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February 29, 2012

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"A Pact with the Devil."

Posted: 29 Feb 2012 12:39 AM PST

Did welfare reform work?:

Welfare Reform Worked, by Ron Haskins and Peter H. Schuck, Brookings: The primary election campaign has intensified a justified concern about inequality in America: People at the top are rising much faster than everyone else. Even low-income Americans consider relatively high levels of inequality acceptable if they have a decent opportunity to improve their condition. But because they may work fewer hours and at stagnant wages, their gains are very limited.
Among the poor, surprisingly, never-married mothers have gained the most in recent decades. Their story shows the best way to reduce poverty and inequality: by encouraging individuals to work more and by supplementing their earnings with tax credits, child-care subsidies and other benefits for low-income working parents.

Until the mid-1990s, never-married mothers seldom worked outside the home, had poverty rates of over 60% and were at least five times more likely than married-couple families to be poor. Then in 1996, congressional Republicans and President Clinton collaborated on a welfare reform law requiring adults on welfare, including never-married mothers, to work.

When Clinton signed the law, many of his strongest political supporters reviled him for entering into "a pact with the devil." They predicted that poor women and their children deprived of welfare would die in the streets. Any employment gains, they insisted, would vanish in the first economic downturn.
The data refute these dire predictions....

See here for another view (scroll down to the section "TANF's Overall Record Belies Claims of Welfare Reform's Success").

Fed Watch: Opportunistic Disinflation?

Posted: 29 Feb 2012 12:24 AM PST

Tim Duy:

Opportunistic Disinflation?, by Tim Duy: Ryan Avent responding to Brad DeLong's interpretation of the most recent FOMC statement, comes down easy on the Fed:

...a strict reading of the Fed statement suggests that the central bank is planning to keep rates low because the economy is likely to remain weak. In that case, the rate forecast wouldn't be expected to raise inflation and wouldn't be stimulative. I shy away from the strict interpretation of the statement, because it would make no sense to add the language in the first place if that's what the Fed were actually saying. Perhaps too charitably, I lean toward a view that the Fed is trying to raise inflation expectations without spooking its critics, internal and external.

Fair enough, I see that. But what has been nagging at the back of my mind is the decline in TIPS measured inflation expectations since the recession:


Of course, these are not perfect measures of inflation expectations, but they still tell an interesting story. Consider that in 2006 and 2007, the average five and ten year inflation expectations were 2.38% and 2.41%, respectively. Since 2010, the averages are 1.80% and 2.14%. A reasonably sharp 58bp decline at the five year horizon, and a smaller 27bp decline at the ten year horizon. So, at first blush, if the Fed is trying to raise inflation expectations to the pre-recession rates, they have not been particularly successful, especially in the near term.

The interesting question, however, is does the Fed want to return inflation expectations to the pre-recession rates? The transfer from TIPS inflation expectations to Fed policy is not perfectly smooth. TIPS returns depend on the CPI; the Fed targets the PCE price index. So instead of focusing on the level of TIPS inflation expectations, consider the roughly 30bp decline in the ten-year horizon. Presumably, the longer-run fits better with the Fed's objectives. And we know the target is 2%, courtesy of the explicit policy statement released at the last FOMC meeting.

Now consider the pre-recession headline PCE price index trend. What should be the beginning of sample? Honestly, I don't know. But for convenience, let's consider the period from 2000:1 through 2007:12, which should be long enough to form reasonable inflation expectations, and extrapolate that trend forward:


The PCE price index is currently tracking below that trend, which would seem to open the door to more aggressive policy. But that trend represents inflation running at 2.3%, about 30bp above the Fed's target. Now fast forward 12 months and consider the trend since 2008:12:


That trend line represents a rate of inflation of just a bit above 2%, right in line with the Fed's target. And 30bp less than the pre-recession trend. Or about the same as the 30bp decline in the ten-year TIPS inflation expectation.

You see where I am going with this. The Fed was facing something higher than 2% inflation prior to the recession. Now they are looking at 2% inflation, which is also now the official target. It seems to me they might have used the recession to bring down the path of prices and along with it inflation expectations - something that might surprise the Fed's critics from both sides of the aisle.

Links for 2012-02-29

Posted: 29 Feb 2012 12:06 AM PST

"What a Difference a Decade Makes on Income Inequality"

Posted: 28 Feb 2012 11:43 AM PST

Steve Benen:

What a difference a decade makes on income inequality, by Steve Benen: For much of the Obama era, issues such as income inequality have been deemed largely off limits by the right. ... But it wasn't too terribly long ago that Republicans felt this was at least a problem worth considering. Our pal James Carter flagged a fascinating item from 2002, written by one of the Republican presidential candidates for an academic journal.

[T]oday, growing disparity between the rich and poor is one of the critical social dilemmas we face in the 21st century. I believe that the growing wealth gap is one of the key reasons for this increasing disparity.

Despite a strong economy through the 1990s, the gap between the rich and the poor expanded. Among Americans who reach age seventy, the top ten percent own more wealth than the bottom ninety percent. How do we address this inequity? [...]

Initiatives that encourage individual wealth creation are imperative to closing the gap between the rich and the poor. I believe the government can play a role in helping many Americans who struggle to enter the economic mainstream.

...The author was then-Sen. Rick Santorum, in a piece for the Notre Dame Journal of Law, Ethics, & Public Policy.

It's only fair to note that Santorum's preferred prescription was not at all progressive. The Republican's focus was on addressing inequality by expanding "wealth creation" -- we would see more income mobility, for example, if working families had their own retirement investment accounts, replacing Social Security.

... In 2002, leading Republicans -- Santorum was the third highest-ranking GOP senator at the time -- were entirely comfortable noting the "growing disparity between the rich and poor," exploring solutions to close the gap, and even envisioning a role for government action.

Santorum's piece 10 years ago wasn't seen as scandalous; it was seen as routine. It's only now that the Republican mainstream sees the need to narrow the public conversation, declaring some topics verboten. Indeed, if President Obama were to declare today that the "growing disparity between the rich and poor is one of the critical social dilemmas we face in the 21st century," nearly all of the leading GOP voices would be quick to condemn such talk as inherently "divisive," promoting "envy," and fomenting class conflict.

What a difference a decade makes.


February 28, 2012

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"How to Bring Jobs to People Who Need Them Most"

Posted: 28 Feb 2012 12:33 AM PST

We must do a better job of protecting workers and their families from the short-run and long-run consequences of globalization and technological change:

How to Bring Jobs to People Who Need Them Most, by Mark Thoma: Is manufacturing special? Should the US do more to preserve its manufacturing base? President Obama brought these questions to the forefront with his recent proposal to use tax breaks and other encouragements to revive the manufacturing sector. Some people such as former Clinton economic advisor Laura Tyson argue that "manufacturing matters." But others such as her UC Berkeley colleague and former Obama advisor Christina Romer argue against such special treatment.
Who is right? In the past, I have given a lukewarm endorsement to the president's proposal. I believe manufacturing is one of the more promising avenues for the future economic growth, but I'm wary of picking winners. I'd prefer that we create the conditions for winners to emerge instead of putting too much emphasis on any one area.
But perhaps a more targeted approach is justified after all. Recent research by David Autor, David Dorn, and Gordon Hanson highlights the large detrimental effects that the loss of manufacturing jobs has had on some communities. ...[continue reading]...

(Apologies that it is split into two pages, it's not my choice -- single page, bare bones, no comments, print version here.)

"Economics and Its Military Patrons"

Posted: 28 Feb 2012 12:24 AM PST

This is from an interview of Judy Klein on, among other things, the origins of economic models:

 ...I was surprised by the very material origins of models we use in economics and by how limits on computational resources molded modeling strategies. Friedman's and Cagan's macroeconomic adaptive expectations model as well as the exponentially weighted moving averages that Box and Jenkins generalized in their time series analysis originated in attempts during WWII to model information flows between gunner and analog computer in the lead computing gun sights of B-17 bombers. Rational expectations was a product of the digital computer age, including Richard Bellman's development of dynamic programming to solve the Air Force problem in the late 1940's of how to allocate scare nuclear bombs to competing targets in a potential multistage strike on the Soviet Union.
I was surprised to learn that so much of what was cutting edge when I was in graduate school at the London School of Economics in the early 1970s had its origins in war, including adaptive expectations, the simplex method, and mathematical programming generally.
I was also struck by the irony that a decade-long government planning contract employing Carnegie Institute of Technology economics professors and graduate students underwrote the modeling strategies for the Nobel-prize winning demonstration that the rationality of consumers renders government intervention to increase employment unnecessary and harmful.

"Putting a Value on State Parks"

Posted: 28 Feb 2012 12:15 AM PST

Return on investment:

Each year, more than 700 million visits are made to America's 6,600 state parks. ... Using conventional economic approaches to estimate the value of recreation time combined with relatively conservative assumptions, the estimated an annual contribution of the state park system is around $14 billion. That value is considerably larger than the annual operation and management costs of state parks.

That's "about $62 per person annually, on average." More here.

Links for 2012-02-28

Posted: 28 Feb 2012 12:06 AM PST

"How Much Do Taxes Matter?"

Posted: 27 Feb 2012 01:35 PM PST

James Kwak reports on new research from Romer and Romer. The bottom line is that we can raise taxes on the wealthy without worrying that they will react by reducing work effort to any significant degree:

How Much Do Taxes Matter?, by James Kwak: Christina and David Romer's new paper, "The Incentive Effects of Marginal Tax Rates: Evidence from the Interwar Era," is available as an NBER working paper (if you are so lucky). Given the current debates about taxes, the paper is likely to garner some attention. ...

Their headline finding is that "The estimated impact of a rise in the after-tax share is consistently positive, small, and precisely estimated" pp. 15–16). They find an elasticity of taxable income with respect to changes in the after-tax income share of 0.19.

Advocates of lower tax rates are sure to seize on this as evidence that higher tax rates depress incentives to work. But that's hardly what the paper says. First of all, the Romers' elasticity estimate is lower than earlier empirical estimates that are largely based on the postwar period. To put this in perspective, an elasticity of 0.19 implies that tax revenues would be maximized with a tax rate of 84 percent; that is, you could raise taxes up to 84 percent before people's reduced incentives to make money would compensate for the higher tax rates.

Second, remember that this is a study of the super-rich: not the top 1%, but the top 0.05%. These are the people whom one would expect to have the highest income elasticity, precisely because they don't need the marginal dollar. Elasticities tend to be lower for ordinary people because they need to cover their expenses.

Finally,... taxable income ... can change both because people are earning less income and because they are engaging in tax strategies to reduce their taxable income. ...[R]ecent U.S. history shows that when you raise taxes on the rich, they don't stop trying to make money: they just pay their lawyers and accountants more to avoid paying taxes. The solution to that is a simpler tax code with fewer exclusions and deductions.

The claim by some that we cannot raise taxes on the wealthy because they will just find a way to avoid them never struck me as very compelling. It's simply a matter of getting the rules right, and then doing what's necessary to enforce them.

February 27, 2012

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Paul Krugman: What Ails Europe?

Posted: 27 Feb 2012 12:34 AM PST

Paul Krugman writing from Lisbon:

What Ails Europe?, by Paul Krugman, Commentary, NY Times: Things are terrible here, as unemployment soars past 13 percent. Things are even worse in Greece, Ireland, and arguably in Spain, and Europe as a whole appears to be sliding back into recession.
Why has Europe become the sick man of the world economy? ... Read ... about Europe ... and you'll probably encounter one of two stories, which I think of as the Republican narrative and the German narrative. Neither story fits the facts.
The Republican story — it's one of the central themes of Mitt Romney's campaign — is that Europe is in trouble because it has done too much to help the poor and unlucky, that we're watching the death throes of the welfare state. ...
Did I mention that Sweden, which still has a very generous welfare state, is currently a star performer...? But let's do this systematically. Look at the 15 European nations currently using the euro..., and rank them by the percentage of G.D.P. they spent on social programs before the crisis. Do the troubled Gipsi nations (Greece, Ireland, Portugal, Spain, Italy) stand out for having unusually large welfare states? No,... only Italy was in the top five, and even so its welfare state was smaller than Germany's.
So excessively large welfare states didn't cause the troubles.
Next up, the German story, which is that it's all about fiscal irresponsibility. This story seems to fit Greece, but nobody else. ...
So what does ail Europe? The truth is that the story is mostly monetary. By introducing a single currency without the institutions needed to make that currency work, Europe effectively reinvented the defects of the gold standard — defects that played a major role in causing and perpetuating the Great Depression. ...
If the peripheral nations still had their own currencies, they could and would use devaluation to quickly restore competitiveness. But they don't, which means that they are in for a long period of mass unemployment and slow, grinding deflation. Their debt crises are mainly a byproduct of this sad prospect, because depressed economies lead to budget deficits and deflation magnifies the burden of debt.
Now, understanding the nature of Europe's troubles ... makes a huge difference, because false stories about Europe are being used to push policies that would be cruel, destructive, or both. The next time you hear people invoking the European example to demand that we destroy our social safety net or slash spending in the face of a deeply depressed economy, here's what you need to know: they have no idea what they're talking about.

Fed Watch: Oil Prices - It's What Everyone is Talking About

Posted: 27 Feb 2012 12:24 AM PST

Tim Duy:

Oil Prices - It's What Everyone is Talking About, by Tim Duy: Via Ryan Avent, Matt Yyglesias opines on the link between oil prices and monetary policy:

But it looks to me as if a demand-side oil issue is really just the same old issue of the trade deficit and the international balance of payments and not the second coming of a 1970s-style oil price shock. Perhaps it's a monetary policy issue. We send dollars abroad in exchange for oil, but then the dollars get sent back in exchange for bonds. That ought to lower interest rates and induce investment in the United States, but nominal interest rates are already at zero so the loop is cut. Even so, higher gas prices should push the price level up which pushes real interest rates down which induces investment in the United States. The chain will only be broken here if the Fed decides to ignore its own self-guidance and target headline inflation instead of core inflation.

There is a lot going on in these few sentences, but I am going to focus on the last two lines. As a point of clarification, the Fed does not target core inflation. Refer to the Fed's freshly printed statement on long-run goals and strategy:

The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate.

That's headline inflation, not core inflation. Of course, there is a near-term focus on core inflation, but not as a target, but as a guide to the path of headline inflation. Monetary policymakers should be wary about overreacting to movements in headline inflation if they are not evident in core inflation.

Consider also that the Fed is setting inflation expectations at 2 percent. Technically, expected, not current, inflation should be a determinant of investment spending. Which means that a spike in headline inflation should not stimulate investment spending via this channel assuming inflation expectations remain anchored. And, at this point, inflation expectations appear anchored:


Still below what we saw last spring. To be sure, we could see inflation expectations edge up, but anything significant would draw the attention of the Federal Reserve. I think they are pretty serious about that 2 percent target. In other words, I would be cautious about reading too much into a drop in ex-post real interest rates due to a rise in energy costs.

Note that this is a criticism of Fed policy at the zero bound, that by locking in inflation expectations at 2 percent they have effectively placed their most powerful remaining policy tool off-limits.

I could imagine that higher-gas prices induce additional investment via some other mechanism, such as increased purchases of energy efficient machinery, etc. But this would not necessarily be a sufficient offset to other, negative impacts of higher energy prices.

In any event, we are all struggling to extract a signal from the data - is this primarily a "good" shock that indicates improving global activity, or a "bad" shock due to a supply constriction? Arguably, both factors are at play - see Jim Hamilton here. Putting aside the possibility of a bad shock for the moment (I think we all agree that a supply disruption stemming from a conflict with Iran would be fairly negative, especially for Europe), I tend to see the challenge in terms similar to this from Reuters:

Looking past the near-term uncertainty surrounding Iran, Andrew Sentance, a former member of the Bank of England's Monetary Policy Committee, said high and fluctuating prices for energy were part of a "new normal" economic climate in which Asia is the main engine of global growth.

Periodic bursts of inflation would add to the volatility of what was likely to be disappointing growth in the West for quite some time, according to Sentance, a senior economic adviser to PricewaterhouseCoopers, an accounting and advisory firm.

"This strong growth in Asia and other emerging markets is putting considerable pressure on markets for energy and other commodities and that is one of the reasons why we are finding growth so difficult to achieve," he told a conference organized by the Institute of Economic Affairs, a free-market think tank in London.

"That's not just a short-term phenomenon. It's a secular issue that's going to persist through the middle of this decade," he said.

Even if higher oil prices are a symptom of improving global growth (a "good" shock) and do not trigger a US recession, they will certainly place some additional strain on US household budgets, which will in turn depress growth relative to what it would have been in the absence of the higher oil prices (consider instead the relatively low and stable prices of oil during much of the US boom during the 1990s). In effect, we could be running up against a global bottleneck that places something of a speed-limit on US (and global) growth.


As to the international finance story Yglesias tells, I think this does come back to a monetary policy story, but I think the direction might be backwards. I am still working this one out:

Yglesias is telling a story of recycling petro-dollars. In order to finance a given level of trade deficit, the dollar outflow must be recycled back into the US economy as a dollar inflow that supports some type of domestic absorption. I shy away from using the term "investment" strictly as it could support government spending or even consumption spending (think of households borrowing against home equity to buy a boat). If foreigners don't not want to recycle their dollars back into the US economy via financial inflows, the value of the dollar falls to stimulate exports and deter imports, thus improving the external deficit.

Now, to Yglesias' point, we may have something of an interesting situation whereby foreign investors find themselves holding dollar assets as cash or near-cash equivalents (low yielding Treasuries). And unless the federal government utilizes that potential via expanded borrowing (note that in the private sector, savings exceeds investment already), little additional demand is supported. Now it is interesting that foreign investors would prefer to hold relatively low-yielding assets rather than using their dollars to purchase US goods and services, but such is the outcome of so many dollars being held for central banks around the world.

As Yglesias' says, the "loop" is cut, but not necessarily because of the zero bound, but by the global demand for dollars, which arguably is the cause of the zero bound. Which then does brings us back to Yglesias' point that this is a monetary policy issue - policymakers could more actively drive down the value of the dollar by raising inflation expectations, thus making it increasingly unattractive for foreigners to hold cash or cash equivalents, and force the funds into either demand for US goods and services or investment goods. Certainly, however, policymakers would view this as a risky strategy, and thus have not gone down this road.

Links for 2012-02-27

Posted: 27 Feb 2012 12:06 AM PST

"Make Them Identify Emotionally"

Posted: 26 Feb 2012 12:18 PM PST

Via digby:

Tribal solidarity, by digby: This post by Chris Mooney about his new book called The Republican Brain: The Science of Why They Deny Scienceand Reality is an interesting insight into something that baffles all of us:

I can still remember when I first realized how na├»ve I was in thinking—hoping—that laying out the "facts" would suffice to change politicized minds, and especially Republican ones. It was a typically wonkish, liberal revelation: One based on statistics and data. Only this time, the data were showing, rather awkwardly, that people ignore data and evidence—and often, knowledge and education only make the problem worse.
Someone had sent me a 2008 Pew report documenting the intense partisan divide in the U.S. over the reality of global warming. It's a divide that, maddeningly for scientists, has shown a paradoxical tendency to widen even as the basic facts about global warming have become more firmly established.

Buried in the Pew report was a little chart showing the relationship between one's political party affiliation, one's acceptance that humans are causing global warming, and one's level of education. And here's the mind-blowing surprise: For Republicans, having a college degree didn't appear to make one any more open to what scientists have to say. On the contrary, better-educated Republicans were more skeptical of modern climate science than their less educated brethren. Only 19 percent of college-educated Republicans agreed that the planet is warming due to human actions, versus 31 percent of non-college-educated Republicans.

For Democrats and Independents, the opposite was the case. More education correlated with being more accepting of climate science—among Democrats, dramatically so. The difference in acceptance between more and less educated Democrats was 23 percentage points.

This was my first encounter with what I now like to call the "smart idiots" effect: The fact that politically sophisticated or knowledgeable people are often more biased, and less persuadable, than the ignorant. It's a reality that generates endless frustration for many scientists—and indeed, for many well-educated, reasonable people...

...Ultimately, this is about tribalism, feeling part of a group, being validated by it and thinking and behaving in ways that preserve your place in it. We all do it to some extent...

The simple rule is this: if you want to persuade liberals of something, bring out the charts and spreadsheets. If you want to persuade conservatives of something, make them identify emotionally with what you want them to believe. ...

I agree with the "make them identify emotionally" part for conservatives. For example, this is telling:

Last week, 2012 GOP presidential hopeful Mitt Romney released a tax plan that, in addition to giving the richest 0.1 percent of Americans a $240,000 tax cut, would blow a $10.7 trillion hole in the deficit. Romney insists that his tax cuts would be paid for by limiting deductions for the rich, but many analysts have pointed out that his numbers simply can't add up.

Today on ABC's This Week, former Gov. Jennifer Granholm (D-MI) noted that Romney's tax plan would exacerbate income inequality while causing the deficit to explode. Former Gov. John Engler (R-MI) responded by dismissing the numbers, saying that "voters aren't analysts":

Granholm: Every analysts who's looked at, for example, Mitt Romney's tax plan, says it exacerbates income disparities. Even the deficit, between $2 trillion and $6 trillion he adds to the deficit.

Engler: Voters aren't analysts. Voters are emotional, and it's about leadership. And they know what they've got. If they like that, they can vote to keep it.

So, for Republicans it appears to be more about signaling by taking extreme positions than truth telling. What I'm less sure about is the claim that the way to convince liberals is to "bring out the charts and spreadsheets." Perhaps, but I think emotional appeal is important here as well. What do you think?

Daniel Davies: Too Big To Fail: The First 5000 Years

Posted: 26 Feb 2012 10:50 AM PST

Daniel Davies on the history and purpose of debt contracts (this is from a series of posts at Crooked Timber discussing David Graeber's new book Debt: The First 5,000 Years):

Too Big To Fail: The First 5000 Years, by Daniel Davies: One of the many fascinating pieces of information that David Graeber tosses off like shrapnel in Debt is that the first recorded appearance of the word "freedom" in a political document is in a Sumerian proclamation of a debt amnesty or jubilee.

What interested me, however, from the point of view of a professional banker, is that the document in question provided only for the discharge of personal debts of the Sumerians; commercial debts of merchants were not discharged. ... The point I am trying to make here is that as well as being the first mention of the word "freedom", this proclamation marks the first recorded instance of a regulator-sanctioned selective default. ... So from the start to the beginning of the story of debt, it has always mattered whether or not you were on the right side of what the relevant regulator wanted to accomplish. ...

I think this because commercial debts between merchants are a really important part of the story here. Not only are they, in simple numeric terms, a much bigger part of the picture than debts between individuals in social groups, or even tax obligations between subjects and rulers, the fact that trade credits between merchants have generally, even in conditions when other kinds of debt relation were being repudiated, tended to be preserved and honored, gives us a few clues toward an alternative story of debt over the last 5000 years.

The Babylonian merchants weren't included in the debt amnesty, of course, because to have upset their trading accounts would have done serious damage to the commercial basis of Babylonian society – to put it frankly, they were too big to fail. ...

So it is noticeable that the concept of "too big to fail" has grown up hand in hand with the concept of the debt relation for the entire traceable history of debt. Although the parallel track of debt as obligation, religion and morality has certainly been there, and is described expertly in the book, from day one it has been recognized among merchants and men of commerce that the point of the debt relation is to serve the organization and arrangement of commercial need.

To my mind, this fact rather colors one of the central theses of Debt – the idea that debt has from its origins been entwined with slavery, military tribute and imperialism. I'd advance the suggestion that of course the first people to start codifying the debt relation were the first emperors and rulers; they were the first people who ever came across the problem of organizing a productive economy larger than a small village or subsistence farming community. The fact that debt has its origins in the creation of tax-collecting, military societies seems to me to be equivalent to the fact that NASA invented Teflon – they had to do it, in order to solve the problems put in front of them. ...

I've repeated myself to a boring extent in the past on the subject of the science of economics being basically a branch of control engineering ("economic cybernetics", as the Russians called it) which went rogue in the 19th century and got caught up in a whole load of moral and political philosophy that didn't belong there. Debt as per Graeber's book is an example of this – the debt contract is basically a tool of industrial organization that escaped from the laboratory and ran wild. But I think he underestimates the extent to which there have always been domesticating influences on the concept, and the extent to which the debt relation has always been, correctly, the subject of revision and reappraisal, with the basic underlying question being that of economics rather than anthropology – "How do we best organize the decision making process with regard to production, consumption, and exchange?"

Having said that, there are some situations where Graeber's analysis seems completely accurate. Countries don't have bankruptcy codes governing them, and so in the sphere of international debt negotiations, one can see all the pernicious aspects of the "folk-economics" version of the debt contract that Graeber describes. Looking at the relationship between the European Union and Greece, or even Ireland, one can see that the debt relation is being specifically shaped into a tool for exercising power... IMF programs seem to be typically designed to fail, to put the client country into the position of a defaulting debtor and entirely reliant on the mercy of its creditors. So ... the book ... is very useful in looking at debt-relations outside the commercial codes that govern most of the world's actually existing debts, and it's a very salutary reminder of what happens when people forget that debt ... really only ought to be ... the legal system's best guess at what kind of arrangements would best serve the general purposes of commerce. It is, as Graeber intimates, when the debt relation takes on an independent life of its own that the problems all start.

[More here.]


February 26, 2012

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Posted: 26 Feb 2012 12:06 AM PST

"The Party of Higher Debts"

Posted: 25 Feb 2012 11:17 AM PST

James Kwak:

Party of Higher Debts, by James Kwak: The Committee for a Responsible Budget recently released an analysis of the budgetary proposals of the four remaining Republican presidential candidates... CFRB compares the candidates' plans to a "realistic" baseline that assumes the Bush tax cuts are made permanent and the automatic sequesters required by the Budget Control Act of 2011 are waived... Relative to that extremely pessimistic baseline, Santorum and Gingrich still want huge increases to the national debt; only Paul's proposals would reduce it. Romney's proposals would have little impact, but that was before his latest attempt to pander to the base: an across-the-board, 20 percent reduction in income tax rates.
How is this possible, since all of them have promised to cut spending? Huge tax cuts, on top of the Bush tax cuts. Romney, as mentioned above, would reduce all rates by 20 percent, repeal the AMT, and repeal the estate tax. Santorum would cut taxes by $6 trillion over the next decade. Gingrich would cut taxes by $7 trillion. Paul, the responsible one, would only cut taxes by $5 trillion.
This is pure crazy talk. I'm not sure what is more remarkable: that the candidates would compete for the affections of the Tea Party (a supposed anti-debt group) by planning to increase the national debt; that they think that they can pose as deficit hawks while planning to increase the national debt; or that they are getting away with it.
How did this happen? It's probably no surprise to you, but over the past thirty years the Republican Party has become not the party of balanced budgets, but the party of tax cuts... The only surprising thing is how long they've been able to wave the flag of fiscal responsibility.
Not that I'm a fan of the Committee for a Responsible Federal Budget. The CRFB is another of those "centrist" groups or panels (like Bowles-Simpson, like Domenici-Rivlin, like the Gang of Six) that is using deficits as an excuse to cut taxes... In fact, compared to current law, they all support large tax cuts, mainly for the rich.
I can understand why you might want tax reform. I can also understand why you might want lower tax rates for the rich. (You might be rich, for one.) I don't understand how you can use the national debt as an excuse for tax cuts. If you care about the national debt, you should want to let the Bush tax cuts expire and then close loopholes without lowering rates.

The answer, I think, is that complaints about deficits and tax cuts are both a means to the same end, and it isn't deficit reduction, it's smaller government. Tax cuts create a deficit while rewarding key constituents at the same time (all the while arguing that the tax cuts create middle class jobs through trickle down effects that never seem to actually appear), and then the subsequent complaints and worries over the deficit lead to spending cuts. People say the Bush tax cuts didn't work -- I say it myself -- and that's true if you are talking about the impact of the cuts on economic growth and employment. It's hard to find evidence of strong effects on these variables. But it has created huge pressure to cut spending -- the government is being starved of the revenue it needs to support some programs -- and even if by some miracle the Bush tax cuts end Republicans will have accomplished the goal of shifting the conversation in a way that even has Democrats supporting changes to social insurance programs.


February 25, 2012

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Posted: 25 Feb 2012 12:06 AM PST
Posted: 24 Feb 2012 09:36 AM PST
The loss of manufacturing jobs to overseas producers has large negative impacts on workers and their communities. I'm with David Autor, one of the authors of the study described below, when he says "policymakers need new responses to the loss of manufacturing jobs: 'I'm not anti-trade, but it is important to realize that there are reasons why people worry about this issue.' ... Trade may raise GDP, but it does make some people worse off. Almost all of us share in the gains. We could readily assist the minority of citizens who bear a disproportionate share of the costs and still be better off in the aggregate":
When (and where) work disappears, MIT News: ...A new study co-authored by MIT economist David Autor shows that the rapid rise in low-wage manufacturing industries overseas has ... had a significant impact on the United States. The disappearance of U.S. manufacturing jobs frequently leaves former manufacturing workers unemployed for years, if not permanently, while creating a drag on local economies and raising the amount of taxpayer-borne social insurance necessary to keep workers and their families afloat.
Geographically, the research shows, foreign competition has hurt many U.S. metropolitan areas — not necessarily the ones built around heavy manufacturing in the industrial Midwest, but many areas in the South, the West and the Northeast, which once had abundant manual-labor manufacturing jobs, often involving the production of clothing, footwear, luggage, furniture and other household consumer items. Many of these jobs were held by workers without college degrees, who have since found it hard to gain new employment.
"The effects are very concentrated and very visible locally," says Autor... "People drop out of the labor force, and the data strongly suggest that it takes some people a long time to get back on their feet, if they do at all." Moreover, Autor notes, when a large manufacturer closes its doors, "it does not simply affect an industry, but affects a whole locality." ...
The findings highlight the complex effects of globalization on the United States. "Trade tends to create diffuse beneficiaries and a concentration of losers," Autor says. "All of us get slightly cheaper goods, and we're each a couple hundred dollars a year richer for that." But those losing jobs, he notes, are "a lot worse off." For this reason, Autor adds, policymakers need new responses to the loss of manufacturing jobs: "I'm not anti-trade, but it is important to realize that there are reasons why people worry about this issue." ...
Double trouble: businesses, consumers both spend less when industry leaves
In the paper, Autor, Dorn (of the Center for Monetary and Fiscal Studies in Madrid, Spain) and Hanson (of the University of California at San Diego) specifically study the effects of rising manufacturing competition from China, looking at the years 1990 to 2007. ...
The types of manufacturing for export that grew most rapidly in China during that time included the production of textiles, clothes, shoes, leather goods, rubber products — and one notable high-tech area, computer assembly. Most of these production activities involve soft materials and hands-on finishing work. "These are labor-intensive, low-value-added [forms of] production," Autor says. "Certainly the Chinese are moving up the value chain, but basically China has been most active in low-end goods."
In conducting the study, the researchers found more pronounced economic problems in cities most vulnerable to the rise of low-wage Chinese manufacturing; these include San Jose, Calif.; Providence, R.I.; Manchester, N.H.; and a raft of urban areas below the Mason-Dixon line — the leading example being Raleigh, N.C. "The areas that are most exposed to China trade are not the Rust Belt industries," Autor says. "They are places like the South, where manufacturing was rising, not falling, through the 1980s." ...
And as the study shows, when businesses shut down, it hurts the local economy because of two related but distinct "spillover effects," as economists say: The shuttered businesses no longer need goods and services from local non-manufacturing firms, and their former workers have less money to spend locally as well. ... "People like to think that workers flow freely across sectors, but in reality, they don't," Autor says. ...
New policies for a new era?
In Autor's view, the findings mean the United States needs to improve its policy response to the problem of disappearing jobs. "We do not have a good set of policies at present for helping workers adjust to trade or, for that matter, to any kind of technological change," he says.
For one thing, Autor says, "We could have much better adjustment assistance — programs that are less fragmented, and less stingy." The federal government's Trade Adjustment Assistance (TAA) program provides temporary benefits to Americans who have lost jobs as a result of foreign trade. But as Autor, Dorn and Hanson estimate in the paper, in areas affected by new Chinese manufacturing, the increase in disability payments is a whopping 30 times as great as the increase in TAA benefits.
Therefore, Autor thinks, well-designed job-training programs would help the government's assistance efforts become "directed toward helping people reintegrate into the labor market and acquire skills, rather than helping them exit the labor market."
Still, it will likely take more research to get a better idea of what the post-employment experience is like for most people. ...
"Trade may raise GDP," Autor says, "but it does make some people worse off. Almost all of us share in the gains. We could readily assist the minority of citizens who bear a disproportionate share of the costs and still be better off in the aggregate."

February 24, 2012

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Paul Krugman: Romney’s Economic Closet

Posted: 24 Feb 2012 02:35 AM PST

What can we learn from the fact that Mitt Romney is "running a campaign of almost pathological dishonesty"? That he can't be trusted:

Romney's Economic Closet, by Paul Krugman, Commentary, NY Times: According to Michael Kinsley, a gaffe is when a politician accidently tells the truth. That's certainly what happened to Mitt Romney on Tuesday... Speaking in Michigan, Mr. Romney was asked about deficit reduction, and he absent-mindedly said something completely reasonable: "If you just cut,... as you cut spending you'll slow down the economy." A-ha. So he believes that cutting government spending hurts growth, other things equal.
The right's ideology police were, predictably, aghast... And a Romney spokesman tried to walk back the remark... But... Almost surely, he is, in fact, a closet Keynesian.
How do we know this? Well,... while his grasp of world affairs does sometimes seem shaky, he has to be aware of the havoc austerity policies are wreaking in Greece, Ireland and elsewhere.
Beyond that, we know who he turns to for economic advice; heading the list are Glenn Hubbard ... and N. Gregory Mankiw... While both men are loyal Republican spear-carriers ... both also have long track records as professional economists. And what these track records suggest is that neither of them believes any of the propositions that have become litmus tests for would-be G.O.P. presidential candidates. ...
Given his advisers, then, it seems safe to assume that what Mr. Romney blurted out Tuesday reflected his real economic beliefs — as opposed to ... what the Republican base wants to hear. And therein lies the reason Mr. Romney acts the way he does, why he is running a campaign of almost pathological dishonesty. ...
What this diagnosis implies, of course, is that the many people on the right who don't trust Mr. Romney ... are correct in their suspicions. He's playing a role, and it's anyone's guess what lies beneath the mask.
So should those who don't share the right's faith be comforted by the evidence that Mr. Romney doesn't believe anything he's saying? Should we, in particular, assume that, once elected, he would actually follow sensible economic policies? Alas, no.
For the cynicism and lack of moral courage that have been so evident in the campaign wouldn't suddenly vanish... If he doesn't dare disagree with economic nonsense now, why imagine that he would become willing to challenge that nonsense later? And bear in mind that if elected, he would be watched like a hawk for signs of apostasy by the very people he's trying so desperately to appease right now.
The truth is that Mr. Romney is so deeply committed to insincerity that neither side can trust him to do what it considers to be the right thing.

The Increase in Household Debt Prior to the Crisis is Not a Moral Issue

Posted: 24 Feb 2012 12:27 AM PST

Via Mike Konczal at Rortybomb, Josh Mason explains the findings of his research with Arjun Jayadev on the dynamics of household debt. Importantly, this research knocks a hole in the story that it was lack of self control -- the decline of the morals of the middle class -- that caused the increase in household debt prior to the financial crisis (the original article also has the mathematics and empirical tables explaining and documenting the results):

Guest Post by JW Mason: The Dynamics of Household Debt: [Mike here. ... Josh Mason ... and Arjun Jayadev, former Roosevelt Institute fellow and economist at Umass-Boston, have an interesting new paper out on the growth of household debt over the past 30 years. I asked them if they would write a summary of this research..., and Josh was willing...]
It's a well-known fact that household debt has exploded in recent decades, rising from 50 percent of GDP in 1980 to over 100 percent on the eve of the Great Recession. It's also well-known that household borrowing has increased sharply over this period. ... In fact, though,... while the first one is certainly true, the second is not.
How can debt have increased if borrowing hasn't? Though this seems counterintuitive, the answer is simple. We're not interested in debt per se, but in leverage, defined as the ratio of a sector's or unit's debt to its income (or net worth). This ratio can go up because the numerator rises, or because the denominator falls. Household leverage increased sharply, for instance, in 1930 and 1931 (see Figure 1) but people weren't were consuming more in the Depression; leverage rose because incomes and prices were falling faster than households could pay down debt. Similarly, changes in interest rates can change the debt burden without any shift in household consumption...
But strangely, despite the example of the Depression (and Irving Fisher's famous diagnosis of rising debt burdens caused by falling prices and incomes (Fisher 1933)), no one has systematically examined what fraction of changes in private debt can be attributed to changes in interest, growth, inflation and new borrowing. In a new paper, Arjun Jayadev and I attempt to fill this gap, applying the standard decomposition of public sector debt changes to household debt in the United States for the period 1929-2011. (Mason and Jayadev, 2012.) Our findings challenge the conventional narrative about rising household debt.
What we find is that the entire increase in household leverage after 1980 can be attributed to the non-borrowing... — what we call Fisher dynamics. If interest rates, growth and inflation over 1981-2011 had remained at their average levels of the previous 30 years, then the exact same spending decisions by households would have resulted in a debt-to-income ratio in 2010 below that of 1980, as shown in Figure 2. The 1980s, in particular, were a kind of slow-motion debt-deflation, or debt-disinflation; the entire growth in debt relative to earlier periods (17 percent of household income, compared with just 3 percent in the 1970s) is due to the slower growth in nominal income as a result of falling inflation. In other words, there is no reason to think that aggregate household borrowing behavior changed after 1980; indeed households reduced their borrowing in the face of higher interest rates just as one would expect rational agents to. The problem is that they didn't, or couldn't, reduce borrowing fast enough to make up for the fact that after the Volcker disinflation, leverage was no longer being eroded by rising prices. In this respect, the rise in debt-income ratios in the 1980s is parallel to that of 1929-1931. ...
Think of it this way: If you borrow money and your income in dollars rises by 10 percent a year (3 percent real growth, say, and 7 percent inflation) then you will find it much easier to pay off the debt when it comes due. But if you borrow the same amount and your dollar income turns out to rise at only 4 percent a year (the same real growth but only 1 percent inflation) then the payment, when it comes due, will be a larger fraction of your income. That, not increased household spending, is why debt ratios rose in the 1980s.
Neither the 1980s nor the 1990s saw an increase in new household borrowing — on the contrary, the household sector in the aggregate showed a primary surplus in these decades, in contrast with the primary deficits of the postwar decades. So both the conservative theory explaining increased household borrowing in terms of shorter time horizons and a general lack of self-control, and the liberal theory explaining it in terms of efforts by those further down the income ladder to maintain consumption standards in the face of a falling share of income, need some rethinking. Given the increased availability of credit and rising inequality, some households may well have chosen to increase spending relative to income, and those lower down the income ladder presumably did rely on borrowing to maintain consumption standards in the face of stagnant wages. But for the household sector in the aggregate, until 2000, there is no increased household borrowing to explain. ...
An important point to note ...[is] that in the period of the housing bubble — 2000 to 2006 — the conventional story is right: during this period, the household sector did run very large primary deficits (averaging 3.3 percent of income), which explain the bulk of increased leverage over this period. But not all of it: even in this period, about a third of the increase in debt was due to ... mechanical effects... And in the following four years, households reduced consumption relative to income by nearly as much as they increased it in the bubble years. But these large primary surpluses barely offset the large gap between interest and (very low) growth and inflation over these four years. In the absence of the headwind created by adverse debt dynamics, the increase in household leverage in the bubble would have been effectively reversed by 2011.
We draw two main conclusions. First, as a historical matter, you cannot understand the changes in private sector leverage over the 20th century without explicitly accounting for debt dynamics. The tendency to treat changes in debt ratios as necessarily the result in changes in borrowing behavior obscures the most important factors in the evolution of leverage. Second, going forward, it seems unlikely that households can sustain large enough primary deficits to reduce or even stabilize leverage. ... As a practical matter, it seems clear that, just as the rise in leverage was not the result of more borrowing, any reduction in leverage will not come about through less borrowing. To substantially reduce household debt will require some combination of financial repression to hold interest rates below growth rates for an extended period, and larger-scale and more systematic debt write-downs. ...

Links for 2012-02-24

Posted: 24 Feb 2012 12:06 AM PST