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April 27, 2012

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Posted: 27 Apr 2012 12:24 AM PDT
We're "living in a world of zombie economic policies":
Death of a Fairy Tale, by Paul Krugman, Commentary, NY Times: This was the month the confidence fairy died.
For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets.
Critics warned from the beginning that austerity in the face of depression would only make that depression worse. But the "austerians" insisted that the reverse would happen. Why? Confidence! ... Or as I put it..., the idea was that the confidence fairy would come in and reward policy makers for their fiscal virtue.
The good news is that many influential people are finally admitting that the confidence fairy was a myth. ... Several events — the collapse of the Dutch government over proposed austerity measures, the strong showing of the vaguely anti-austerity François Hollande in the first round of France's presidential election, and an economic report showing that Britain is doing worse in the current slump than it did in the 1930s — seem to have finally broken through the wall of denial. ...
The question now is what they're going to do about it. And the answer, I fear, is: not much.
For one thing, while the austerians seem to have given up on hope, they haven't given up on fear — that is, on the claim that if we don't slash spending, even in a depressed economy, we'll turn into Greece, with sky-high borrowing costs.
Now, claims that only austerity can pacify bond markets have proved ... wrong... And serious analysts now argue that fiscal austerity in a depressed economy is probably self-defeating: by shrinking the economy and hurting long-term revenue, austerity probably makes the debt outlook worse rather than better.
But while the confidence fairy appears to be well and truly buried, deficit scare stories remain popular. Indeed, defenders of British policies dismiss any call for a rethinking of these policies, despite their evident failure..., on the grounds that any relaxation of austerity would cause borrowing costs to soar.
So we're now living in a world of zombie economic policies — policies that should have been killed by the evidence that all of their premises are wrong, but which keep shambling along nonetheless. And it's anyone's guess when this reign of error will end.
Posted: 27 Apr 2012 12:15 AM PDT
Larry Summers:
Romney's fiscal fantasy plan, by By Lawrence Summers, Commentary, Washington Post: Political arithmetic is always suspect...
This principle was aptly illustrated by the "budget analysis" Mitt Romney's chief economic adviser, Glenn Hubbard, recently put forward. In a Wall Street Journal op-ed this week, Hubbard constructs a budget plan that he imagines President Obama might propose someday, engages in a set of his own extrapolations and then makes assertions about it. He does not discuss the actual Obama plan or how it has been evaluated by the CBO. ...
The independent CBO confirms that the Obama budget would stabilize the debt as a share of the economy... Rather than criticize this approach, Hubbard ignores it — and instead chooses to invent assumptions that bear no relationship to the president's actual policies. ...
Hubbard should perhaps address some of the many gaps in Romney's plans. ... The Romney campaign has been very clear about what the former governor is promising: $5 trillion in tax cuts on top of extending the Bush tax cuts,... heavily weighted toward the country's wealthiest taxpayers. Romney himself has acknowledged the lack of details... Romney has also proposed a massive defense buildup, even while he says he will cut spending deeply enough to balance the budget. ...
This is a consequential presidential election. As the country continues to recover from the largest economic crisis in generations, we need to strengthen the job market, address big fiscal challenges and build an economy that is based on sustainable, shared economic growth. ... Obama — consistent with his obligations as president — has laid out a multiyear budget embodying his vision for the future, and it has been evaluated by independent experts. It is time for Romney to do the same.
Posted: 27 Apr 2012 12:06 AM PDT
Posted: 26 Apr 2012 01:15 PM PDT
Dani Rodrik:
Ideas over Interests, by Dani Rodrik, Commentary, Project Syndicate: The most widely held theory of politics is also the simplest: the powerful get what they want. Financial regulation is driven by the interests of banks, health policy by the interests of insurance companies, and tax policy by the interests of the rich. Those who can influence government the most ... eventually get their way.
It's the same globally. ... It is a compelling narrative... Yet this explanation is far from complete, and often misleading. ... Our interests are in fact hostage to our ideas.
So, where do those ideas come from? Policymakers ... perspectives on what is feasible and desirable are shaped by ... economists and other thought leaders... The ideas that have produced, for example, the unbridled liberalization and financial excess of the last few decades have emanated from economists...
In the aftermath of the financial crisis, it became fashionable for economists to decry the power of big banks. It is because politicians are in the pockets of financial interests, they said, that the regulatory environment allowed those interests to reap huge rewards at great social expense. But this argument conveniently overlooks the legitimizing role played by economists themselves. It was economists and their ideas that made it respectable for policymakers and regulators to believe that what is good for Wall Street is good for Main Street.
Economists love theories that place organized special interests at the root of all political evil. In the real world, they cannot wriggle so easily out of responsibility for the bad ideas that they have so often spawned. With influence must come accountability.
There are differences on these issues among economists. The fact that some ideas, e.g. that austerity is somehow expansionary, take hold while others do not has a lot to do, I think, with the interests of the powerful. So I'm not fully convinced that economists are the primary driving force. They are part of it, to be sure, but when those with the most political power promote one idea over another, it matters.
Posted: 26 Apr 2012 11:47 AM PDT
Pollution levels off the California coast have dropped significantly since the passage of the Clean Water Act (i.e., contra Repulicans, government is not always the problem):
First evaluation of the Clean Water Act's effects on coastal waters reveals major successes, EurekAlert: Landmark legislation helped clean up LA's coastal waters over the past 40 years, study indicates
Levels of copper, cadmium, lead and other metals in Southern California's coastal waters have plummeted over the past four decades, according to new research from USC.
Samples taken off the coast reveal that the waters have seen a 100-fold decrease in lead and a 400-fold decrease in copper and cadmium. Concentrations of metals in the surface waters off Los Angeles are now comparable to levels found in surface waters along a remote stretch of Mexico's Baja Peninsula.
Sergio Sañudo-Wilhelmy, who led the research team, attributed the cleaner water to sewage treatment regulations that were part of the Clean Water Act of 1972 and to the phase-out of leaded gasoline in the 1970s and 1980s. ...
Posted: 26 Apr 2012 08:15 AM PDT
Antonio Fatás:
Ideology and Facts in the Economic Policy Debate: The fact that ideology matters in the economic policy debate should not be a surprise to anyone. But the influence that ideology has has in some of the economic analysis we have seen since the beginning of the financial crisis has led to completely contradictory statements about the facts behind the causes and potential remedies to the crisis.
Via Greg Mankiw's blog I read a strong criticism of the Obama administration written by James Capretta. Quoting from his article:
When he (Obama) came into office, he favored a massive injection of new government spending into the economy in the name of "stimulus" — counter-cyclical federal activity aimed at offsetting depressed consumer demand emanating from a recession-battered private sector. The net result provides little if any boost to aggregate demand because the states — and to some extent private citizens — simply pocket the federal money and reduce their deficits and debts. Meanwhile, what federal taxpayers get is a permanent increase in the size of government.
We have all heard similar statements before which tend to be supported by references to $800 billion to $1 trillion stimulus packages and bailouts both in the US and Europe.
But have we really see an unusual expansion of government size? Quite the contrary. As I argued in a previous post, what we have seen during the current crisis is exactly the opposite. Relative to previous crisis government spending has been growing at a much slower rate this time. Paul Krugman makes an even more interesting comparison in blog, a comparison that reveals how inaccurate the above statement is. He compares government employment under the Obama administration to the Bush and Clinton administrations. The Bush administration is probably the most relevant comparison because it also started in the middle of a recession. Here is the chart from Krugman's analysis. ...
The data speaks for itself. 40 months into the Obama administration, the number of government employees (all levels of government) has gone down by 600,000. During the Bush administration the number had increased by about 700,000. A difference of 1.3 million. So where is the increase in government size? ...
[See here for another graph comparing government spending during recent recoveries.]
I don't think the evidence supports the assertion that the preponderance of the stimulus was saved rather than spent. But suppose that it was. For consumers in particular, this is a form of balance sheet repair -- they are saving to make up for losses in asset values that they were depending upon for retirement, to pay for college, and so on. Balance sheet repair does not show up in current GDP statistics, so it looks like the policy is doing nothing. But since consumers won't begin spending normally until their balance sheets are repaired, high savings allows us to exit the recession faster than otherwise (though balance sheet repair is a slow process in any case). State and local budgets --balance sheets --were also wiped out by the recession, so similar arguments can be made here. If state and local government did use this money mostly to backfill revenue losses instead of taking on new projects, that's a sign they didn't get enough help (this is also reflected in the fall in state and local employment). State and local governments have to make up for budget shortfalls somehow, and the sooner they are able to do that, the sooner the layoffs and so on stop. So although we don't see the savings component in current GDP figures, the savings allows balance sheet repair to happen faster, and that allows an earlier exit from the recession.
Again, though, there is plenty of evidence that runs counter to the claim that the stimulus did nothing. The ARRA (stimulus package) had more tax cuts than I would have preferred, and hence there was more savings and less spending than a better designed package might have produced (but the package would not have made it through Congress if it was more spending, less tax cuts). But the higher rate of saving does have benefits in a balance sheet recession.

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Posted: 26 Apr 2012 12:06 AM PDT
Posted: 25 Apr 2012 01:08 PM PDT
James Galbraith on inequality:
Here's the entire session:
The Impact of Inequality on Macroeconomics Dynamics
Moderator
Speakers
Posted: 25 Apr 2012 10:35 AM PDT
My reaction to the Fed's Press Release from its monetary policy meeting that ended today.
Fed Policy Remains on Hold: (MoneyWatch) COMMENTARY The Federal Reserve just concluded a two-day meeting to decide what's next for monetary policy, and as was widely expected the Federal Reserve decided to keep policy on hold. Interest rates are still expected to remain extraordinarily low through late 2014, and there is no change in the Fed's other programs intended to stimulate the economy such as its program "to extend the average maturity of its holdings of securities" and reinvest principle as the assets mature.
The question is whether this is the correct policy. Presently, the Fed is missing its employment target, and it is also below its declared inflation target of 2 percent. As the statement says, "the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate." So there is no risk of overshooting the inflation target according to the Fed, only a risk of undershooting it.
If that's true, if the Fed is likely to undershoot both of its targets -- the committee believes that in the worst case it will only hit its inflation target, not exceed it -- then why not pursue more aggressive policy?
The answer, despite what the press release says about low inflation risks, is fear of inflation. In particular, it is the fear that inflation expectations will become unmoored. The Fed believes that expectations of inflation are largely self-fulfilling. If people expect prices to go up, they will take actions such as demanding wage increases that will make that happen, and the expectation will be validated. Then, as inflation begins rising, that can then lead to further increases in expected inflation which will also be self-fulfilling, and an upward spiral is set in motion.
Is this fear realistic? Some of us, myself included, think the Fed should overshoot the inflation target in the short-run since that would stimulate the economy, then bring inflation back to target once the economy nears full employment. But the Fed seems unwilling to tolerate even the possibility that inflation might cross the 2 percent threshold.
I think the Fed should have more faith in itself. It is still paralyzed by the 1970s when the self-fulfilling inflation expectations scenario above played out to the detriment of the economy. But the inflation didn't just happen without the central banks participation, policy mistakes had a lot to do with the outcome. Does the central bank think it has learned nothing? Would it really stand by and watch inflation rates go into the double digits without taking corrective action?
If inflation expectations begin to rise, and there's no sign of that presently, the Fed has the tools to bring them back down again if it has the will to use them. Is that the problem? Is the Fed worried that it won't have the courage to bring down inflation if it is called for (which would likely slow the economy)? If the unemployment rate is still relatively high and inflation begins accelerating, would the Fed be unwilling to try to fix the problem?
If unemployment is still too high, there's no reason to fix the problem. That's the policy that is called for. The important question is what happens as we approach full employment, and I have little doubt that the Fed will take appropriate action in such a case. I just wish the Fed had more faith in itself. If it did -- if it was absolutely clear that the appropriate action will be taken as the economy reaches full employment -- then long-term expectations would not be a problem.
Posted: 25 Apr 2012 09:34 AM PDT
Maybe you can help me. As you may or may not know, I grew up in a relatively small town (just under 4,000 people) in Northern California. So I have always been somewhat attuned to the GOP's use of small town America in its political rhetoric (Democrats do this too, but not as much). Much to the chagrin of city folk, small town America has always been held up as an ideal:
why is it OK to disrespect big city values, even to suggest — as Bush has — that big-city dwellers aren't part of the "real America"? ... The big-city immigrant experience is as much a part of what made America as the rural, small-town experience. It deserves the same degree of respect.
That always made me laugh since people in rural areas complain that cities have all the power and influence. Where I grew up Sacramento and LA steal all the water, etc., and to some extent the glorifying of small-towns is playing to this feeling of political powerlessness. The dog whistle here is, of course, that those immoral cities that are full of decadence and decay are stealing the tax money of hard-working, small town America to support social programs that mostly goes to urban areas (the reality of how money actually flows notwithstanding -- rural areas actually do quite well all things considered, but that is not generally known). And the feeling that they lack political power makes this a relatively easy sell.
But this year, this type of rhetoric seems to be largely absent from the presidential race, and I'm trying to understand what has changed (maybe I've just missed it?) A few ideas:
Is it because Romney is a city boy and can't credibly wear Bush-type cowboy boots to show his affinity with rural America (and does this help to explain the soft-support for Romney from small town tea party types)?
Did Palin kill harm the small-town brand?
Or is it something more fundamental?
I think it's something more fundamental, perhaps reflecting a shift of political power from rural to urban areas, but I don't know for sure. For example, what has replaced the small-town rhetoric? The dog-whistling about taxes flowing to the undeserving is still there, but the implied us against them is both a different us and a different them.
So here's the question. Have I simply missed that the same old rhetoric is actually being used, or is there something else going on? If it's something else, what is it? These are quick, unformed thoughts -- mostly what I'm looking for is perspectives on this issue.
Posted: 25 Apr 2012 08:44 AM PDT
More on Social Security:
Let's beef up Social Security benefits instead of cutting them, by Michael Hiltzik: Advocates for strengthening Social Security have come to dread the release of the annual report of the program's trustees. That's because the event has become the basis for more hand-wringing about Social Security's fiscal condition and calls to cut benefits for current and future retirees. This week's release of the 2012 report is no exception. ...

What won't be adequately explained is that the program isn't "insolvent" or "bankrupt." ... Economic recovery alone will improve the program's fiscal condition, and the trustees say that even if Congress does absolutely nothing, in 2033 there still will be money to pay about 75% of currently scheduled benefits.

And by the way, despite facing the worst economic conditions in its history, the program ran a surplus of $69 billion last year, increasing the trust fund to nearly $2.7 trillion. ...
It's time to shut down the talk of cutting benefits, which serves nobody, and pump up the volume on making them better. ... Of the customary three legs of the retirement stool, two — personal savings and employer-paid pensions — have been shattered into smithereens by the markets, high unemployment and changes in workplace benefits. Social Security is the third leg. ...

Modernizing Social Security is crucial today because the actions of government and industry have increased Americans' dependence on the program. ...

Undoubtedly you're going to hear that improving Social Security will bankrupt America. This is the mating cry of the haves-and-want-mores, and it's malarkey. Federal taxes ... amounted to about 15.4% of our gross national product last year... That's lower than the level of every other industrialized country...

Isn't it curious that the same people who insist that America is the greatest, richest country in the world, ever, are those who insist that there's no way we can afford to provide for our elderly, our disabled and the survivors of our deceased workers to the same degree as the rest of the industrialized world? ...
We can afford to give people a decent retirement. People who benefitted from the hard work of others -- those who reaped the gains of increasing inequality and have more than enough -- can do more to help provide a decent retirement to the people who toiled day in and day out to help create that wealth. And as I've said again and again, the income distribution mechanism has gone awry in recent decades. People at the lower income are not getting what they have earned, and people at the top are getting more than what they contribute. So I view this as simply returning income to its rightful owners.

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Posted: 25 Apr 2012 12:06 AM PDT
Posted: 24 Apr 2012 08:32 PM PDT
Via New Economist:
Dixit on 'the 21st Century's Economic Hurricane', by New Economist: Princeton emeritus professor Avinash Dixit is always worth reading, even when he is speculating about the economy over the next hundred years. Likening economic forecasting to weather forecasting (plenty of caveats and uncertainty), his approach is suitably skeptical. Here's how he kicks off:
At least one prediction can be made with high confidence... in the course of the next century there will be several financial and economic crises. Each crisis will be preceded by a boom and by a state of euphoria, when almost everyone will believe that "this time is different; we have learned how to avoid crises, and have finally learned the secret of how to sustain the Great Moderation."
When the crisis hits, policymakers everywhere will be shocked and unprepared. Their panicked responses will merely paper over the real problems and sow the seeds of the next crisis a few years down the line.
Dixit lays out some provocative scenarios for our economic future. The chapter, entitled The Cone of Uncertainty of the 21st Century's Economic Hurricane (PDF), will appear in In 100 Years, ed. Ignacio Palacios-Huerta, to be published by MIT Press in 2013.
Some of the scenarios are nightmarish:
In America, recurrent macroeconomic crises will be made worse by the loss of technological leadership, as governments controlled by or beholden to religious conservative forces forbid research on the frontiers of biotech and related areas. American education will continue to be squeezed...; this will accelerate the decline. China lost its technological leadership in the 1400s because of capricious decisions of its emperors, and took almost six centuries to climb back; for the U.S. the 21st century will be just be beginning of a similar downhill slide.
A side-effect of this decline will become good news for some: the U.S. will regain its position as a manufacturing economy. As early as 2011, production of some mops and brooms was coming back to the U.S. from China. The Chinese didn't want to be making these crappy plastic goods any longer; they wanted to move into more advanced and complex technological sectors. At least this reversal will create employment for the poorly educated and unskilled U.S. workers.
However:
my real purpose in depicting such nightmares is, of course, to shock the readers, and hopefully to help set in motion some actions that will reduce the risk of turning the nightmares into reality.
He goes on to give his "dream scenario," and the set of actions that might bring it about.
Posted: 24 Apr 2012 03:28 PM PDT
Joshua Gans notes a new development in the eBook wars:
The DRM free movement for eBooks expands, Digitopoly: So it started with JK Rowling who went platform independent and effectively DRM free on the Harry Potter series. This meant that for those books purchasers would not be locked into any one platform (e.g., Kindle) and that also meant that no platform could use lock-in to build up market power. Interestingly, you can't buy those books from Apple's iBookstore but you can buy them direct from Pottermore and import them into iBooks... Some other publishers have offered DRM free versions but JK Rowling was the first to break through Amazon's store to get what is effectively a non-platform specific version on the Kindle.
Today comes an announcement from TOR books (who is owned by Macmillan) that their entire line of science fiction books will be available in a DRM free version. ...
Now as Amazon sells these as does Apple, I wonder if that means TOR will be using a similar method that Pottermore uses to break through those platforms. It will be interesting to see.
This all suggests that publishers are waking up to the fact that if they have ceded power to eBook platforms it is of their own choosing by insisting on DRM. ...
The same thing happened in music. DRM was the thing that got music publishers interested in digital downloads (like iTunes) and then something we couldn't have predicted in 2003 happened; DRM was abandoned and nobody really noticed. What is more DRM was abandoned with a coincidental 30% (!) price increase to consumers as compensation for the extra value provided by portability. My feeling (based on no real evidence) is that overall the consumers won out of that deal (they are paying a little more to save on paying lots more later). It will be interesting to see how TOR's pricing changes as it goes DRM free.
Publishers were always aggregators to some extent. They (supposedly) found the best writing from all the manuscripts that are out there, or solicited it themselves, and then made it available for a fee (the price of the book).
As authors take things into their own hands and self-publishing in the form of eBooks proliferates, there will likely be a role for publishers to continue doing this. They won't get paid for binding books in the traditional sense, but they can still offer a platform where authors will get noticed in return for exclusivity. That is, if a site develops a reputation for aggregating the best content and has a large following, then it can use that reputation to attract the best authors to the site. It can also lock the authors up with contracts that do not allow them to publish on other sites in return for exposure (which works best with new authors). The public can go to the site, know there's a good chance of finding something interesting -- just like browsing for books now -- and then purchase an eBook (the sites could also be supported, in part or in whole, by ads).
Or will some other model prevail?
Posted: 24 Apr 2012 11:48 AM PDT
I posted the graph showing that the US has the highest share of employees performing relatively low wage work at CBS News:
Research shows the US is a low wage country

Posted: 24 Apr 2012 10:05 AM PDT
Dean Baker:
The Primary Cause of Social Security's Bleak Outlook Is Upward Redistribution, by Dean Baker: In an article on the release of the 2012 Social Security trustees report the Washington Post told readers that:
"Social Security's bleak outlook is primarily driven by the ever-larger numbers of people in the baby boom generation entering retirement."
Actually the fact that baby boomers would enter retirement is not news. Back in 1983, the Greenspan Commission knew that the baby boomers would retire, yet they still projected that the program would be able to pay all promised benefits into the 2050s.
The main reason that the program's finances have deteriorated relative to the projected path is that wage growth has not kept pace with the path projected. This is in part due to the fact that productivity growth slowed in the 80s, before accelerating again in the mid-90s and in part due to the fact that much more wage income now goes to people earning above the taxable cap.
In 1983 only 10 percent of wage income fell above the cap and escaped taxation. Now more than 18 percent of wage income is above the cap.
Raising the cap is my favored solution, but (surprise) somehow raising taxes of those with the most political power is not on the agenda. Instead, the proposed solutions always seem to hit those who are the most politically and economically vulnerable.
Peter Dorman also weighs in:
For the past thirty years we have seen repeated campaigns to eviscerate Social Security—to privatize it, siphon off its finances, drain it of its essential social insurance character.  These have failed, not because of the brilliance or commitment of its defenders, but simply because it fulfills a vital social function and is wildly popular.  Even those who, in their heart of hearts, want to crush it to bits, claim to be in favor of "saving" it.  So what's the strategy of the anti-SS minions?
Cynicism.  Convince younger voters, whose benefits are still decades away, that the program is dying a slow but certain death, and that politicians are too myopic or pandering or just stupid to do anything about it.  From time to time I poll my students, and by a big majority they always tell me that SS will not be around to support them in their retirement.  (Not that this has provoked a big Feldsteinesque spike in their personal savings....)  As this mindset takes hold, it becomes easier to simply tune out the debate over SS.  After all, it's not like it's actually going to be there when I'm old, no matter what they say, right?  At some point, it goes from being a third rail to a footnote to just background noise, to mangle a bunch of metaphors.
What I'd like to see are news stories that say something like, "Social Security has had its ups and downs, but it's in better financial shape now than it was a generation ago, and unless its enemies prevail, it will be there for you when you need it."
People also need to realize that "Social Security faces a shortfall — NOT bankruptcy — a quarter of a century from now. OK, I guess that's a real concern. But compared to other concerns, it's really pretty minor, and doesn't deserve a tenth the attention it gets. It's also worth noting that even if the trust fund is exhausted and no other financing provided, Social Security will be able to pay about three-quarters of scheduled benefits, which would mean real benefits higher than it pays now."
Notice that even under the worse case scenario, real benefits would be higher than they are now. The benefits would not keep up with increases in productivity as they do presently -- payments rise as the standard of living rises -- but the benefits would still rise as much or more than inflation. So today's standard of living would still be available even in the worst possible case. But there is the problem of how to cover the productivity increases over the next quarter century. What to do?
Raise the cap and close the gap.

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Posted: 24 Apr 2012 12:33 AM PDT
We are, as they say, live. Did the welfare state work during the recession?:
Dynamic Capitalism vs. the Welfare State
Does increased social protection for middle class households lower "dynamism"?
Posted: 24 Apr 2012 12:06 AM PDT
Posted: 23 Apr 2012 06:15 PM PDT
Peter Diamond and Emmanuel Saez:
High Tax Rates Won't Slow Growth, by Peter Diamond and Emmanuel Saez, Commentary, WSJ: The share of pre-tax income accruing to the top 1% of earners in the U.S. has more than doubled to about 20% in 2010 from less than 10% in the 1970s. At the same time, the average federal income tax rate on top earners has declined significantly. Given the large current and projected deficits, should the top 1% be taxed more? ...
But will taxable incomes of the top 1% respond to a tax increase by declining so much that revenue rises very little or even drops? In other words, are we already near or beyond the peak of the famous Laffer Curve, the revenue-maximizing tax rate? ...
According to our analysis..., the revenue-maximizing top federal marginal income tax rate would be in or near the range of 50%-70%... Thus we conclude that raising the top tax rate is very likely to result in revenue increases at least until we reach the 50% rate that held during the first Reagan administration, and possibly until the 70% rate of the 1970s. ...
But will raising top tax rates significantly lower economic growth? In the postwar U.S., higher top tax rates tend to go with higher economic growth—not lower. ... Neither does international evidence support a case for lower growth from higher top taxes. ...
By itself, a suitable increase in the taxation of top earners will not solve our unsustainable long-term fiscal trajectory. But that is no reason not to use this tool to contribute to addressing this problem.
With the "taxes harm growth" and Laffer curve arguments undercut by research such as this, Republicans have fallen back on the argument that it's unfair to take income away from those who earn it. But that presumes that the system allocates income fairly, a claim that is hard to swallow given how much financial executives are paid relative to their contribution to the productive process (to name just one example). There's nothing unfair about using taxes to "clawback" misdirected income, and it won't harm growth to send income where it should have gone in the first place.
Posted: 23 Apr 2012 12:13 PM PDT
More on "duration matters":
No End in Sight, by James Surowiecki, New Yorker: The talk in Washington these days is all about budget deficits, tax rates, and the "fiscal crisis" that supposedly looms in our near future. But this chatter has eclipsed a much more pressing crisis here and now: almost thirteen million Americans are still unemployed. ...
Being unemployed is even more disastrous for individuals than you'd expect. Aside from the obvious harm—poverty, difficulty paying off debts—it seems to directly affect people's health, particularly that of older workers. ...
Unemployment doesn't hurt just the unemployed, though. It's bad for all of us. Jobless workers, having no income, aren't paying taxes, which adds to the budget deficit. More important, when a substantial portion of the workforce is sitting on its hands, the economy is going to grow more slowly...
Most worrying... Right now, unemployment is mainly the result of what economists call cyclical factors... But if high long-term unemployment continues there's a danger that ... cyclical unemployment could become structural unemployment... The longer people are unemployed, the harder it is for them to find a job... Being out of a job can erode people's confidence and their sense of possibility; and employers, often unfairly, tend to take long-term unemployment as a signal that something is wrong. A more insidious factor is that long-term unemployment can start to erode job skills...
You'd think that Congress and the Federal Reserve would be straining every sinew to avoid such a fate. It isn't as if they're out of tools. ... Sadly, there's little sign that policymakers have much interest in using these tools. ...
I don't know how many ways, or how many times I can say that labor markets need more help than they are getting. It's futile, I know -- Congress turned its back on the unemployed long ago and the Fed is not inclined to fill the gap any more than it already has -- but I can't help trying.
This is from two years ago:
I've been pushing hard for more help for labor markets for quite awhile -- at times I've thought it was a bit repetitive, but necessary -- but it's probably time for me to give up and accept that we are going to have a slower recovery than we could have had with more aggressive fiscal policy. ... Congress is not going to provide anything more than token help from here forward. ...
I'll still complain -- there's no reason to let policymakers off the hook -- but it's time to give up the hope that anything more will be done to help the unemployed find jobs.
If we'd done more then -- or even earlier like many of us were calling for -- we'd be in much better shape today. The thing is, it's still not too late. If we do more now, two years from now we'll be happy that we did.

April 23, 2012

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Posted: 23 Apr 2012 12:33 AM PDT
Will the media let Romney get away with his "amnesia campaign"?:
The Amnesia Candidate, by Paul Krugman, Commentary, NY Times: Just how stupid does Mitt Romney think we are? If you've been following his campaign from the beginning, that's a question you have probably asked many times.
But the question was raised with particular force last week, when Mr. Romney tried to make a closed drywall factory in Ohio a symbol of the Obama administration's economic failure. It was a symbol, all right — but not in the way he intended.
First..., George W. Bush ... was president when the factory in question was closed. Does the Romney campaign expect Americans to blame President Obama for his predecessor's policy failure?
Yes, it does. Mr. Romney constantly talks about job losses under Mr. Obama. Yet all of the net job loss took place in the first few months of 2009,... before any of the new administration's policies had time to take effect. ...
But Mr. Romney's poor choice of a factory for his photo-op aside,... Mr. Romney is essentially advocating a return to ... Bush policies. And he's hoping that you don't remember how badly those policies worked. ... Yes, Mr. Obama's jobs record has been disappointing — but it has been unambiguously better than Mr. Bush's over the comparable period of his administration. ...
Which brings me to another aspect of the amnesia campaign: Mr. Romney wants you to attribute all of the shortfalls in economic policy ... to the man in the White House, and forget ... that Mr. Obama has faced scorched-earth political opposition since his first day in office. ...
So am I saying that Mr. Obama did everything he could, and that everything would have been fine if he hadn't faced political opposition? By no means. Even given the political constraints, the administration did less than it could and should have in 2009, especially on housing. Furthermore, Mr. Obama was an active participant in Washington's destructive "pivot" away from jobs to a focus on deficit reduction.
And the administration has suffered repeatedly from complacency — taking a few months of good news as an excuse to rest on its laurels... So there is a valid critique one can make of the administration's handling of the economy.
But that's not the critique Mr. Romney is making. Instead, he's basically attacking Mr. Obama for not acting as if George Bush had been given a third term. Are the American people — and perhaps more to the point, the news media — forgetful enough for that attack to work? I guess we'll find out.
Posted: 23 Apr 2012 12:15 AM PDT
Tim Duy:
Distributional Impacts of Monetary Policy, by Tim Duy: Dean Baker, responding to this Wall Street Journal article, sees an opportunity to make us aware on the distributional impacts of monetary choices. Specifically, Baker responds to the claim that inflation erodes earnings:
Actually, most wages follow in step with inflation, although some workers do see declines in real wages when inflation rises.
People seem to forget the connection between inflation and wages. A sustained increase in inflation needs to be accompanied by a matching increase in wages, otherwise higher inflation would simply undermine real purchasing power, leading to slower growth and a subsequent decline in the inflation rate. To be sure, as Baker notes, while on average higher inflation is matched with higher nominal wages, it does not affect all workers equally - workers with less bargaining power could see their real wages decline even if average real wages hold constant.
Baker identifies this basic chart (I replaced CPI with PCE inflation) to support his argument (click on figures for larger versions):

Notice that Baker correctly shifts from real wages to the broader measure of real compensation. He says:
These series give the basic story, although they are not perfect for reasons that you do not want to hear about. If you can see a negative relationship (i.e. higher inflation leads to lower real wage growth) you have better eyesight than me.
In fact, the correlation between these two series is 0.36. In other words, there is a weak positive relationship between inflation and real compensation - although I would be wary about calling it a causal relationship, and instead only point out that although it is often claimed that inflation erodes real wages, this is not obvious. What is more evident, and causally related, is the link between productivity and real compensation:

The correlation is 0.75, and the story is a familiar one - we expect that higher productivity growth results in higher real wage growth. That said, a careful eye will notice that the growth rates are not identical, yielding this well-known result:

Certainly since the 1980s, the gap between output and real compensation is rising. Another version of this issue is that labor's share of income has been falling since 1980. What is of course curious is that this occurs despite the sustained period of disinflation. Those who claim that inflation erodes real wage growth seem to miss that the period since 1980 has seen real compensation growth slow to a pace below productivity growth despite falling inflation. This issue is taken up by Steve Randy Waldman at interfluidity with a thought provoking post:
An increase in unit labor costs can mean one of two things. It can reflect an increase in the price level — inflation — or it can reflect an increase in labor's share of output. The Federal Reserve is properly in the business of restraining the price level. It has no business whatsoever tilting the scales in the division of income between labor and capital.
Yet throughout the Great Moderation, increases in unit labor costs were the standard alarm bell cited by Fed policy makers as an event that would call for more restrictive policy. And all through the Great Moderation, except for a brief surge during the tech boom, labor's share of output was in secular decline...
...even if the Fed didn't "cause" the decline in labor's share, Great Moderation monetary policy made it very difficult for labor's share to grow...
...Since the early 1990s, all actors in the US political system have understood that policies that increase unit labor costs risk a response by the "inflation fighting" central bank, whose "credibility" was swaggeringly defined as a willingness to provoke recession rather than risk inflation. In this environment, the decline of labor unions and their shift in focus from wage growth to working conditions was understandable...
Waldman is saying that the Federal Reserve is at least complicit in allowing the competition between capital and labor to be tilted toward capital (not sure this should be a surprise - I don't see a revolving door between the Federal Reserve and the AFL-CIO). In other words, monetary policy has a direct impact on the distribution of income. It's not just simply raising and lowering interest rates to affect the level of output - it has an impact on how the subsequent output is split up. Waldman offers some policy advice:
All of this is one more reason to prefer the NGDP path target promoted by Scott Sumner and his merry Market Monetarists. It might prove difficult in practice to target inflation without paying some especial attention to wage growth. But a central bank can target the path of aggregate expenditure without playing favorites about who pays what to whom. Simple neutrality by the central bank in the contest between capital and labor would be a huge improvement over the status quo.
Note that even if the central bank is no longer playing "favorites", monetary policy would still have a distributional impact. For example, reverting to the pre-recession path of nominal spending would likely entail a temporarily higher rate of inflation than currently expected. And higher than expected inflation will indeed create some winners and losers:
However, the biggest losers are creditors who are almost by definition wealthy, since people owe them money. If a creditor has lent out $100 million at 2 percent interest (e.g. buying a 10-year U.S. or German government bond) and the inflation rate rises from 2 percent to 4 percent, this creditor has lost an amount equal to 100 percent of his expected income or 2 percent of his wealth. This is a far larger loss than any worker could experience as a result of this increase in the inflation rate.
Who would be the winners?
Also, most workers are debtors to some extent. They are likely to have mortgage debt, credit care debt, student loan debt and or car debt. A higher rate of inflation means that they can repay this debt in money that is worth less than the money they borrowed.
And once again, we get to the same place - changing monetary policy at this juncture would likely have significant impacts on the distribution of income and wealth. And an unwillingness to alter this current distribution is likely another reason we would not expect the Federal Reserve to change their basic policy framework away from the current 2 percent inflation target regime.
Posted: 23 Apr 2012 12:06 AM PDT
Posted: 22 Apr 2012 06:27 PM PDT
Via Barry Ritholtz, who says "Other than getting Lehman's role in the overall crisis wrong, this is a fascinating look at Lehman's demise":
Posted: 22 Apr 2012 11:25 AM PDT
Background for a column I'm working on:
Update: A larger sample (from here):
Us-eu-un-rates-1
Posted: 22 Apr 2012 09:49 AM PDT
Do high levels of public debt reduce economic growth?:
Is high public debt harmful for economic growth?, Ugo Panizza and Andrea F Presbitero, Vox EU: ... Most policymakers do seem to think that debt reduces growth. This view is in line with the results of a growing empirical literature which shows that there is a negative correlation between public debt and economic growth, and finds that this correlation becomes particularly strong when public debt approaches 100% of GDP (Reinhart and Rogoff 2010a, 2010b; Kumar and Woo 2010; Cecchetti et al. 2011).
Correlation, however, does not imply causation. The link between debt and growth could be driven by the fact that it is low economic growth that leads to high levels of public debt (Krugman 2010).1 Establishing the presence of a causal link going from debt to growth requires finding what economists call an 'instrumental variable'.2
In a new paper (Panizza and Presbitero 2012), we propose a novel instrument variable that allows us to reject the notion that debt causes slower growth in OECD countries. We do confirm the oft-noted negative correlation between debt and growth, but show that debt does not have a causal effect on growth (see Figures 8 and 9 in our paper). ...
We ... do not find any evidence that high public debt hurts future growth in advanced economies. Therefore,... we believe that the debt-growth link should not be used as an argument in support of fiscal consolidation.
The fact that we do not find a negative effect of debt on growth does not mean that countries can sustain any level of debt. There is clearly a level of debt beyond which debt becomes unsustainable, and a debt-to-GDP ratio at which debt overhang, with all its distortionary effects, kicks in. What our results seem to indicate, however, is that the advanced economies in our sample are still below the country-specific threshold at which debt starts having a negative effect on growth. ...
Conclusion
Our reading of the empirical evidence on the link debt-growth link in advanced economies is:
  • Many papers that show that public debt is negatively correlated with economic growth.
  • No paper that makes a convincing case for a causal link going from debt to growth.
  • Our new paper suggests that such a causal link does not exist (more precisely, our paper does not reject the null hypothesis that there is no impact of debt on growth).
We realize that our results are controversial. While we are convinced of the soundness of our findings, we know that skeptical readers will find ways to challenge our identification strategy. However, the first two points are uncontroversial. The case that public debt has causal effect on economic growth still needs to be made. ...