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June 1, 2012

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Latest Posts from Economist's View



Posted: 01 Jun 2012 12:24 AM PDT
What do austerity advocates really want?:
The Austerity Agenda, Paul Krugman, Commentary, NY Times: "The boom, not the slump, is the right time for austerity." So declared John Maynard Keynes 75 years ago, and he was right... — slashing spending while the economy is deeply depressed is a self-defeating strategy,... it just deepens the depression.
So why is Britain doing exactly what it shouldn't? ... Over the past few days, I've posed that question to a number of supporters of the government of Prime Minister David Cameron... And all these conversations followed the same arc: They began with a bad metaphor and ended with the revelation of ulterior motives.
The bad metaphor — which you've surely heard many times — equates the debt problems of a national economy with the debt problems of an individual family. A family that has run up too much debt, the story goes, must tighten its belt. So if Britain ... has run up too much debt — which it has, although it's mostly private rather than public debt — shouldn't it do the same? What's wrong with this comparison? ...
When the private sector is frantically trying to pay down debt, the public sector should do the opposite, spending when the private sector can't or won't. By all means, let's balance our budget once the economy has recovered — but not now. The boom, not the slump, is the right time for austerity.
As I said, this isn't a new insight. ... And ... when you push "austerians" on the badness of their metaphor, they almost always retreat to assertions along the lines of: "But it's essential that we shrink the size of the state."  ...
So the austerity drive in Britain isn't really about debt and deficits...; it's about using deficit panic as an excuse to dismantle social programs. And this is, of course, exactly the same thing that has been happening in America.
In fairness to Britain's conservatives, they aren't quite as crude as their American counterparts..., in general, they seem less determined ... to aid the rich and punish the poor. Still, the direction of policy is the same — and so is the fundamental insincerity of the calls for austerity.
The big question here is whether the evident failure of austerity to produce an economic recovery will lead to a "Plan B." Maybe. But my guess is that even if such a plan is announced, it won't amount to much. For economic recovery was never the point; the drive for austerity was about using the crisis, not solving it. And it still is.
Posted: 01 Jun 2012 12:01 AM PDT
Posted: 31 May 2012 11:53 AM PDT
Another one from Tim Duy:
Push Comes to Shove, by Tim Duy: The Spanish banking crisis is forcing another showdown in Europe with the German-led Northern contingent increasingly under siege not just from the South but now from just about everyone else. Spain is under pressure to finance a bank recapitalization, but worries that that path will push them straight into a Troika bailout program. And we all know just how well that has worked for Greece and Ireland and Portugal. And Spain holds real leverage. No one is under the delusion (well, almost no one) that Spain can exit the Euro without significant economic damage throughout Europe. Hence we are seeing increasing pressure on Germany to step-up the timetable to real fiscal integration, starting with a Euro-wide banking rescue using ESM funds. From Bloomberg:
German Chancellor Angela Merkel was besieged by critics for letting the euro crisis smolder, with the leaders of Italy and the European Central Bank demanding bolder steps to stabilize the 17-nation economy.
Italian Prime Minister Mario Monti and ECB President Mario Draghi pushed Germany to give up its opposition to direct euro- area aid for struggling banks. Monti further antagonized Germany by urging a roadmap to common borrowing.
The idea is to let banks tap the funds directly without going through their respective national governments - thus avoiding another Troika bailout disaster. Germany, of course, continues to resist, as this would force them to give up one of their tools to enforce austerity throughout Europe. Perhaps, however, German Chancellor Angela Merkel is starting to break under the pressure:
Merkel put some nuance into the German position today. While promising "no taboos" in attacking the crisis, she floated a timeline of "five to 10 years" for fixing flaws in a currency shared by countries with divergent wealth and attitudes toward taxing and spending.
Of course, Europe doesn't have a 5 to 10 year horizon. I am thinking they have something closer to a 5 to 10 week horizon to get their act together. Something big is going to happen in Europe this summer, and I think the odds of a tail-end outcome are increasing, at both ends of the tail. Either Europe pulls together sooner than the German timeline, or finally blows apart. The middle-ground, muddle-through option looks less attractive each day.
Posted: 31 May 2012 11:52 AM PDT
Tim Duy:
Cash Exiting China, by Tim Duy: Something that I have thinking about for a few weeks - and was reminded of reading Ryan Avent this morning - is the series of pieces at FT alphaville regarding the outflow of cash from China. See here and here and here. The thinking had been that the renminbi was a one-way bet as China moved forward with capital account liberalization as investors rushed to be part of the Chinese story. The growing exodus of cash, however, is calling that story into question.
Moreover, I am interested in how much of the outflow is attributable to a generalized rush to safety as a result of the European crisis versus how much is attributable to capital flight due to a a deteriorating economic environment inside China itself. I am reminded of this story from the Wall Street Journal earlier this year:
With a fortune of at least $1.6 million, Mr. Shi is part of the wealthy elite that benefited most from the Communist Party's brand of capitalism. He is riding the crest of arguably the biggest economic expansion in history.
And yet, while the party touts the economic success of the "Chinese model," many of its poster children are heading for the exits. They are in search of things money can't buy in China: Cleaner air, safer food, better education for their children. Some also express concern about government corruption and the safety of their assets.
Domestic money in China will be the first to head for the exit - insiders will always know more than outsiders about the underlying economic conditions. So the exodus of cash could indicate that the Chinese story is coming to a close - and that will have significant consequences for the global economy. It is another signal that emerging markets will not be supporting global demand anytime soon. I think the team at alphaville is right - this story is slipping under the radar while we all have our eyes focused on the farce in Europe. But it could be the real game changer in the global economy.
Posted: 31 May 2012 11:03 AM PDT
Brad DeLong:
The Economic Costs of Fear, by Brad DeLong, Commentary, Project Syndicate: The S&P stock index now yields a 7% real (inflation-adjusted) return. By contrast, the annual real interest rate on the five-year United States Treasury Inflation-Protected Security (TIPS) is -1.02%. Yes, there is a "minus" sign in front of that: if you buy the five-year TIPS, each year over the next five years the US Treasury will pay you in interest the past year's consumer inflation rate minus 1.02%. Even the annual real interest rate on the 30-year TIPS is only 0.63% – and you run a large risk that its value will decline at some point over the next generation, implying a big loss if you need to sell it before maturity.
That is an extraordinary gap in the returns that you can reasonably expect. It naturally raises the question: why aren't people moving their money from TIPS (and US Treasury bonds and other safe assets) to stocks (and other relatively risky assets)? ...
Posted: 31 May 2012 09:56 AM PDT
Here are some old posts from here and elsewhere that provide rebuttal to recent rebuttal (mostly the usual hacks twisting the data to "prove" that government has expanded immensely under Obama). It would be better for the economy if spending across all levels of government had increased temporarily to a signficant degree, so this isn't necessarily a badge of honor. But nevertheless the charge that Obama has used the recession as an excuse to increase the size of government doesn't withstand an honest look at the evidence:
Paul Krugman:
The Secret of Our Non-success, by Paul Krugman: ... Look at government (all levels) purchases of goods and services, that is, actually buying stuff as opposed to transfer payments like Social Security and Medicare. Here's the past decade:
Obama, far from presiding over a huge expansion of government the way the right claims, has in fact presided over unprecedented austerity, largely driven by cuts at the state and local level. And it's therefore an amazing triumph of misinformation the way that lackluster economic performance has been interpreted as a failure of government spending.
From this blog:
Per Capita Government Spending by President, Economists View: Via email:
Seeing the Krugman commentary comparing real government spending under Obama and Reagan made me curious about what it looks like if you express it in per capita terms?  In particular, how does the Obama period compare with other presidencies in terms of penury/austerity versus spendthriftness?
To compare presidencies, I did the calculation two ways.  One starts in the quarter before the president was elected (e.g., 2008Q4), the other starts in the first quarter of the presidency (e.g., 2009Q1). (The ARRA probably had some effect in Q1, but most of the change was simply economic conditions that the incoming president had nothing to do with, so I think I prefer the Q1 to Q1 method). Ranking since Johnson (starting in 1968), and using the first-quarter comparisons, and calculating growth under Obama through 2011Q4, Clinton is the most austere, followed by Obama.  The most spendthrift are (1) Nixon-Ford, (2) Reagan, and (3) Bush II. The figure is pasted below:
Percapgov
Michael Mandel:
The Government Investment Drought Continues….., by Michael Mandel: Sometimes things are not what we think they are. The conventional notion is that government has become more important under President Obama, while the private sector has stagnated. Yet in some ways the data tell a different story. Take a look at this chart.
Mandel2
The top (blue) line shows that private nonresidential investment has rebounded smartly since early 2009, when President Obama took office. Residential investment first dropped, and then mostly came back.
The real problem is government investment, which is down 8.3% since the first quarter of 2009, and still falling. In other words, government spending on infrastructure infrastructure, building, and equipment is declining, adjusted for prices changes.
This is just utterly bizarre. In a time when the economy is still sluggish, government investment should be the simplest thing to pump up. We need to modernize our infrastructure and bring government into the 21st century, and it's just not happening.
Here's another angle. This chart shows net government investment as a share of GDP.
Mandel1
According to this chart, net government investment is the smallest share of GDP in more than 40 years, and dropping.
Antonio Fatas:
Euro and US Coordinating Austerity, by Antonio Fatas: To add yet one more perspective on how significant the shift to austerity among advanced economies has been since 2009, I decided to add the Euro series to a chart from Paul Krugman's blog. This is real government consumption for both the US and the Euro (17 countries) area.


It is remarkable how the Euro area and the US display a strong coordinated contraction in fiscal policy starting in the first quarter of 2009 that accelerates during 2010 and 2011... No surprise that the recovery is not going as well as some thought and some countries are going back into recession.
Kash Mansori:
Government Job Destruction, Kash Mansori: Another jobs report in the US, another month where part of the private sector's job creation was undone by continued job destruction by the government sector.
The 15,000 additional jobs lost in April brings total job losses in the government sector since January 2010 to over 500,000. While the US has not quite been experiencing European-style austerity over the past two years, that's still a pretty tough headwind to fight as it emerges from recession.
Another one from Paul Krugman:
Four Fiscal Charts, by Paul Krugman: Here's an exercise I did for my own edification... I wanted a simple answer to the people who always insist that we must be having massive fiscal stimulus because we have a big budget deficit; my answer is that the deficit is a result of the depressed economy...
Well, here's a quick and dirty approach. ... First, most of the surge in the federal deficit is about plunging revenue. In the figure below, the "No recession" line shows what would have happened if federal revenue had grown 5 percent per year after 2007:
That's about an $800 billion per year shortfall.
What about spending? Well, it is higher than you would have expected in the absence of the slump, by around $300 billion:
What's that $300 billion about? Well, they're mainly about the category CBO calls "income security", mainly food stamps and unemployment insurance:
Income security spending is, of course, strongly related to the state of the economy. So are some other forms of spending — Medicaid, of course, but also things like disability insurance, where people on the cusp are more likely to seek the benefits if they can't find work.
So basically, the federal deficit is all, yes all, about the recession and aftermath.
And meanwhile, there has been austerity at the state and local level (calendar years here instead of fiscal, but that's not crucial):
So the reality is that we have deficits because the economy is depressed, but relative to previous policy we've been imposing fiscal austerity, not stimulus.

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Posted: 31 May 2012 12:06 AM PDT
Posted: 30 May 2012 10:12 AM PDT
Betsey Stevenson and Justin Wolfers have a new column arguing that the debt ceiling debate harmed the economy:
Debt-Ceiling Deja Vu Could Sink Economy, by Betsey Stevenson and Justin Wolfers: ...the biggest threat to the emerging U.S. economic recovery may be Congress. John Boehner, the leader of the House Republicans, has promised yet another fight with the White House over the debt ceiling -- the limit Congress has placed on the amount the federal government can borrow.
If this sounds familiar, it's because we suffered through an identical performance last summer. Our analysis of that episode leads to a troubling conclusion: It almost derailed the recovery, and this time could be a lot worse. ...
High-frequency data on consumer confidence from the research company Gallup ... provide a good picture of the debt-ceiling debate's impact (see chart). Confidence began falling right around May 11, when Boehner first announced he would not support increasing the debt limit. It went into freefall as the political stalemate worsened through July. ... Businesses were also hurt by uncertainty... This proved far more damaging than the regulatory uncertainty on which Republican criticisms of Barack Obama's administration have focused...
Growth in nonfarm payrolls decelerated to an average 88,000 a month during the three months of the debt-ceiling impasse, compared with an average of 176,000 in the first five months of 2011...There are also more visible permanent scars. The sense that the U.S. political system could no longer credibly commit to paying its debts led the credit-rating company Standard & Poor's to remove the U.S. government from its list of ... AAA ratings. ...
All told, the data tell us that a debt-ceiling standoff is an act of economic sabotage. ...
The next debt-ceiling battle could be worse, because the stakes are even higher. In addition to the threat of default, the U.S. is facing the so-called fiscal cliff... Another stalemate would almost certainly plunge the economy into a deep recession. Our best alternative -- in fact, our only hope -- is for Congress to set aside partisan politics and work together with a common goal of helping our country out of the Great Recession.
I wrote a column during the debt ceiling debate making many of these points, and it's nice to have more evidence to back them up:
The Real Cause of Economic Uncertainty: Prior to the midterm elections, Republicans made a big issue out of the economic uncertainty supposedly created by Democrats in areas such as health care reform, financial reform, future tax rates, the deficit, environmental regulation, and the long-run viability of our social insurance programs.
Even though there was little to suggest that uncertainty rather than lack of demand was the fundamental economic problem, Republicans were able to persuade many voters that this uncertainty was holding back the economic recovery and lowering long-run economic growth. Electing Republicans, it was argued, would help to eliminate the uncertainty and go a long way toward curing our economic ills.
Does anyone think that uncertainty has been reduced since Republicans gained a majority in the House of Representatives? I certainly don't.
Let's look at the record. Upon taking the House, Republicans began looking for ways to make good on their campaign promise to repeal health care reform. Whether they can actually do this or not isn't clear – so long as Obama is in the White House veto power prevents major change – but even so, challenges in court, promises to cut the funds needed to implement the law, and vows to overturn health care reform at the first opportunity make it much more difficult for businesses and households to make long-run plans. Uncertainty has gone up, not down.
We've seen a similar attack on financial regulation. Conservatives have vowed to repeal as much of Dodd-Frank as they can, and to prevent any additional regulation. They have done everything possible to prevent the Consumer Financial Protection Agency from having any teeth, or existing at all, and they retain their misplaced faith that unfettered financial markets are the key to stability rather than an invitation for more problems. Again, precisely how successful they will be over time, and what the regulatory structure will look like in the longer run are uncertain, and it is more difficult than before for businesses to plan for the future. 
Republicans have also vowed to privatize Medicare and Social Security, and to substantially reduce the scale of these and other social insurance programs. And, when given the opportunity, they have demonstrated this is more than campaign rhetoric. They intend to privatize and scale down these programs if there's any way possible to do it, and to continue trying for as long as it takes. It's hard to see how this increases the financial security of the elderly, the unemployed, and the unhealthy, or how it promotes a more certain economic environment.
And then there's the biggest of them all, the fight over the debt ceiling. It would be bad enough to hold the nation's future hostage over an ideological dispute in the best of times, but to do so at a time when we are struggling to recover from the most severe recession since the Great Depression, a time when millions and millions can't find jobs and must rely upon programs Republicans are trying to cut, is unconscionable. And this is not the first time Republicans have done this. Remember when Republicans threatened to undermine the recovery if Democrats tried to raise taxes on the wealthy? It was a clear threat – if we don't get our way, the economy gets it.
And the current threat is even worse. ... And think of the precedent this sets. In the future, we can expect more of this. ... How does that promote long-run stability?
There will be a big sigh of relief when the fight over the debt ceiling ends, at least I hope it ends with relief... But if an agreement is reached, we should be careful not to think that the overall level of uncertainty has been reduced... Republicans will simply move on to the next target, and then the target after that – why not so long as it works. Until they are done with their efforts to impose their ideological will through whatever means necessary, holding the nation hostage, whatever it takes, the uncertainty will persist.
The president might have been able to stop this behavior had he stood up to the threat the first time Republicans played this game. But he didn't... This won't stop unless the next election tells both Republicans and the Democrats who enable them, in no uncertain terms, that this behavior will not be tolerated.
Posted: 30 May 2012 09:48 AM PDT
Tim Duy:
"Fun" Is Not The Word I Would Use, by Tim Duy: Bloomberg quotes Nassim Taleb:
A breakup of the euro "is not a big deal," Taleb said yesterday at an event in Montreal hosted by the Alternative Investment Management Association. "When they break it up, there will be a lot of fun currencies. This is why I am not afraid of Europe, or investing in Europe. I'm afraid of the United States."
Somehow I think this over-trivializes the situation in Europe. Just a little. Yes, a Euro breakup would create new currencies, and I imagine they could be thought of as "fun" depending on the printing, colors, artwork, etc. But overall, I don't think economic upheaval is the path to "fun."
Posted: 30 May 2012 09:28 AM PDT
Stan Collender is driven to shrillness:
Is This The Economic Dark Ages In The U.S?, by Stan Collender: ...a behavior -- bald-face lying --... has become so blatant and commonplace among Republican policymakers on economic issues that any one of them who is even slightly honest and candid now would be both an absolute rarity and a welcome relief.
And the fact that the GOP lying about the economy...and especially the budget...is so accepted and expected means that any Republican who wasn't jump-the-shark ridiculous on these issues wouldn't be allowed to stay in the party much longer. ...
House Speaker John Boehner (R-OH) ... easily qualifies as the weakest and least effective Speaker in my lifetime and has to be included on the list of the all-time worst in U.S. history, demonstrated yet again that he'll say and do anything to stay speaker even when what he's saying about the budget can easily be shown to be nonsense and when he knowingly and without giving it a second thought  threatens the well-being of the U.S. economy.
I'd say this doesn't bode well for the outcome of this year's federal budget debate, but that's both obvious and an understatement. It actually points to the a period in U.S. history that is very likely to be labeled by historians as its economic dark ages.
I think that reporting on economic issues has improved, and that blogs have something to do with that. But when it comes to political reporting on economic (and other) issues, it's just as disappointing as ever. If there's no reputational or other costs associated with this behavior, why stop?

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Posted: 30 May 2012 12:06 AM PDT
Posted: 29 May 2012 05:12 PM PDT
Via the NBER, evidence from Atif Mian and Amir Sufi that "Weak household balance sheets and the resulting aggregate demand shock are the main reasons for historically high unemployment in the U.S. economy." This is also evidence for the "balance sheet recession" characterization of the downturn that many of us have been advocating (and it points toward balance sheet repair type policies that go along with this perspective as a key component of attempts to help the economy recover):
Explaining the Rise of Unemployment, by Laurent Belsie, NBER Digest: Unemployment rose dramatically during the Great Recession because highly indebted consumers slashed their spending, according to Atif Mian and Amir Sufi writing in What Explains High Unemployment? The Aggregate Demand Channel (NBER Working Paper No. 17830). They find that shocks to household balance sheets account for 4 million of the 6.2 million jobs lost in the United States between March 2007 and March 2009.
The stage was set for a substantial shock to household balance sheets during the housing bubble. Housing prices rose sharply, but homeowners borrowed even more aggressively. Between 2001 and 2007, household debt doubled from $7 trillion to $14 trillion. Homeowners' debt-to-GDP ratio rose sharply, from 0.7 to 1.0, during the same period. When housing prices collapsed, households were stuck with much higher debt, forcing them to cut back spending, which has shaped the depth and length of the economic slump that followed.
Earlier research by these authors and others had already demonstrated the link between dramatically weaker household balance sheets and plummeting consumer spending. In high-debt U.S. counties, housing prices fell by nearly 30 percent from 2006 to 2010. Households in those counties slashed consumption of durable goods and even cut back grocery spending. In the 10 percent of U.S. counties with the lowest debt-to-income ratios, house prices didn't fall and the fall in consumption wasn't as dramatic. Consumption of durable goods fell 20 percentage points more in high-debt counties than in low-debt counties.
The high-debt counties got that way, at least in part, because of the housing bubble. During the boom, housing prices didn't rise uniformly: the biggest increases came in counties with terrain or regulatory environments that made it more difficult to build new homes. In turn, homeowners in those counties were more apt to boost their debt to unprecedented levels. This finding is important not only because it explains the variability of debt, but also because it points out the absence of a construction boom and bust in many of the most indebted counties.
Mian and Sufi find that employment losses in the non-tradable sector were greater in the U.S. counties with the most highly indebted households than in other counties. In the tradable sector, however, employment losses were more uniform across the United States. The relationship between high debt-to-income ratios and the sharp decline in non-tradable goods purchases allows the authors to estimate the impact of shocks to balance sheets, and therefore on aggregate demand and on nation-wide employment.
"Our main insight is that the relation between demand shocks and employment losses in industries catering to local demand can be used to estimate the effect of aggregate demand on aggregate unemployment," the authors conclude. "We believe that weak household balance sheets and the resulting aggregate demand shock are the main reasons for historically high unemployment in the U.S. economy."
Posted: 29 May 2012 04:49 PM PDT
Richard Green makes a prediction:
Maybe I am too eager to believe it, and...: ..I expect to be smote down for saying it, but I think the two month old, mediocre, Case-Shiller number that came out today is consistent with the idea that the housing market will really come back big this year (I said so in the paper and on the radio today, so I might as well say it here).
Inventories in many hard hit markets are now low by historical standards. Time on market has fallen. HARP II can accelerate amortization (which is its most important feature). Prices are really cheap, both when the user cost they produce is compared with rent, and when compared with incomes (by World standards).
Posted: 29 May 2012 12:51 PM PDT
Tim Haab:
Study rules out stupidity as a cause of disbelief in climate science*:
And the Yale research published today reveals that if Americans knew more basic science and were more proficient in technical reasoning it would still result in a gap between public and scientific consensus.
Indeed, as members of the public become more science literate and numerate, the study found, individuals belonging to opposing cultural groups become even more divided on the risks that climate change poses.
Funded by the National Science Foundation, the study was conducted by researchers associated with the Cultural Cognition Project at Yale Law School and involved a nationally representative sample of 1500 U.S. adults.
"The aim of the study was to test two hypotheses," said Dan Kahan, Elizabeth K. Dollard Professor of Law and Professor of Psychology at Yale Law School and a member of the study team. "The first attributes political controversy over climate change to the public's limited ability to comprehend science, and the second, to opposing sets of cultural values. The findings supported the second hypothesis and not the first," he said.
"Cultural cognition" is the term used to describe the process by which individuals' group values shape their perceptions of societal risks. It refers to the unconscious tendency of people to fit evidence of risk to positions that predominate in groups to which they belong.
The results of the study were consistent with previous studies that show that individuals with more egalitarian values disagree sharply with individuals who have more individualistic ones on the risks associated with nuclear power, gun possession, and the HPV vaccine for school girls.
via www.enn.com
*Unless you classify stubbornness as stupidity.
Posted: 29 May 2012 10:13 AM PDT
You can't keep a good oligarch down:
Shock Therapy on the Altiplano, by Daron Acemoglu and James Robinson: In our last post we explained how the Bolivian Revolution of 1952 was an example of what the German sociologist Robert Michels called the Iron Law of Oligarchy. Michels noted in his book Political Parties
society cannot exist without a …dominant… or… political class, and that the ruling class, while its elements are subject to frequent partial renewal, nevertheless constitutes the only factor of sufficiently durable efficacy in the history of human development. [T]he government, or, … the state, cannot be anything other than the organization of a minority. It is the aim of this minority to impose upon the rest of society a "legal order" which is the outcome of the exigencies of dominion and of the exploitation of the mass … Even when the discontent of the masses culminates in a successful attempt to deprive the bourgeoisie of power, this is … effected only in appearance; always and necessarily there springs from the masses a new organized minority which raises itself to the rank of a governing class…" (pp. 353-354).
...In our paper with Simon Johnson and Pablo QuerubĂ­n "When Does Policy Reform Work?", we analyzed exactly this process. We explained why policy reform, against the background of unchanged political institutions, may create a seesaw effect, whereby the reform of one distortionary, extractive policy leads to the rise of another. We then illustrated these ideas with central bank independence, adopted enthusiastically by many countries with the encouragement of international organizations since the 1990s. Central bank independence, except in places such as Zimbabwe where it doesn't mean anything at all, does take away some of the tools that politicians under extractive institutions can use for clientelism or for personal enrichment. But if their incentives and constraints facing them and the political elites are unchanged, they will often find other tools to achieve the same objectives — and these other tools may sometimes be even more distortionary. So with more constraint on monetary policy after central bank independence, many countries with weak institutions start running bigger budget deficits. ...
Tax cuts seem to be the major extractive tool presently. Despite pledges from Obama and others to stand up to this and undo some of the extraction, it continues. When it comes to raising taxes on the wealthy or cutting benefits for the not so well off to balance the budget, its pretty clear whose interests are likely to prevail.
Posted: 29 May 2012 09:09 AM PDT
Uwe Reinhardt wonders how long will workers continue to tolerate an employer-based health care insurance system that allows wage gains to be "wiped out" by increases in health care costs:
The Fork in the Road for Health Care, by Uwe E. Reinhardt, Commentary, NY Times: Milliman, the global actuarial and employee benefit consulting firm, released its annual Milliman Medical Index for 2012 on May 15. ... For 2012, the nationwide average of the total health spending for a typical family of four was estimated by Milliman to be $20,728. ... A just-released study by the Health Care Cost Institute shows that much of these spending increases are the result of rising prices and not of rising use. ...
On average, according to Milliman, employers contributed 58 percent, or $12,144, to the total cost of $20,728, through contributions to their employees' health insurance premiums. The family itself contributed another 25 percent, or $5,114, toward the premium via direct payroll deduction. In addition, it spent 17 percent, or $3,470, out of pocket for health care.
Although the family's contribution of $8,584 is by no means trivial, it is less than half of the total average cost of a family's health care cost. Most employees probably believe that "the company" – that is, its owners – absorbs the other 58 percent of the family's total health spending.
Economists have long argued that this is an illusion – that over the longer haul the bulk and possibly all of the ostensibly employer-paid health insurance premiums gets indirectly shifted back into the employee's paycheck through lower increases in take-home pay. ...
This point on backward cost-shifting was driven home recently in a paper in Health Affairs by David Auerbach and Arthur Kellerman. The authors present data showing that a decade of health care cost growth in employer-based health insurance "has wiped out real income gains for an average U.S. family" from 1999 through 2009. Health care has come to chew up American household budgets like Pacman. ...
Americans are fond of the idea that individuals and families should be self-reliant. But a question confronting the American public and their political representatives is how they imagine households with money income of, say, $30,000 to $50,000 will tolerate the ever-larger bites the health care Pacman seeks to take out of their budgets. ...

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Posted: 29 May 2012 12:06 AM PDT
Posted: 28 May 2012 02:25 PM PDT
Philadelphia Fed president Charles Plosser on the risks from Europe:
Q&A: Philadelphia Fed President Charles Plosser, by Brian Blackstone, WSJ: On whether Europe could have a significant effect on the U.S. economy:
Plosser: Europe is clearly near recession. That impacts the U.S. in part through trade ... but Europe is not our largest trading partner at the end of the day. The thing that people really worry about is you have some financial implosion in Europe and markets freeze up and you have some serious financial disruptions.
There are several ways this could go. At one level the U.S. has been trying to insulate itself from that risk. The Fed and regulators have tried to stress to money market funds, for example, to reduce their exposure to European financial institutions. So on a pure exposure basis I would say U.S. financial institutions are taking the steps they need to ensure that ... financial distress in Europe it doesn't necessarily lead to distress for them...
People have made the analogy that an implosion in Europe would be a Lehman Brothers-type event. It might be a Lehman Brothers-kind of event for Europe. And if the market is sort of indiscriminate in whom they withdraw funding to, you could have indiscriminate funding restrictions on U.S. institutions just because everybody's scared.
There's another scenario that is exactly the opposite. There might be–and you already see some of this–a flight to safety. So rather than the markets freezing access to short-term funding for U.S. institutions, you could have a flood of liquidity that gets withdrawn from European institutions ... and floods into the United States. That's exactly the opposite problem.
On which scenario is more likely:
Plosser: I don't have the answer to that. ... I don't think a flood of liquidity is a huge problem. That would be manageable. The bigger problem is if it dries up for everybody. The Fed still has the tools it used during the crisis. ... So I think we have the tools at our disposal if they become necessary. ...
Thus, he thinks the Fed can handle whatever comes its way, and hence sees no need to alter his forecast:
On his economic forecasts:
Plosser: I'm still looking for 2.5% to 3% growth over the course of this year. I think the unemployment rate is going to continue to drift downward to 7.8% by the end of this year. I would think for 2013 we'll see similar developments. As long as that's continuing then I don't see the case for ever increasing degree of accommodation.
Since he believes output will grow no matter what happens in Europe, inflation is the biggest risk:
On inflation:
Plosser: I think headline will drift down just because of oil and gasoline. It will be interesting to see what happens with the core. The inflation risk we have is longer term. The problem is that as the U.S. economy grows we have provided substantial amounts of accommodation. We have $1.5 trillion in excess reserves. Inflation is going to occur when those excess reserves start flowing into the economy. When that begins to happen we'll have to restrain it somehow. The challenge for the Fed is will we act quickly enough or aggressively enough to prevent that from happening.
It may be a challenge politically when we have to start selling assets, particularly if we have to start selling (mortgage backed securities) to shrink the balance sheet and to prevent those reserves from becoming money.
My view is different. I'm more worried about output and employment being affected by events in Europe than he is, and less worried about long-run risks from inflation (both the chance that it will happen and the consequences if it does). So I see a far greater need for policymakers -- monetary and fiscal -- to take action now as insurance against potential problems down the road.
It is interesting, however, that he sees the political risk as the primary challenge  for controlling inflation for a supposedly independent Fed, especially since several Fed presidents recently assured us that politics plays no role whatsoever in the Fed's decision making process (I also wonder why he didn't mention raising the amount paid on reserves as a way of keeping reserves in the banks).
Finally, I'm glad he said "I don't see the case for ever increasing degree of accommodation," rather than saying he thought we needed to begin reducing accommodation. We may not get any further easing, but perhaps there's a chance we can keep what we have, at least for now.
Posted: 28 May 2012 11:26 AM PDT
A new paper from a colleague (along with coauthors, Jess Benhabib and Seppo Honkapohja):
Liquidity Traps and Expectation Dynamics: Fiscal Stimulus or Fiscal Austerity?, by Jess Benhabib, George W. Evans, and Seppo Honkapohja, NBER Working Paper No. 18114, Issued in May 2012: We examine global dynamics under infinite-horizon learning in New Keynesian models where the interest-rate rule is subject to the zero lower bound. As in Evans, Guse and Honkapohja (2008), the intended steady state is locally but not globally stable. Unstable deflationary paths emerge after large pessimistic shocks to expectations. For large expectation shocks that push interest rates to the zero bound, a temporary fiscal stimulus or a policy of fiscal austerity, appropriately tailored in magnitude and duration, will insulate the economy from deflation traps. However "fiscal switching rules" that automatically kick in without discretionary fine tuning can be equally effective.
However, for austerity to work "requires the fiscal austerity period to be sufficiently long, and the degree of initial pessimism in expectations to be relatively mild." That is, the policy must be left in place for a considerable period of time, and if there is expected deflation or an expected decline in output of sufficient magnitude, austerity is unlikely to be effective. The conditions for fiscal stimulus to work are not as stringent, so it is more likely to be effective, but even so "One disadvantage of fiscal stimulus and fiscal austerity policies is that both their magnitude and duration have to be tailored to the initial expectations, so they require swift and precise discretionary action."
Because of this, they suggest fiscal switching as the best policy. Under this policy the government keeps government spending (and taxes) constant so long as expected inflation exceeds a predetermined lower bound. But if expected inflation falls below the threshold, then government spending is increased enough to achieve an output level where actual inflation exceeds expected inflation. Thus, a rule that credibly promises strong fiscal action if expectations become pessimistic can avoid the bad equilibrium in these models. As they note:
Two further points should be noted about this form of …fiscal policy. First, it is not necessary to decide in advance the magnitude and duration of the …fiscal stimulus. Second, in contrast to the preceding section we now do not assume that agents know the future path of government spending.
In summary, our analysis suggests that one policy that might be used to combat stagnation and de‡ation, in the face of pessimistic expectations, would consist of a …fiscal switching rule combined with a Taylor-type rule for monetary policy. The fi…scal switching rule applies when in‡ation expectations falls below a critical value. The rule speci…fies increased government spending to raise infl‡ation above in‡ation expectations in order to ensure that in‡ation is gradually increased until expected in‡ation exceeds the critical threshold. This part of the policy eliminates the unintended steady state and makes sure that the economy does not get stuck in a regime of defl‡ation and stagnation. Furthermore, unlike the temporary fi…scal policies discussed in the previous section, the switching rules do not require …fine tuning and are triggered automatically. Remarkably, our simulations indicate that this combination of policies is successful regardless of whether the households are Ricardian or non-Ricardian.
[open link to paper]

Latest Posts from Economist's View


Latest Posts from Economist's View



Posted: 28 May 2012 02:08 AM PDT
Fake budget hawks:
Big Fiscal Phonies, by Paul Krugman, Commentary, NY Times: ...Until now the attack of the fiscal phonies has been mainly a national rather than a state issue, with Paul Ryan, the chairman of the House Budget Committee, as the prime example. As regular readers of this column know, Mr. Ryan has somehow acquired a reputation as a stern fiscal hawk despite offering budget proposals that, far from being focused on deficit reduction, are mainly about cutting taxes for the rich while slashing aid to the poor and unlucky. ...
The same can be said of Mitt Romney, who claims that he will balance the budget but whose actual proposals consist mainly of huge tax cuts (for corporations and the wealthy, of course) plus a promise not to cut defense spending.
Both Mr. Ryan and Mr. Romney, then, are fake deficit hawks. ... Still, Mr. Ryan and Mr. Romney are playing to a national audience. Are Republican governors, who have to deal with real budget constraints, different? Well, there have been many claims to that effect; Mr. Christie, in particular, has been widely held up, not least by himself, as an example of a politician willing to make tough choices.
But last week we got to see him facing an actual tough choice — and aside from the yelling-at-people thing, he proved himself just another standard fiscal phony.
Here's the story:... Mr. Christie has been touting what he calls the "Jersey comeback." Even before his latest outburst, it was hard to see what he was talking about... Yet Mr. Christie has been adamant that ... this makes room for, you guessed it, tax cuts that would disproportionately benefit the wealthy.
Last week reality hit:... the state faces a $1.3 billion shortfall. ... New Jersey, then, is still in dire fiscal shape. So is our tough-talking governor willing to reconsider his pet tax cut? Fuhgeddaboudit. ... So much for fiscal responsibility.
Will Mr. Christie's budget temper tantrum end speculation that he might become Mr. Romney's running mate? I have no idea. But it really doesn't matter: whoever Mr. Romney picks, he or she will cheerfully go along with the budget-busting, reverse Robin Hood policies that you know are coming if the former governor wins.
For the modern American right doesn't care about deficits, and never did. All that talk about debt was just an excuse for attacking Medicare, Medicaid, Social Security and food stamps. And as for Mr. Christie, well, he's just another fiscal phony, distinguished only by his fondness for invective.
Posted: 28 May 2012 12:06 AM PDT
Posted: 27 May 2012 01:51 PM PDT
Larry Bartels:
More on the Politics of the Super-Rich, Monkey Cage: Andrew argues, based on "extrapolation from preferences of the top 5%, data on campaign contributions, and data on political attitudes of the top third of income," that "there are lots more rich and powerful Republicans" than Democrats. While extrapolation from the top third, or even the top 5%, to the "super-rich" seems perilous, some new data on campaign contributions handsomely support his claim. ...
While these data seem compelling with regard to the partisan alignment of the super-rich, they do not speak to Andrew's additional claim that "rich Democrats tend to be moderate on economic policy, whereas rich Republicans tend to be highly economically conservative." ...
For what it's worth, I suspect that Andrew is mostly right on this score as well—but also that there is a great deal of politically significant variation even within the domain of "economic policy." For example, the finance industry super-rich in Bonica's data look, on average, much like the rest of the super-rich. However,  even those who contribute mostly or entirely to Democrats are probably not "moderate" on the issue of financial regulation—a fact that may be relevant to understanding why the regulatory response to the Wall Street meltdown was not more vigorous. ...
This graph from his post shows the ideological distribution of Democrats (blue), Republicans (red), and the Forbes 400 (black):
Ideology
Posted: 27 May 2012 12:49 PM PDT
Chris Dillow says past performance is not indicative of future results:
The strong demand for charlatans, by Chris Dillow: In the improbable event of ever being invited to give a commencement address, my advice to graduates wanting a lucrative career would be: become a charlatan. There has always been a strong demand for witchdoctors, seers, quacks, pundits, mediums, tipsters and forecasters. A nice new paper by Nattavudh Powdthavee and Yohanes Riyanto shows how quickly such demand arises.
They got students in Thailand and Singapore to bet upon a series of five tosses of a fair coin. They were given five numbered envelopes, each of which contained a prediction for the numbered toss. Before the relevant toss, they could pay to see the prediction. After the toss, they could freely see the prediction.
The predictions were organized in such a way that after the first toss half the subjects saw an incorrect prediction and half a correct one, after the second toss a quarter saw two correct predictions, and so on. The set-up is similar to Derren Brown's The System, which gave people randomly-generated tips on horses, with a few people receiving a series of correct tips.
And here's the thing. Subjects who saw just two correct predictions were 15 percentage points more likely to buy a prediction for the third toss than subjects who got a right and wrong prediction in the earlier rounds. Subjects who saw four successive correct tips were 28 percentage points more likely to buy the prediction for the fifth round.
This tells us that even intelligent and numerate people are quick to misperceive randomness and to pay for an expertise that doesn't exist; the subjects included students of sciences, engineering and accounting. ...
It's easy to believe that this happens in real life. For example, the people who are thought to have predicted the financial crisis of 2008 are invested with an expertise which they might not really have. ... This paper ... suggests ... people are too quick to perceive skill and thus to pay for something that doesn't exist. The demand for forecasters and tipsters substantially exceeds the real ability such pundits actually have.
Why does this happen? Daniel Kahneman:
Kahneman: ...Psychologists distinguish between a "System 1" and a "System 2," which control our actions. System 1 represents what we may call intuition. It tirelessly provides us with quick impressions, intentions and feelings. System 2, on the other hand, represents reason, self-control and intelligence. ...
System 2 is the one who believes that it's making the decisions. But in reality, most of the time, System 1 is acting on its own, without your being aware of it. It's System 1 that decides whether you like a person, which thoughts or associations come to mind, and what you feel about something. All of this happens automatically. You can't help it, and yet you often base your decisions on it. ...
System 1 can never be switched off. You can't stop it from doing its thing. System 2, on the other hand, is lazy and only becomes active when necessary. Slow, deliberate thinking is hard work. It consumes chemical resources in the brain, and people usually don't like that. …
Spiegel: By studying human intuition, or System 1, you seem to have learned to distrust this intuition…
Kahneman: I wouldn't put it that way. Our intuition works very well for the most part. But it's interesting to examine where it fails. ... In the stock market, for example, the predictions of experts are practically worthless. Anyone who wants to invest money is better off choosing index funds... Year after year, they perform better than 80 percent of the investment funds managed by highly paid specialists. Nevertheless, intuitively, we want to invest our money with somebody who appears to understand, even though the statistical evidence is plain that they are very unlikely to do so. ... The experts are even worse because they're expensive.
Spiegel: So it's all about selling snake oil?
Kahneman: It's more complicated because the person who sells snake oil knows that there is no magic, whereas many people on Wall Street seem to believe that they understand. That's the illusion of validity …
Spiegel: Do we generally put too much faith in experts?
Kahneman: I'm not claiming that the predictions of experts are fundamentally worthless. … Take doctors. They're often excellent when it comes to short-term predictions. But they're often quite poor in predicting how a patient will be doing in five or 10 years. And they don't know the difference. That's the key.
Spiegel: How can you tell whether a prediction is any good?
Kahneman: In the first place, be suspicious if a prediction is presented with great confidence. That says nothing about its accuracy. You should ask whether the environment is sufficiently regular and predictable, and whether the individual has had enough experience to learn this environment. ...
One implication of this is that we use rules of thumb rather than rational, deliberative thought (i.e. rational expectations) for many of our decisions.