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August 30, 2012

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Central Planning in the Bronze Age

Posted: 30 Aug 2012 01:11 AM PDT

To what extent did ancient economies rely upon central planning?:

Comment and Discussion on Central Planning in the Bronze Age, by Daron Acemoglu and James Robinson: In our earlier post, we suggest that the economic organization of Greek Bronze Age civilizations had many elements similar with what we today identify as central planning — centralized control of the economy for extraction and redistribution of resources.

William Parkinson and Gary Feinman from the The Field Museum in Chicago have sent this comment pointing to some recent, more nuanced interpretations. Here is their comment:

The study of ancient economies is evolving, bolstered by years of painstaking data collection by archaeologists and their collaborators. ... We agree that more-or-less centralized economic and political systems certainly existed in the past, many early states, which in the past were described as centralized, redistributive, economies, now are understood based on new empirical underpinnings to have been much more dynamic systems with characteristics of decentralized economies and even vibrant markets. ...

In the case of the Aegean Late Bronze Age, for example, Mycenaean palaces were initially characterized as ... powerful redistributive centers whose primary role was to extract labor and materials from the hinterland, and to support production and distribution of ... specialized craft products.

Over the last decade the roles and relationships of Mycenaean palaces have been redefined significantly. Rather than being portrayed as centralized rulers that controlled nearly every aspect of the political economy, the Mycenaean palatial elite now are understood to have been very savvy statesmen who managed to gain some limited political benefits by directing very specific aspects of the palatial economy. This revisionist perspective depicts Mycenaean palaces not as omnipotent, highly centralized, redistributive centers, but as cogs in more delicate, networked, sociopolitical systems that were dependent on economic activities that they could not completely control.

Models of ancient Near Eastern temple economies, which previously also were described as centralized, redistributive, centers, have undergone similar modifications. Across the ocean, later prehispanic Mesoamerican economies are now seen as having been characterized by active market systems with flexible economic valuations, and broadly accepted currencies, albeit not coinage. Earlier theoretical perspectives that reflexively applied the centralized and command economy model to this region have largely been rejected as increasing bodies of evidence have revealed that most productive activities for exchange were implemented in domestic contexts and so would have been near impossible to control centrally.

Gary Feinman and William Parkinson certainly know more about this literature than we do. ... Nevertheless, it is important to distinguish between absolute control of the governing institutions ... and central planning itself. Central planning involves the suppression of markets and price systems for the governing institutions and elites to better extract resources and politically and economically control society. The fact that the palace elites were "cogs in more delicate, networked, sociopolitical systems that were dependent on economic activities that they could not completely control" does not imply that there was no central planning. ...

So though the literature is evolving and though the control of the elite was certainly not absolute, the economic organization of Bronze Age Greek civilizations still appears to have many many parallels with central planning.

The Base of Mount Sharp

Posted: 30 Aug 2012 12:15 AM PDT

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Posted: 30 Aug 2012 12:06 AM PDT

'It Is Mathematically Impossible for Romney to Keep His Tax-Policy Promises'

Posted: 29 Aug 2012 03:05 PM PDT

Greg Mankiw points to Matin Feldstein: Marty runs some numbers.

Brad DeLong checks the math. Oops:

Martin Feldstein Accidently Proves Either (i) 152 > 186 or (ii) It Is Mathematically Impossible for Romney to Keep His Tax-Policy Promises: The fact that he sought to prove otherwise and wound up confirming the Tax Policy Center's conclusions purely by accident gives me additional confidence that the TPC knows what it is doing. ...

More here.

RomneyRyanomics: A Bad Deal for the Working Class:

Posted: 29 Aug 2012 10:16 AM PDT

This is a column I wrote just after Paul Ryan was chosen as Romney's running mate (see also yesterday's column: Republicans: "We Won't Build That"):

RomneyRyanomics: A Bad Deal for the Working Class: Mitt Romney's choice of Paul Ryan as his running mate makes it abundantly clear that the upcoming presidential election presents a choice between two very different views on the role of government in the economy. Republicans believe that smaller, less intrusive government and the reduced tax burden that smaller government allows, particularly for the wealthy, and are the keys to robust economic growth.

Democrats do not share the Republican vision of a smaller government, and they are particularly opposed to cuts to social insurance programs such as Medicare and Social Security that are generally at the forefront of Republican proposals to reduce the size of government. Democrats want to preserve existing social insurance programs and perhaps even expand them in this era of increasing uncertainty. They also want to make sure that everyone – including the wealthy – pays an equitable share of the taxes required to support the government programs that we provide.

The debate on this topic should be welcomed. We need to figure out how much government we desire as a nation, and how to pay for it. But the debate must be based upon facts. The discussion should not be driven by politicians hoping to satisfy ideological desires through misinformation, false promises, and misplaced blame for our economic problems. Unfortunately, that's a pretty good description of how the debate on this topic has gone so far during the presidential campaign, particularly what we've heard from Romney, Ryan, and other politicians on the political right.

In order to support their call for reduced spending on government programs and lower taxes on the wealthy, Romney and Ryan want you to believe that our budget problems were caused by out of control spending on social programs, programs favored by Obama and other Democrats. They also want you to believe that our economic problems stem largely from a government sector that is too large and too involved in private sector affairs. According to this perspective, the solution to all of our problems is to cut incentive killing taxes, particularly for the wealthy, to cut social programs that undermine the desire to work and save, and to leave as much as possible – including whatever remnants of Social Security and Medicare remain after the cuts they'd like to impose – to the private sector.

But the Romney-Ryan narrative about out of control spending, an over-zealous government, and growth inhibiting taxes isn't accurate. First, our present budget problems are primarily the result of the Bush tax cuts, the recession, and the wars in Iraq and Afghanistan. As the CBPP points out, "Without the economic downturn and the fiscal policies of the previous Administration, the budget would be roughly in balance over the next decade." It wasn't out of control spending by Democrats or the policies enacted by Obama that created our current deficit problem, it was the decision by Bush and other Republicans to cut taxes and engage in wars.

Second, the deficit was also caused by the recession, but here again blame is misplaced. The recession wasn't caused by over-zealous government policy as Republicans charge. It was an out of control private sector – the decisions of financial executives who made mountains of money as they crashed the economy – that caused our problems.  

Third, Romney, Ryan, and other Republicans also argue that a key part of the solution to our troubles is to cut taxes for the wealthy, but there's very little evidence that tax cuts for the wealthy spur economic growth. The economy's performance after the Bush tax cuts, for example, does not support this contention.

And that's not the only problem with Romney's plan. An analysis by the non-partisan Tax Policy Center shows that Romney's numbers can't work unless there are large cuts to social programs the middle class relies upon, and regressive middle class tax increases. For reasons that are easy to guess, Republicans are doing their best to hide this from voters. For example, Mitt Romney won't specify the spending cuts and middle class tax increases that will be needed in order to make his budget work. In fact, Romney insists – laughably according to every honest analyst that examines his plan – that he can balance the books by closing tax loopholes. But no matter how much Republicans try to avoid admitting it, large costs to middle class households cannot be avoided under the Romney plan.

When all of the misleading arguments are set aside, Romney's economic proposal comes down to a simple tradeoff, less social insurance and other government programs for the working class, perhaps higher taxes as well, and more tax cuts for the wealthy.  Perhaps that's a tradeoff America wants to make, perhaps not – I suspect not. But whatever the choice, people should be fully informed about the decision they are making. Unfortunately, as is all too clear from their misinformation campaign, an informed electorate is not something that Romney, Ryan, and other Republicans have an interest in promoting.

'Changing Views of Globalization’s Impact'

Posted: 29 Aug 2012 08:34 AM PDT

Edward Alden of the Council on Foreign Relations:

Changing Views of Globalization's Impact, by Edward Allen, Commentary, NY Times: ...For decades, economists resisted the conclusion that trade – for all of its many benefits — has also played a significant role in job loss and the stagnation of middle-class incomes in the United States. ...
Rather than focusing on trade, economists argued that other factors – especially "skill-biased technical change," technological innovation that puts an added premium on skilled workers – played the biggest role in holding down middle-class wages. But now economists are beginning to change their minds. Responding to The Times's recent survey about the causes of income stagnation, many top economists have cited globalization as a leading cause.
While the evidence is still not conclusive, it is pretty strong. Trade's effect on jobs and income, which was probably modest through the 1990's, now seems to be growing much larger. [list and discussion of recent studies]...
The usual rebuttal to these findings is to argue that they stem mostly from manufacturing. And manufacturing, the argument goes, is facing a long-run, secular decline in employment that is largely technology-driven, not unlike the story of agriculture in the 20th century. The job losses in manufacturing may seem as if they have been caused by trade,... but they have actually been caused by technological change.
Through the 1990s, that story was largely plausible. But over the last decade it is not. ... There is no question that over the last decade United States manufacturing has declined, taking away jobs and driving down wages for those who are still employed. Robert Atkinson and colleagues have a useful paper on this topic, showing that the loss of more than five million jobs in manufacturing in a decade was not primarily a technology and productivity story.
The real-world evidence makes it surprising that it has taken economists so long to catch on...
I've expressed pro-trade views in the past, and I still have them. But it's not enough to say, as we do, that the gains from trade are such that (under fairly general conditions) we can make everyone better off and no one worse off. If the actual result is that all the gains go to the top of the income distribution, and all the costs go to the working class -- if the distribution of the gains results in a large class of losers -- then it is much harder to defend. We must find a way to ensure that trade realizes the promise of "lifting all boats" instead of just the yachts.

August 29, 2012

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Posted: 29 Aug 2012 12:06 AM PDT

The 'Grand Old Marxists'

Posted: 28 Aug 2012 12:30 AM PDT

Who are the real Marxists? This is from Timothy Snyder at the NYRB blog:

Grand Old Marxists, by Timothy Snyder, NY Review of Books: A specter is haunting the Republican National Convention—the specter of ideology. The novelist Ayn Rand (1905-1982) and the economist Friedrich von Hayek (1899-1992) are the house deities of many American libertarians, much of the Tea Party, and Paul Ryan in particular. ...
Romney has lots of money... In the right-wing anarchism that arises from the marriage of Rand and Hayek, Romney's wealth is proof that ... unhindered capitalism represented by chop-shops such as Bain must in the end be good for everyone. ...
The attempt to add intellectual ballast to Romney's career pulls the ticket downward into the slog of twentieth-century ideology... Like Marxism, the Hayekian ideology is a theory of everything, which has an answer for everything. Like Marxism, it allows politicians who accept the theory to predict the future, using their purported total knowledge to create and to justify suffering among those who do not hold power. ...
Hayek and Rand are comfortable intellectual company not because they explain reality, but because, like all effective ideologists, they remove the need for any actual contact with it. ...
Rich Republicans such as Romney are of course a small minority of the party..., the Republican electorate ... must be instructed that their troubles are not simply a pointless contrast to the gilded pleasures of the man at the top of the Republican ticket, but rather part of the same story, a historical drama in which good will triumph and evil will be vanquished. Hayek provides the rules of the game: anything the government does to interfere in the economy will just make matters worse; therefore the market, left to its own devices, must give us the best of all possible worlds. Rand supplies the discrete but titillating elitism: this distribution of pleasure and pain is good in and of itself... In her novels, the suffering of ordinary Americans ("parasites," as they are called in Atlas Shrugged) provides the counterpoint to the extraordinary pleasures of the heroic captains of industry (which she describes in weird sexual terms). A bridge between the pain of the people and the pleasure of the elite which mollifies the former and empowers the latter is the achievement of an effective ideology.
In the Romney/Ryan presidential campaign, Americans who are vulnerable and isolated are told that they are independent and strong, so that they will vote for policies that will leave them more vulnerable and more isolated. Ryan is a good enough communicator and a smart enough man to make reverse Marxism work as a stump speech or a television interview. But as national policy it would be self-destructive tragedy. ...

'The Party of Capitalism?'

Posted: 28 Aug 2012 12:24 AM PDT

Why do conservatives support job and economy killing austerity?:

The party of capitalism?, by Chris Dillow: Most of us instinctively think of the Tories as the party that promotes capitalists' interests. But is this true? ...
Cameron's apparent desire to see a fall in household debt, would both be bad for profits (except under unlikely conditions). This poses the question: if Tory policies threaten to depress profits, how can we say that the Tories are the party of capitalism?
One answer might be that they'd like to be the party of capitalism, but are also the stupid party, and so are incapable of seeing that capitalists' interests require - at least temporarily - a looser fiscal policy.
Another possibility is that they are playing a longer game. They believe that fiscal austerity will weaken workers' bargaining power and so permit higher profit margins. ...
Yet another answer would be Kalecki's famous one - that governments must renounce activist fiscal policy in order to maintain capitalists' power in the longer-term by ensuring that the economy remains dependent upon business "confidence."
All these answers have a common problem. They render the claim that "the Tories are the party of capitalists" untestable. Pretty much any policy that seems to jeopardize capitalists' near-term interests can be explained away either as stupidity or as being in capitalists' longer-term interests. This poses the question: what evidence would disconfirm the claim that the Tories are the party of capitalism? Unless this can be answered, the claim loses any empirical interest.
There is, though, another possibility. Maybe it's not that Tories like the capitalist class, but rather that they hate the working class.

August 28, 2012

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Posted: 28 Aug 2012 12:33 AM PDT
I couldn't resist commenting on the economic policies being promoted at the Republican National Convention:
Republicans: We Won't Build That
(The discussion of Republican policy is at the end of the article.)
Posted: 28 Aug 2012 12:06 AM PDT
Posted: 27 Aug 2012 01:56 PM PDT
Ezra Klein notes that Republicans aren't the deficit hawks they claim to be:
Remembering the Republicans' stimulus, by Ezra Klein: I see that the Republican convention will feature a debt clock ticking away behind the speakers. It will also, as I understand it, consist entirely of speakers who want to make all the Bush tax cuts permanent without paying for them, and who want to pass trillions of dollars more in tax cuts that they also haven't said how they'll pay for.

...The Senate Republicans ... voted for Sen. Jim DeMint's "American Option: A Jobs Plan That Works." DeMint's plan would have extended all of the Bush tax cuts permanently, cut the top marginal rate from 35 percent to 25 percent, the corporate rate from 35 percent to 25 percent and the estate tax to almost nothing.
The proposal would have cost about $3 trillion over the next decade — so a bit less than 400 percent what the stimulus cost — ...not a dollar of it would've been paid for..., and the tax cuts were largest for the richest Americans... Yet most every Senate Republican voted for it. And now they're standing on the stage underneath a debt clock arguing that the Obama administration spent too much. ...
 But both Romney's and Ryan's budgets include a tax reform that looks very much like what DeMint proposed...
Posted: 27 Aug 2012 09:58 AM PDT
An interview with Thomas Kochan, the Bunker professor of management, MIT's Sloan School of Management, and co-director of the MIT Institute for Work and Employment Research:
Can America Compete?, Harvard Magazine: ...Read the complete article, "Can America Compete?" (September-October 2012)
Harvard Magazine: You speak of a fundamental human-capital paradox in the way American employers and workers interact with each other.
Thomas Kochan: American corporations often say human resources are their most important asset. In our national discourse, everyone talks about jobs. Yet as a society we somehow tolerate persistent high unemployment, 30 years of stagnating wages and growing wage inequality, two decades of declining job satisfaction and loss of pension and retirement benefits, and continuous challenges from the consequences of unemployment on family life. If we really valued work and human resources, we would address these problems with the vigor required to solve them.
HM: What causes this disconnection?
TK: The root cause is that we have become a financially driven economy. The view of shareholder value as corporations' primary objective has dominated since the 1980s. That motivation—to get short-term shareholder returns—then pushes to lower priority all the other things we used to think about as a social contract: that wages and productivity should go together, that there should be an alignment between the interest of American business and the overall American economy and society. That creates a market failure: it's not in the interest of an individual firm to address all of the consequences of unemployment and loss of high-quality jobs, but the business community overall depends on high-quality jobs to produce the purchasing power needed to sell their goods and services to the American market. Sixty percent of U.S.-based multinational corporations' revenue still comes from the U.S. market. We've got to solve this market failure.
But I think there is also a deep institutional failure in the United States. We have allowed the labor movement and the government and our educational institutions—the coordinating glue that brought these different interests together and provided some assistance in coordinating economic activity—all to decline in effectiveness. Government is completely polarized and almost impotent at the moment. Unions have declined to the point where they are no longer able to discipline management or serve as a powerful and valued partner with business to solve problems. And I'm concerned that our business schools particularly have receded into the same myopic view of the economic system where finance rules everything, so we aren't training the next generation of leaders to manage businesses in ways that work for both investors and shareholders and for employees in the community. ...
Posted: 27 Aug 2012 09:31 AM PDT
Many people have called for the Fed to lower the rate it pays on reserves as a way of stimulating loan activity -- the argument is that if the reward to holding funds is lowered then banks are more likely to let go of them -- but Gaetano Antinolfi and Todd Keister of the NY Fed argue that lowering the rate would not have much of an effect on bank lending:
Interest on Excess Reserves and Cash "Parked" at the Fed, by Gaetano Antinolfi and Todd Keister, Liberty Sreet, FRB NY: The European Central Bank recently lowered from 0.25 percent to zero the interest rate it pays on funds that Eurozone banks hold on deposit with it. On the same day, Denmark's central bank began charging banks 0.20 percent (that is, paying a negative interest rate) on certain deposits. These events have led commentators to ask what would happen if the Federal Reserve were to reduce the interest rate that banks in the United States earn on funds in their reserve accounts from its current level of 0.25 percent. In particular, some people wonder if lowering this rate would lead banks to hold smaller deposits at the Fed and instead lend out some of these "idle" balances. In this post, we use the structure of the Fed's balance sheet to illustrate why lowering the interest rate paid on reserve balances to zero would have no meaningful effect on the quantity of balances that banks hold on deposit at the Fed.
Since 2008, the amount of money banks hold on deposit at the Federal Reserve has increased dramatically, as shown in the chart below. The vast majority of these funds represent excess reserves, that is, funds held above the level needed to meet an institution's reserve requirement. (See this Federal Reserve Bank of Richmond paper for a more detailed view.) Some observers have called for the Fed to lower the interest rate it pays on excess reserves (often called the IOER rate) as a way of encouraging banks to maintain lower balances.
Deposits-Held-by-Banks-at-the-Federal-Reserve
The View from the Balance Sheet
It's important to keep in mind, however, what determines the total quantity of these balances. One way of understanding the issue is by looking at the Fed's balance sheet, a simple version of which is presented in the table below.
Balance-Sheet-of-the-Federal-Reserve-System-August-1-2012

As the table shows, the balances that banks hold on deposit at the Fed are liabilities of the Federal Reserve System. The other significant liability is currency in the form of Federal Reserve notes. Together, this currency and these deposits make up the monetary base, the most basic measure of the money supply in the economy. The composition of the monetary base between these two elements is determined largely by the amount of currency used by firms and households (both in the United States and abroad) to make transactions and by banks to stock their ATM networks.
What determines the size of the monetary base? As with any other institution's balance sheet, the Fed's dictates that its liabilities (plus capital) equal its assets. The Fed's assets are predominantly Treasury and mortgage-backed securities, most of which have been acquired as part of the large-scale asset purchase programs. In other words, the size of the monetary base is determined by the amount of assets held by the Fed, which is decided by the Federal Open Market Committee as part of its monetary policy.
It's now becoming clear where our story's going. Because lowering the interest rate paid on reserves wouldn't change the quantity of assets held by the Fed, it must not change the total size of the monetary base either. Moreover, lowering this interest rate to zero (or even slightly below zero) is unlikely to induce banks, firms, or households to start holding large quantities of currency. It follows, therefore, that lowering the interest rate paid on excess reserves will not have any meaningful effect on the quantity of balances banks hold on deposit at the Fed.
Language Matters
The language used in the press and elsewhere is often imprecise on this point and a source of potential confusion. Reserve balances that are in excess of requirements are frequently referred to as "idle" cash that banks choose to keep "parked" at the Fed. These comments are sensible at the level of an individual bank, which can clearly choose how much money to keep in its reserve account based on available lending opportunities and other factors. However, the logic above demonstrates that the total quantity of reserve balances doesn't depend on these individual decisions. How can it be that what's true for each individual bank is not true for the banking system as a whole?
The resolution to this apparent puzzle is that when one bank decides to hold a lower balance in its reserve account, the funds it sheds necessarily end up in the account of another bank, leaving the total unchanged (see FT Alphaville and this New York Fed Current Issues in Economics and Finance article for more detailed discussions of this point). In the aggregate, therefore, these balances do not represent "idle" funds that the banking system is unwilling to lend. In fact, the total quantity of reserve balances held by banks conveys no information about their lending activities – it simply reflects the Federal Reserve's decisions on how many assets to acquire.
Other Implications
This logic doesn't imply that changing the IOER rate would have no effect on banks' lending decisions, of course. A change in this rate could feed through to changes in other interest rates in the economy and thereby potentially affect the incentives for banks to lend and for firms and households to borrow. Lowering this rate may also lead to disruptions in markets that weren't designed to operate at very low interest rates (see this earlier post for a discussion). Households and firms could respond to these changes in ways that either increase or decrease the amount of currency in circulation, the level of bank deposits, required reserves, and other variables. These shifts would likely be small, however, and should not obscure the basic point: The quantity of balances banks hold on deposit at the Fed would be essentially unaffected by a change in the IOER rate.
A final note: If the IOER rate were set sufficiently far below zero, banks may choose to store currency rather than hold deposits at the Fed, and households may prefer holding cash if banks impose significant fees on deposits. In this case, the level of reserve balances would decline, but the change would simply reflect a shift in the composition of the monetary base; its total size would remain unchanged for the reasons described above.

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Posted: 27 Aug 2012 12:24 AM PDT
The Jersey comedown:
The Comeback Skid, by Paul Krugman, Commentary, NY Times: There will be two big stars at the Republican National Convention, and neither of them will be Mitt Romney. One will, of course, be Paul Ryan, Mr. Romney's running mate. The other will be Chris Christie, the governor of New Jersey, who will give the keynote address. And while the two men could hardly look or sound more different, they are brothers under the skin.
How so? Both have carefully cultivated public images as tough, fiscally responsible guys willing to make hard choices. And both public images are completely false.
I've written a lot lately deconstructing the Ryan myth, so let me turn today to Mr. Christie.
When Mr. Christie took office in January 2010, New Jersey — like many other states — was in dire fiscal straits thanks to the effects of a depressed economy..., so like other governors, Mr. Christie was forced to engage in belt-tightening.
So ... while Mr. Christie has made a lot of noise about his tough budget choices, other governors have done much the same. Nor has he eschewed budget gimmicks... But ... Mr. Christie talks a good (and very loud) game about his willingness to make tough choices, making big claims about spending cuts — claims, by the way, that PolitiFact has unequivocally declared false.
And for the past year he has been touting what he claims is the result of those tough choices: the "Jersey comeback"... It was ... supposed to demonstrate that good times were back, revenue was on the upswing, and it was now time for what Mr. Christie really wants: a major cut in income taxes ...that ... would do very little for the middle class but give large breaks to the wealthy.
But in any case, the good times are by no means back, and neither is the revenue boom that was supposed to justify a tax cut. So has the very responsible Mr. Christie accepted the idea of at least delaying his tax-cut plan until the promised revenue gains materialize? Of course not.
Which brings me back to the comparison with Paul Ryan. Mr. Ryan, as people finally seem to be realizing, is at heart a fiscal fraud, boasting about his commitment to deficit reduction but actually placing a much higher priority on tax cuts for the wealthy. Mr. Christie may have a different personal style, but he's playing the same game.
In other words, meet the new boaster, same as the old boaster. And pray that we won't get fooled again.
Posted: 27 Aug 2012 12:06 AM PDT
Posted: 26 Aug 2012 02:30 PM PDT
David Warsh on David Brooks:
Brooks is a prestidigitator, that wonderful word borrowed from the French, descended from the Latin, meaning juggler, deceiver. He is all the more successful because of his earnest nice-guy manner. But he's a slippery fellow, frequently passing off Tea Party sleight-of-hand as moderate magic. That's what makes him fun to read. It also drives his NYT stable-mate Paul Krugman to distraction.
More here.
Posted: 26 Aug 2012 10:23 AM PDT
Adam Levitin of Credit Slips explains why "there will not be any serious prosecutions of senior bank executives or institutions for the financial crisis," but he's not happy with the explanation:
Why No Prosecutions, by Adam Levitin: The NYTimes had a very good editorial today bemoaning, with resignation, that there will not be any serious prosecutions of senior bank executives or institutions for the financial crisis.  The biggest fish to be caught was Lee Farkas. Who? That's the point. There have been prosecutions of some truly small fry fringe players and some settlements that are insignificant from institutional points of view (even $500 million, the SEC's record settlement with Goldman over Abacus was a yawn for Goldman), but that's it. ...
My prediction is that when the history of the Obama Administration is written, there will be some positive things to say about it, but also two particular blots on its escutcheon.  First, the failure to act decisively to help homeowners avoid foreclosure, and second, the failure to hold anyone accountable for the financial crisis. ... Both are explained by the "Obama administration's emphasis on protecting the banks from any perceived threat to their post-bailout recovery." 
The logic here is that financial stability and economic recovery are more important than rule of law. There's an argument to be made that law has to give way to basic economic needs.  I, however, would reject the choice as false. Instead, the best way to restore confidence in markets is to show that there is rule of law.  The best route to economic recovery was through rule of law, not away from it. ...
The Administration, however, determined that it wasn't going to rock the boat via prosecutions, even though there is no person in the banking system who is so indispensible to economic stability as to merit immunity from prosecution...
Posted: 26 Aug 2012 10:03 AM PDT
Michael Roberts argues that changes in commodity prices have very little impact on the price of food:
What's the price of corn in your meat? Less than you think., by Michael Roberts: ... So much of our food is ultimately derived from corn, or from other commodities like wheat and soybeans whose prices track corn prices fairly closely. But it ... makes little difference.

Take meat, for example. There are only 3-5 pounds of corn used to make an additional pound of beef, and between 2 and 3 pounds of corn for a pound of chicken or pork. ... This can vary a bit from operation to operation or how it's measured, but feed use efficiency has risen a lot over the last couple decades with the growth of confined animal feeding operations, or CAFOs.

Let's says 5 pounds of corn per pound of meat. There are 56 pounds of corn in a bushel and since June prices have increased from about $5 to about $8 per bushel. This means the amount corn in your quarter-pound burger have increased from about 11 cents to about 18 cents. If there is market power by processing companies or retailers, retail prices would go up by less than this amount (this is basic microeconomics, but I'll save the details for another time). So, you'll have to squint to see the effect of this year's drought on prices at grocery stores and restaurants.

There are lots of complaints about CAFOs being inhumane for animals. That may be, but they are also extremely efficient at using resources. Without CAFOs, you would see bigger prices in all kinds of food, and this year's heat and drought would have caused a larger price spike. We would also be using more land in crop production globally, and be using more fertilizers that pollute water and all manner of other environmental problems that follow from crop production. Many environmentalists don't like CAFO's but they may well be doing more good for the environment than eating grass-fed beef, unless the high price of grass fed beef causes you to eat less. (Granted, grass-fed beef is probably healthier.)

Anyhow, the main point is that commodities are a tiny share of retail prices in developed economies. Prices of most everything, including food, is made up primarily of labor and capital costs, plus rents to producers and retailers with market power. The big concern for high commodity prices in the developed world where the commodity share of food expenditures is much, much greater and people spend a much larger share of their income on food.
[I have a feeling there will be disagreement about the desirability of CAFO's...]

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Posted: 26 Aug 2012 12:06 AM PDT
Posted: 25 Aug 2012 01:45 PM PDT
Robert Frank:
Carbon Tax Silence, Overtaken by Events, by Robert Frank, Commentary, NY Times: ...Mitt Romney ... has been equivocal about whether rising temperatures are caused by human action. But he has been adamant that uncertainty about climate change rules out policy intervention. ...
Climatologists are the first to acknowledge that theirs is a highly uncertain science. The future might be better than they think. Then again, it might be much worse. Given that risk, policy makers must weigh the potential cost of action against the potential cost of inaction. And even a cursory look at the numbers makes a compelling case for action. ...
The good news is that we could insulate ourselves from catastrophic risk at relatively modest cost by enacting a steep carbon tax. ... A carbon tax would also serve two other goals. First, it would help balance future budgets. ... If new taxes are unavoidable, why not adopt ones that ... make the economy more efficient? By reducing harmful emissions, a carbon tax fits that description.
A second benefit would occur if a carbon tax were ... phased in gradually, only after the economy had returned to full employment. High unemployment persists in part because businesses, sitting on mountains of cash, aren't investing it... News that a carbon tax was coming would create a stampede to develop energy-saving technologies. ...
Some people argue that a carbon tax would do little good unless it were also adopted by China and other big polluters. It's a fair point. But access to the American market is a potent bargaining chip. The United States could ... tax imported goods in proportion to their carbon dioxide emissions if exporting countries failed to enact carbon taxes at home.
In short, global warming has a fairly simple and cheap technical solution. ...
Update: I didn't do a very good job of highlighting Robert Frank's point that we shouldn't "expect to hear much about climate change at the Republican and Democratic conventions," but "Many climate scientists ... are now pointing to evidence linking rising global temperatures to the extreme weather we're seeing around the planet." Thus, "Extreme weather is already creating enormous human suffering, and "If the recent meteorological chaos drives home the threat of climate change and prompts action, it may ultimately be a blessing in disguise."
Posted: 25 Aug 2012 12:47 PM PDT
If we had nearly a trillion in additional tax revenue over the next ten years, it would help the budget picture quite a bit:
CBO: Ending High-Income Tax Cuts Would Save Almost $1 Trillion, CBPP: The Congressional Budget Office's (CBO) new report shows that allowing President Bush's 2001 and 2003 income tax cuts on income over $250,000 to expire on schedule at the end of 2012 would save $823 billion in revenue and $127 billion on interest on the nation's debt, compared to permanently extending all of the Bush tax cuts.  Overall, this would mean $950 billion in ten-year deficit reduction, a significant step in the direction of fiscal stability.
Posted: 25 Aug 2012 09:19 AM PDT
As a follow up to this post on Inflation Lessons from Paul Krugman:
Demand-siders like me saw this as very much a slump caused by inadequate spending: thanks largely to the overhang of debt from the bubble years, aggregate demand fell, pushing us into a classic liquidity trap.
But many people — some of them credentialed economists — insisted that it was actually some kind of supply shock instead. Either they had an Austrian story in which the economy's productive capacity was undermined by bad investments in the boom, or they claimed that Obama's high taxes and regulation had undermined the incentive to work (of course, Obama didn't actually impose high taxes or onerous regulations, but leave that aside for now).
How could you tell which story was right? One answer was to look at the behavior of ... inflation. For if you believed a demand-side story, you would also believe that even a large monetary expansion would have little inflationary effect; if you believed a supply-side story, you would expect lots of inflation from too much money chasing a reduced supply of goods. And indeed, people on the right have been forecasting runaway inflation for years now.
Yet the predicted inflation keeps not coming. ... So what we've had is as good a test of rival views as one ever gets in macroeconomics — which makes it remarkable that the GOP is now firmly committed to the view that failed.
Note what's been happening to estimated inflation expectations lately:
Expinf
[Source: Cleveland Fed]
The Fed has used fear of inflation to argue against doing more for the unemployed, but what's the Fed so afraid of? Where's the evidence fo their fears?
(When fear of inflation fails as an argument against further easing, as it has, the Fed also relies upon a vague fear that further quantitative easing would somehow break overnight money markets. But as FT Alphaville has noted several times -- and I've noted this as well -- those fears are hard to understand, and the minutes from the last Fed meeting seemed to indicate they were largely unfounded.
So I, too, "remain curious to get some details about exactly what Bernanke meant when he said that further easing shouldn't be undertaken lightly because it would pose a risk to 'market functioning' and 'financial stability.'" That's especially true in light of the statement in the the most recent FOMC minutes that they have looked at this worry and determined that, repeating a quote from FT Alphaville, there is "substantial capacity for additional purchases without disrupting market functioning."
Thus, it appears the biggest worries about further easing -- inflation and market disruption -- are unfounded, and it will be intersting to see what new excuses are invented to forestall action. I'm guessing it will be the old, "it's not in the data yet, but just wait, you'll see, inflation really will be a problem. Soon. Very soon." Never mind that we've been hearing this for years already.)

August 25, 2012

Latest Posts from Economist's View


Latest Posts from Economist's View


Posted: 25 Aug 2012 12:06 AM PDT
Posted: 24 Aug 2012 07:06 PM PDT
When I was in Kenya earlier this summer with the International Reporting Project, we met with Sarah Obama at her home near Kisumu for a 45 minute interview. She's president Obama's step-grandmother, and she attended his presidential inauguration. During the interview, she was asked by Irin Carmon about "people who believe the president was born in Kenya." Sarah Obama says (through a translator), that the president wasn't born in Kenya, he was born in America:
[Note: The sound failed on my iPhone video, so this uses audio from Martin Robbins.]
Posted: 24 Aug 2012 12:56 PM PDT
Are you surprised?:
New Jobs Come With Lower Wages, by Sudeep Reddy, WSJ: During the recession, people who lost long-held jobs struggled to find new employment and often took substantial pay cuts if they did find new work. Little appears to have changed after the recession ended, a new Labor Department report shows. ...
People lucky enough to find new work are often taking steep wage cuts. Of the displaced workers who lost full-time wage and salary jobs from 2009-2011 and were reemployed by January, just 46% were earning as much or more than they did in their lost job. A third of them reported earnings losses of 20% or more. Both figures are almost identical to those from the prior report. (See our article from last year about these workers: "Downturn's Ugly Trademark: Steep, Lasting Drop in Wages")
Posted: 24 Aug 2012 10:42 AM PDT
Laura D'Andrea Tyson:
Evidence vs. Ideology in the Medicare Debate, by Laura D'Andrea Tyson, Commentary, NY Times: When formulating public policy, evidence should be accorded more weight than ideology, and facts should matter... The ... Romney campaign has been deliberately misrepresenting President Obama's Medicare record.
Mitt Romney characterizes the $716 billion of Medicare savings over the next 10 years, contained in the Affordable Care Act, as President Obama's "raid" on the Medicare program to pay for his health care program. This fear-mongering is simply untrue. These savings result from reforms to slow the growth of Medicare spending per enrollee – there are no cuts in Medicare benefits. ...
Both Governor Romney and Representative Paul D. Ryan have promised to repeal the Affordable Care Act and with it the reforms behind the $716 billion in Medicare savings (although Mr. Ryan duplicitously counts the savings from these reforms in his deficit-reduction plan). Medicare beneficiaries would ... lose the benefits..., and they would be forced to pay higher premiums and co-pays as a result of faster growth in Medicare costs.
President Obama's health care plan is not a raid on Medicare; it is an investment in a stronger system. If the Affordable Care Act had not met this standard, the AARP would not have endorsed it. ...
Now Mr. Ryan has espoused – and Governor Romney has embraced — a proposal to transform Medicare into a premium support system. ... There is no evidence that such a system would control Medicare spending more effectively than the current Medicare program strengthened by Affordable Care Act reforms. Indeed,...the C.B.O. has concluded that ... such plans would drive up total health-care spending per Medicare beneficiary...
A voucher system would do little to control the growth of health care costs, but it would shift their burden onto Medicare beneficiaries in the form of higher premiums and reduced care. Cost-shifting should not be confused with cost containment. ...
A "serious" deficit hawk committed to saving and strengthening Medicare, not one whose primary goals are repealing health-care reform and cutting taxes for the wealthy, would base his Medicare plan on the evidence. ...
Robert Reich is astounded at the Romney-Ryan campaign:

Romney's Lying Machine, by Robert Reich: I've been struck by the baldness of Romney's repetitive lies about Obama — that Obama ended the work requirement under welfare, for example, or that Obama's Affordable Care Act cuts $716 billion from Medicare benefits. ...
Every campaign is guilty of exaggerations, embellishments, distortions, and half-truths. But this is another thing altogether. I've been directly involved in seven presidential campaigns, and I don't recall a presidential candidate lying with such audacity, over and over again. Why does he do it, and how can he get away with it?
The obvious answer is such lies are effective. Polls show voters are starting to believe them... Romney's lying machine is extraordinarily well financed. ... Romney's lying machine is working.
But what does all this tell us about the man who is running this lying machine? (Or if Romney's not running it, what does it tell us about a man who would select the people who are?)
We knew he was a cypher — that he'll say and do whatever is expedient, change positions like a chameleon, eschew any core principles.
Yet resorting to outright lies — and organizing a presidential campaign around a series of lies — reveals a whole new level of cynicism, a profound disdain for what remains of civility in public life, and a disrespect of the democratic process.
The question is whether someone who is willing to resort to such calculated lies, and build a campaign machine around them, can be worthy of the public's trust with the most powerful office in the world.
The press is completely dropping the ball in its duty to inform voters (surprise!). If stories consistently opened up with something along the lines of "The Romney campaign continued to make lies and misleading inferences the centerpiece of its campaign today...," this would stop. (It would also be worth noting, I think, that making lies about the other side the most prominent feature of a campaign is a pretty good indication that the candidate has no new ideas of his own to present. But simply pointing out the lies -- and the massive number of flip-flops of convenience -- would go a long way toward fulfilling the duty of the press to inform voters rather than mislead them by presenting false claims as legitimate debate.)