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February 4, 2013

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Latest Posts from Economist's View


Posted: 12 Dec 2012 12:06 AM PST
Posted: 11 Dec 2012 01:28 PM PST
One more from Tim Duy:
The Debt-Ceiling Gamble, by Tim Duy: Ezra Klein reports that the White House is drawing a line in the sand on the debt-ceiling, and they really, really mean it:
The Obama administration is utterly steadfast on this point: They will not suffer a repeat of 2011, when they conducted negotiations over whether the United States should default. If Republicans go over the cliff and try to open up talks for raising the debt ceiling, the White House will not hold a meeting, they will not return a phone call, they will not look at the e-mails.
The Administration is looking to take the debt ceiling off the table forever. This is good policy; that Congress should be able to pass laws authorizing spending but not authorizing the required debt is beyond ridiculous. Also ridiculous - and irresponsible - is the willingness of the Republicans to use the debt ceiling to hold the economy hostage. Ending this travesty should be a priority for the White House.
Klein adds that the White House is ready for the fight now while their strength is up:
Boehner and the Republicans don't want to give up the leverage of the debt ceiling forever, or for 10 years, or even, as John Engler, head of the Business Roundtable and a former Republican governor suggested, for five years. But the White House isn't very interested in compromising on this issue, as they figure that if there needs to be a final showdown over the debt ceiling, it's better to do it now, when they're at peak strength, then delay it till 2014 or 2015, when their own vantage might have ebbed.
I would add another advantage. Better - from a political point of view - to have a recession at the beginning of President Obama's second term that can be blamed entirely on the Republicans. A recession in the first half of 2013 means that, most likely, the Democratic presidential nominee can run on the back of an improving economy by 2016. Alternatively, they run the risk that this recovery, anemic as it is, gets long in the tooth by 2016. Even worse would be that they agree to let the Republicans once again hold the economy hostage two years from now. Politically, if I had to pick between a recession now or closer to the next election, I would pick now.
Posted: 11 Dec 2012 11:32 AM PST
Tim Duy:
Disappointing Trade Report, by Tim Duy: Today's international trade report confirms that sluggish global growth is taking a toll on the US economy. Exports are now barely up compared to last year:
Exp
Calculated Risk notes the wider goods deficit with the Eurozone. I would add that this is clearly on the back of weaker exports (imports are up slightly). On the plus side, exports of services were up 4.3 percent, while goods exports were down slightly, a story consistent with the divergent ISM manufacturing and services surveys.
Also note the negative year-over-year growth around 1998, the time of the Asian Financial Crisis, which means that even a significant external shock does not necessarily induce a US recession. That said, the softer external sector does leave the economy more vulnerable to negative internal shocks. In the late 1990's, the US experienced a positive internal shock, mitigating the impact of the Asian Financial Crisis. In the near-term, such a positive shock does not look as likely this time around. 
I take little comfort from the import data:
Imp
Flat to negative numbers are typically consistent with recession as they reflect periods of negative domestic demand. We can't write off the slightly negative reading as simply a reflection of falling oil imports (down $625 million); non-petroleum imports (down $792 million) also fell slightly compared to a year ago. Unless the pace of import-substitution is happening very quickly, this data seems like something of a red flag.  Something to be cautious of as we head into 2013.
Bottom Line: While I do not believe the US economy is in recession by any stretch of the imagination, I am under no illusions about the lack of underlying momentum. Slow and steady, in my opinion. But slow also means more vulnerable; there was more room to absorb an external hit in the late 1990's than today. Which again leaves me wary about the impact of tighter fiscal policy, and I am not alone. I question the belief that the clarity-induced confidence of a deal will be sufficient to offset the impact of tighter policy. Just as the Federal Reserve has committed to asset purchases until labor markets are substantially and sustainably stronger, fiscal policymakers should commit to easy policy until those conditions are met as well. Instead, we are poised for another austerity experiment. For now, the plan is to squeeze through the choppy first part of 2013 to the restorative powers of improved private sector balance sheets at the end of 2013. Hopefully we make it there relatively unscathed.  
Posted: 11 Dec 2012 10:11 AM PST
This is not starting off as the greatest day ever. Grrr. A quick one on inequality while I sort things out:
Jobs, Productivity and the Great Decoupling, by Erik Btynjolfsson and Andrew McAffee, Commentary, NY Times: ...For several decades after World War II ... G.D.P. grew, and so did productivity... At the same time, we created millions of jobs, and many of these were the kinds of jobs that allowed the average American worker, who didn't (and still doesn't) have a college degree, to enjoy a high and rising standard of living. ...
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But as shown by the accompanying graph, which was first drawn by the economist Jared Bernstein, productivity growth and employment growth started to become decoupled from each other at the end of that decade. Bernstein calls the gap that's opened up "the jaws of the snake." They show no signs of closing. ... Wages as a share of G.D.P. are now at an all-time low, even as corporate profits are at an all-time high. The implicit bargain that gave workers a steady share of the productivity gains has unraveled.
What's going on? ... There are several explanations, including tax and policy changes and the effects of globalization and off-shoring. We agree that these matter but want to stress another driver of the "Great Decoupling" — the changing nature of technological progress. ...
The Great Decoupling is not going to reverse course... And this should be great news for society. Digital progress lowers prices, improves quality, and brings us into a world where abundance becomes the norm.
But there is no economic law that says digital progress will benefit everyone evenly. ... Designing a healthy society to go along with such an economy will be the great challenge, and the great opportunity, of the next generation. ...
As I've stressed in the past many, many times, I believe the growth in economic power and the political power that comes with it is also a factor, and this has distorted the distribution of income away from working class households (the market power and technological progress explanations aren't mutually exclusive, and may be complementary -- I should also mention political factors as well, e.g. the politics behind the demise in unions, as another cause even though I think of this as part of the economic/political power explanation).
Posted: 11 Dec 2012 09:42 AM PST
Mike Konczal:
What Does the New Community Reinvestment Act (CRA) Paper Tell Us?, by Mike Konczal: There are two major, critical questions that show up in the literature surrounding the 1977 Community Reinvestment Act (CRA).
The first question is how much compliance with the CRA changes the portfolio of lending institutions. Do they lend more often and to riskier people, or do they lend the same but put more effort into finding candidates? The second question is how much did the CRA lead to the expansion of subprime lending during the housing bubble. Did the CRA have a significant role in the financial crisis?   There's a new paper on the CRA, Did the Community Reinvestment Act (CRA) Lead to Risky Lending?, by Agarwal, Benmelech, Bergman and Seru, h/t Tyler Cowen, with smart commentary already from Noah Smith. (This blog post will use the ungated October 2012 paper for quotes and analysis.) This is already being used as the basis for an "I told you so!" by the conservative press, which has tried to argue that the second question is most relevant. However, it is important to understand that this paper answers the first question, while, if anything, providing evidence against the conservative case for the second. ...
"the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis." ...
Posted: 11 Dec 2012 09:07 AM PST
In light of the recent attention on the importance of capital ownership as source of inequality, Arin Dube reminds me of this piece in the Economists' Voice from March 2012 that he published along with Ethan Kaplan ("Occupy Wall Street and the Political Economy of Inequality"). They argue that upper tail income inequality is best understood through the lens of increasing power of those owning capital. Here is an excerpt provided by Arin:
... During the 1990s and 2000s, most economists viewed the growth in the upper-tail inequality as largely representing the same phenomenon as the growth in wage inequality elsewhere—primarily a change in the demand for skills through technological change, with some role for policy ...  Missing from all this was a discussion about how upper-tail earnings inequality could be better understood as an increase in the power of those with control over financial and physical capital. The exceptions were mostly outside of mainstream economics (e.g., Duménil and Lévy 2004). 
Consider three pieces of evidence. First, there has been a broad decline in the labor share of income from around 66 percent in 1970 to 60 percent in 2007. Moreover, as measured, labor income includes compensation going to top executives—the modern day equivalent of the nineteenth century capitalist. The exclusion of their compensation would show a substantially greater drop in labor's share. Additionally, most of the growth in executive compensation has been capital-based, i.e., through stock options but appears in national accounts as labor income (Frydman and Molloy 2011).
Second, based on tax data, the majority of income at the top comes from capital-based earnings (capital gains, dividends, entrepreneurial income and rent). In 2007, this proportion was 62 percent and 74 percent for the top 1 percent and 0.1 percent, respectively (Figure 1).
Third, the biggest driver of upper-tail inequality—both in terms of capital and wage based income—was finance, the sector which governs the allocation of capital. Between 2002 and 2007, 34 percent of all private sector profits came from the financial sector. Meanwhile, studies of financial sector pay setting suggest that the exorbitant finance premium in earnings was driven by financial sector profits (Philippon and Resheff 2009, Crotty 2011).
Overall, a focus on the 1 percent concentrates attention on the aspect of inequality most clearly tied to the distribution of income between labor and capital. This type of inequality is seen as being the least fair, as economic rents and returns to wealth are often perceived as unearned income (Atkinson 2009). ...

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