created bank money is subject to runs in the absence of government regulation.
I'll just add the periodic reminder that we do not yet have the regulation in place that is needed to address the problem of bank runs of "privately created bank money." Gary Gorton is skeptical that we can ever solve this problem, that's one of the pointsof th ecolumn, but if that's the case then we should be doing all we can to ensure that the consequences of a shadow bank run are minimized, and there is much more we can do along these lines.
Posted: 25 Nov 2012 11:08 AM PST
This got more attention than I expected on Twitter, Facebook, etc., so thought I'd highlight it here:
Still think you can beat the market?, by Tim Harford: One of the most maligned ideas in economics is the efficient market hypothesis... The EMH has various forms, but in brief its message is very simple: an individual investor cannot reliably outperform financial markets. The reasoning is equally simple... Anything that could reasonably be anticipated already has been anticipated, and so markets instead respond only to genuinely unexpected news.
But the EMH has a problem: researchers keep discovering predictable patterns in the data... That is a minor embarrassment for the EMH; and it becomes a major one if the anomalies persist after they have been discovered. Yet this seems doubtful. ...
A new research paper by David McLean and Jeffrey Pontiff explicitly examines the idea that academic research into anomalies is a self-denying endeavor. They find some evidence of spurious patterns... But what is really striking is that after an anomaly has been published, it quickly shrinks – although it does not disappear.
The anomalies are most likely to persist when they apply to small, illiquid markets – as one might expect, because there it is harder to profit from the anomaly.
The efficient markets hypothesis is surely false. What is striking is that it is very close to being true. For the Warren Buffetts of the world, "almost true" is not true at all. For the rest of us, beating the market remains an elusive dream.
Posted: 25 Nov 2012 09:43 AM PST
Because of the way the Social Security program is funded -- through a payroll tax on workers along with an employer contribution -- many people believe there is an account for them at some government agency holding those contributions, or at least giving them credit for them, and that they will be able to collect their contributions when they retire. It's their money, collected from them monthly, and no matter their income level they have a right to get that money back when they retire. Try telling them that they don't. Even those people who understand that if their income is high enough they may not receive payments equal to all they put in get something back -- it's there for them no matter what -- and this increases support for the program.
But if we change the funding so that payments for Social Security come out of the general fund -- the money the government collects through taxes for all purposes -- and impose means testing (i.e. phase out the payments once income is high enough), the link between contributions and benefits would be broken and I fear support for the program would be broken as well. It would become another welfare program, and attacked. When programs are supported through the general fund there is competition for funding, there is never enough money to go around, and it wouldn't be long before the people in power, or with lots of influence over those in power (who don't really need Social Security in most cases) would argue that the money is best used elsewhere.
I am far from the first person to make this point:
Ross Douthat Argues that Social Security Would be Easier to Cut If It Were Changed from a Social Insurance Program to a Welfare Program, by Dean Baker: Ross Douthat argues convincingly that if we eliminated the link between contributions and benefits it would be much easier politically to cut Social Security. Of course he thinks ending the link would be a good idea for that reason, but his logic is certainly on the mark, people will more strongly protect benefits that they feel they have earned. ...
The payroll tax certainly can cover the program's expenses. In fact, had it not been for the upward redistribution of income over the last three decades, which nearly doubled the share of wage income going over the cap on taxable income, the projected 75-year shortfall would be about half of its current level.
Even with the current projected shortfall, if ordinary workers shared in projected productivity growth over the next three decades, a tax increase equal to 6 percent of their wage growth over this period would be sufficient to make the program fully solvent. The problem is clearly the policies that led to the upward redistribution of income..., not Social Security.
It is worth pointing out that when Douthat proposes "means-testing for wealthier beneficiaries," his notion of wealthy means school teachers and firefighters, not Bill Gates and Mitt Romney. ...
Peggy Noonan said today that Republicans will accept tax increases if there is significant entitlement reform. Assuming she can be believed (a rather heroic assumption), and that she speaks for a significant portion of the Republican Party in saying this (which is probably true, so I'm a bit less embarrassed about quoting her), it's clear that Republicans are going to demand cuts to programs like Social Security as a condition of raising taxes.
Democrats need to remember who won the election, and that despite their act to the contrary, the Republicans are not the ones calling the shots at this point. Democrats have considerable leverage, and they need to use it to protect programs their core constituency values highly. Social Security is at the top of the list.