Sunday, July 31, 2011
Obama's 5 Options If Congress Fails To Raise Debt Ceiling On Time
2) The full haircut. Under the constitution the president (and the treasury secretary acting on his behalf) does not have the right to decide to pay some bills and not others (although this has been done in the past during hilariously labeled "government shutdowns"). So, to avoid violating this law, he simply cuts all spending across the board by the necessary amount to immediately balance the budget, everything. This would mean a technical default as interest payments on the debt would not be made. This has serious legality, but very unlikely.
3) Partial haircut. Avoid technical default by paying interest and principal on coming due debt, but cut other spending. This has many variations from applying (2) but not to the debt itself or also preserving some other categories not to cut, with pensions for veterans having perhaps the strongest constitutional argument for being preserved based on the specific language in Section 4 of Amendment 14 that speaks of pensions for Union soldiers in addition to the national debt as being inviolate. Some variatoin on this may be his most likely choice, legally problematic as it would be.
4) Mint high-value platinum coins. I have posted here on this idea of beowulf's, legal under a 1997 law. So, US Treasury mints trillion dollar platinum coin and deposits it with the NY Fed, continues to pay bills without having to borrow. This is indeed legal and would avoid a constitutional crisis, but would kick the can down the road on the broader debt ceiling and deficit issues, and would also probably be ridiculed and poorly received by the financial markets.
5) Have the Fed forgive portions of US debt it holds. This would allow for borrowing without breaching the debt ceiling, and is probably legal. However, no other central bank has ever done such a thing, as near as I can discern from some googling (although some have forgiven interest payments on debt), and would also be received poorly by financial markets. Also, House in particular would probably go after the Fed big time, led by Ron Paul. Indeed, I suspect that if Ben Bernanke and Tim Geithner were to discuss this, Ben would say to Tim, "you mint that coin."
I shall make one final note on the debt ceiling itself. Many are loudly declaring that it has always been there to "discipline" the budgetmakers, even though the budgetmakers are Congress itself and should tie the debt ceiling to their making of a budget, as I recommended in my most recent post here. However, back in 1917 when the ceiling was first adopted, it was done so as a mechanism to allow for flexibility on the part of the Treasury in connection with financing for WW I. Previously, in following the explicit mandates in the Constitution, Congress had always specifically approved (or disapproved) every specific act of borrowing money by the US government, much in the way one sees at state and local government levels. But the debt ceiling was put in place to allow the Treasury to engage in borrowing on its own, although within the limits set by the debt ceiling, very far from the current interpretations by so many people, including a lot of idiots in Washington who, as Paul Krugman describes them, claim to be Very Serious People.
Friday, July 29, 2011
If No Abolition, Then At Least Link Debt Ceiling Changes To Budget Passage
Moody's Says "Abolish The Debt Ceiling"
I remind everyone again: no other nation in world history has ever had such a ridiculous thing as a nominal debt ceiling. Whether or not it is unconstitutional, it is utterly incoherent. It forces the president to break the law if Congress neither raises the ceiling nor prescribes which bills are to be paid on time (if at all). I find it bizarre that all sorts of people are loudly declaring how the president has no authority raise the debt ceiling but somehow has the authority to "prioritize" which bills will be paid and which will not, meaning that somehow it is his responsibility rather than Congress's to actually destroy the "full faith and credit of the United States" that is demanded by the Constitution. Again, not paying legally mandated bills is a default, not just a failure to pay interest on securities on time.
Tuesday, July 26, 2011
Fun and Games
Monday, July 25, 2011
What the Other 95% Reads
What would you say to someone who believes this visual demonstration of how US sovereign debt translates into paper conveys an important truth? My approach would be a variant on the classroom game, “What’s the Denominator?” Everything has to be measured in relation to something else. A million dollars is a lot for me but not Bill Gates. If we put $1M in the numerator, what should we put in the denominator in order to make sense of it? Now do this with the government’s debt: we know what goes in the numerator, but what goes in the denominator? How much room does all that denominator paper take up? What have you learned? (When governments and corporations move lots of money around, it’s better not to use paper.)
Sunday, July 24, 2011
Bill Clinton Says Debt Ceiling Unconstitutional
So, he says he "would not hesitate" to use the constitutional option, that the 4th section of the 14th amendment overrides the debt ceiling and he "would dare" the courts to stop him, which would take a lot of time. Obama has said his lawyers say this is "not a winning case," but has continued to refuse to unequivocally rule out using this tool. The article notes many consequences, including a possible impeachment by the House, not to be implemented by the Senate. It also notes that not bringing this forward makes it more likely that there will be a deal, which may be a lousy deal. In any case, Clinton's waying in on this is important.
Transcending Medieval Economics
Matters of exchange: commerce, medicine, and science in the Dutch Golden Age by Harold John Cook:
15-6: "Universities were the preserve of the professors who had studied and disputed for long years and then passed on their knowledge to students by lecturing and debating. They valued demonstrative certainty above all else, wishing to draw conclusions that could be shown to follow from necessity. Such demonstrative certainty came from reasoning by clear and certain steps from premises known to be true. The classic examples are demonstration by dialectic, in which a proposition (thesis) is contradicted (antithesis) and resolved by a proposition containing truths from both (synthesis) or by the use of syllogism, in which a proposition known to contain true and universal assertions is linked to another that refers to a new premise, yielding new truths conclusively (as in "All men are mortal, Socrates is a man, Socrates is mortal"). These methods could be clearly explained and could be tested not only by writing things down but by debating with an opponent. Because such methods yielded demonstrative certainty, knowledge of this kind could be built into philosophical systems of great range and power capable of being passed on to others by explanation. Above all, they had the capacity to reason about the causes of change, probing for why matters were as they were."
A Game Plan for Rational, Self-Interested Republicans
As an unpaid advisor to Boehner and company, here is what I propose:
Using any arguments at hand, however implausible, delay an agreement on raising the debt ceiling. At some point, just before moment of reckoning, the markets will be spooked, and interest rates will begin to take off. Use this crisis to reach a compromise that raises the ceiling, but only for a couple of months or so, signaling to the markets that default risk remains on the table. With luck, interest rates will stay relatively high. Continue doing this, again and again, until next year’s elections.
The advantages practically scream out to be heard. Above all, the interest rate spike will doom the economy, more or less guaranteeing a second, even more painful dip. Obama will have to go before the American people with the economy in tatters and unemployment at a post-FDR high. He might as well stay in bed.
Second, the added interest expense guarantees that there will be no resources for the government to initiate any new programs under Obama’s watch or even implement the few he has started. The public sector at all levels will be tied in knots.
Third, higher interest rates mean more transfers to the bondholders, a core constituency of the Republicans. True, at the moment it may look like a risk premium that simply compensates the rich for the added risk of default, but in reality the Republicans have their hands on the dial and can keep averting default at the last moment so that there is a real ex post transfer.
To put it bluntly, a perils-of-Pauline debt ceiling strategy will force the Democrats to run on a ruined economy, bleed them of fiscal resources and cleverly funnel yet more money to the rich. What’s not to like?
There is a risk, however, that the Democrats will be able to make the argument that Republican intransigence and guile has tanked the economy and made them unworthy of election. My assessment is that this risk is minimal for four reasons:
1. Democrats would have to be capable of taking a strong partisan stand. Simply by continuing to play the (illusory) negotiating game, and by presenting the image of a clash of honestly-held principles, they would undermine their ability to go partisan. If Republicans were using the debt ceiling standoff as a ruse to depress the economy, what were the Democrats doing?
2. It would have to be clear that Republican actions had caused the renewed economic slump. It is never so simple, however, because there are always lots of other things going on at the same time that might have an effect on recession and unemployment. There will almost certainly be more bad news coming out of the Eurozone, for instance, as well as natural and man-made disasters, corporate scandals, etc. It could be this or it could be that.
3. Above all, the public would have to acquire a sufficiently sophisticated understanding of financial and economic matters to see the connection between debt ceiling brinksmanship, interest rates and economic pain. Since the evidence is clear that they don’t have this understanding now, they would have to learn in a hurry. This is unlikely, especially since there will be a steady flow of analyses coming out of academia, think tanks and the mass media to cast doubt on truly valid explanations. The climate debate shows that this is entirely doable.
4. There remains the worry that business interests may become alienated from the Republicans due to the losses they incur as a result of this kill-the-economy strategy. Without doubt, some will see it this way and support the Democrats. By this point, most of this segment of the business community is already leaning to blue, so the net effect is likely to be small. The rest of the corporate and financial upper tier will have the discipline to recognize that short-term suffering is the price that has to be paid to restore complete conservative dominance of American politics. Come 2013, a Republican president and congress will go ape-Keynesian, slashing taxes and increasing spending on various emergency and national security initiatives. The economy will come back, and meanwhile a serious, unimpeded assault will begin on what remains of the public sector. The profit opportunities will be spectacular.
Friday, July 22, 2011
Is Platinum Coin Seignorage A Way Out Of The Debt Ceiling Impasse?
This can be done due to a peculiar and little known act passed in 1996 that allows the US Treasury to mint platinum coins of arbitrary value, but no other metals. Why this was passed, I have no idea, but it is in the code apparently. A single one trillion dollar platinum coin deposited at the NY Fed by the Treasury would do the trick for some time.
I thank James Galbraith for bringing this to my attention. Apparently this was suggested initially some time ago by the commentator known as "beowulf." Matt Yglesias provides more discussion at http://tinyurl.com/6xub2ab .
Trigger Madness: A Clue to How Dumb the Debt Ceiling Deal Truly Is
First, let’s look at it from the point of view of Obama. He thinks the problem is that credit markets may shift their sentiment regarding the long-range US fiscal position. Long rates on Treasuries are low right now, but how can we be sure they will stay that way? Wouldn’t it be better if we could lock in a decade-length deal that would stabilize public debt as a percentage of GDP?
But the problem is that we live in a democracy. Every two years there is an election, and the new politicos in charge may want to reverse the policies of their predecessors. How can we lock in any policy for the long run? This is the time consistency problem.
Ah, but there is an oh-so-clever solution: impose on yourself and your negotiating partner a horrible outcome that will come to pass unless you follow through with your commitments. This self-threat is the “trigger”.
Like many economists, I first heard about this strategy from Thomas Schelling. He describes a situation in which you are being held by a kidnapper. You want to be released, but the kidnapper is rationally afraid that you will reveal his identity. Of course, you could promise to never do such a thing, but how can the kidnapper know that you will keep this promise? Once you are released, it will be in your interest to go to the police: your incentives then will be different from what they are today. Schelling’s very clever solution is for you to share with the kidnapper some awful fact about your life that you want to keep secret. What this does is to keep your post-release incentives the same as your pre-release. The ability of the kidnapper to spill your secret is the trigger that keeps you honest. (I have always wondered how common it is for people to have a secret that is awful enough to do the job, but that’s another story.)
In effect, Obama and Boehner are offering to share secrets, to each bind their future selves to a long-term deal so that something horrible, like repeal of the Bush tax cuts (horrible to Boehner) or the removal of the health insurance mandate (horrible to Obama) doesn’t happen “automatically”. One convenient feature of this strategy is that the timing of the various aspects of the budget deal don’t matter. If the cuts come first, but the revenue increases don’t happen until several years from now, it’s not a problem because the triggers ensure that all aspects of the deal will eventually materialize.
Except that it’s all an illusion. The triggers being negotiated by Obama and Boehner are legislative, not constitutional. They can be undone by a future Congress or president. If Michele Bachmann is our new president come 2013 (gulp), I’m sure she will be happy to remove the tax increase trigger, especially if she has a Republican congress to work with.
The general point is that the hold-yourself-hostage trigger strategy does not solve the time inconsistency problem in a democracy, because part of the meaning of democracy is that new governing majorities have the power to undo the acts of those they replace. It is not possible for Obama to negotiate a ten (or more) year plan with the Republicans—period. He can push for actions to be taken during his term, and after that it’s up to the next president.
Of course, the markets know this well. Suppose there is a change in investor sentiment, and, against all logic, potential creditors decide that the US government is at risk of being unable to service its debts. Do you suppose they would be placated by promises to cut deficits several years down the road? Look at Greece and Italy. When interest rates shoot up, the only bone governments can throw is immediate austerity. Bondholders are perfectly aware of the time consistency problem, and promises mean nothing to them.
But that’s why the whole debt ceiling charade is so dumb. Bondholders are happy to hold Treasuries, even with long maturities. We don’t need austerity any time soon. And if the tide ever changes, distant promises will be irrelevant; the only thing that will matter will be fiscal policies at the moment of crisis.
The only thing we can do, although it is apparently too much for us, is to act intelligently in the present. Getting current fiscal policy right would be a good place to start, and addressing longer-term challenges through investments in people and infrastructure, along with cost controls in health care, would be a good way to continue.
Wednesday, July 20, 2011
Cut, Cap, and Balance Made Personal
would slash federal programs deeply, and restrict dramatically the government's ability to do anything constructive for the country.
And I think Brian has this right. But going over Federal budget numbers might not quite drive my point home as to what should rightly be called Duck, Dodge, and Dismantle. So let me recast Jay Carney’s point by an analogy to a family in Manhattan struggling to make ends meet. The husband is making $70,000 (gross) a year on his primary job and is considering part-time work that would pay him an additional $30,000. The wife in addition to taking primary care of their two children – who both have medical conditions that cause them to spend $2000 a month on medical care – works receiving $50,000 a year. If the husband took the second job, their $150,000 in gross income would net $120,000 after taxes or $10,000 a month. While that might seem like a nice income – this is Manhattan and their apartment runs them $4000 a month, and they spend $1000 a month on food, $1000 a month on other necessities, and $1000 a month on entertainment.
The husband just happens to be a Republican and really does not understand why he needs to take this part-time job. After the wife – who just happens to be a Democrat – lays out the simple arithmetic of their budgetary situation, the husband replies by arguing that they could just reduce their spending by 20 percent. The wife – having counting to ten so she doesn’t scream in front of the kids – asks the husband where do they cut spending. After all, it is the husband who wants to stay in their Manhattan apartment and insists that they not cut back on the entertainment budget. She then points out that reducing the food and other necessities budgets by any feasible amount is not going to come close to making ends meet if the husband chooses not to take the part-time position.
Well – I guess the husband might suggest that they eliminate their medical spending but he should be forewarned that divorce attorneys in Manhattan are also expensive.
From Chaos To Catastrophe?
Tuesday, July 19, 2011
Quote of the Day
Students’ attitudes towards economics as well as their knowledge of economics before and after taking a college introductory economics class is examined using standardized multiple choice economics knowledge and attitude questions. Prior knowledge of economics, having a bank account, and other biographical information are used to hold constant many factors influencing pre/post performance in an economics class. Students who gained in economics knowledge appear to have a more negative attitude towards the subject compared to students who exhibited no knowledge gained.
I take back every cynical comment I have ever made about the student portion of the human race.
Whose Responsibility Is it that the Public Doesn’t Understand Public Finance?
Obviously, a great majority of the American people lack the elementary knowledge of government budgets to formulate a sensible answer—and, yes, there is only one sensible answer.There are at least three things they apparently fail to understand:
1. An increase in the debt ceiling simply follows through on the revenue and spending commitments that Congress has already made. Not raising it is like check kiting.
2. The only way the debt can fail to rise each and every year is if the government runs a budget surplus. Such a surplus is impossible this year, all but impossible for the next several, and has been a rare event not only in the US, but in every other modern economy. Moreover, there is no theoretical reason why such surpluses should be the norm, and many why moderate, intelligently directed borrowing should be.
3. Failure to raise the debt ceiling would lead to an immediate economic calamity. US Treasury bonds play a crucial role in the national and world economies, and all of us depend, directly or indirectly, on the income people get from government employment and social programs.
But there’s no point in complaining. The question is, how did we get into this political mess, and how can we get out of it? Real answers depend on real data, but in the meantime here are some speculations:
1. There is no functioning incentive in the media (print and electronic) from which most people get their information to be factually correct. Whether to portray the world as it actually is or make stuff up is a choice, and those who go for option #2 suffer no ill effects. Hence there is a vast amount of misinformation out there. The solution is not government regulation of the media, but a societal effort to build incentives for journalistic integrity. For instance, professional associations could not only give awards for exceptional service, but also black marks for incompetence and deceit. Teams of journalists could noncoercively “accredit” news outlets (including megablogs) the way colleges and universities are accredited, through an open process with transparent criteria.
2. Economists have collectively taken little responsibility for public education. For instance, I know of no attempts to identify the critical gaps in the public’s understanding of economics in order to mobilize a response. Even in the obvious places, like introductory textbooks, there is no systematic attempt to address economic illiteracy. If you think I’m exaggerating, show me the textbooks that speak to the three elementary observations made above—that make it clear that public debts are rarely capped, much less “repaid”, and that these debts are also economically vital assets.
3. There is a deep cognitive dimension to economic illiteracy. The term “national debt” is perceived by most people to be ominous and threatening, especially when numbers in the trillions are thrown around. They think governments are like households, going on consumption binges and waking up to debt bondage. In other words, they have a one-way view of causation, beginning with one’s own economic choices and leading to debt, and cannot see the other, from debt choices made by the government back to the economy, since each individual household’s insertion into the economy (their frame of reference) has only the first dimension. In addition, they see their own debts only from the liability side and not from the asset side. In other words, they are applying a personal, household template to the systemic terrain that economics is supposed to illuminate. Without getting more specific, all I can say is that a defective frame can be countered only by a better one: we need a coordinated effort to popularize a framework for visualizing the economy that is also based on us as a community, not just me as an atom.
4. The first three of these causal factors are exploited and amplified by a wealthy and politically powerful business-conservative coalition. They bankroll media that cynically make stuff up, and where none exist they create them. They reward economists who twist evidence and invent fanciful models that just happen to justify misinformation and cognitive errors regarding the real-world economy. And of course they make constant reference to images and framing devices that reinforce the inability of the public to think clearly about economic choices. Their political strategy is predicated on mass ignorance and error, so any movement for rationality and honesty has to be political as well.
Monday, July 18, 2011
Priorities in a declining empire
"... public finances are one of the best starting points for an investigation of society. The spirit of a people, its cultural level, its social structure, the deeds its policy may prepare -- and this and more is written in its fiscal history." He cites Goldscheid. 1917. Staatsozialismus order Staatskapitalismus. "the budget is the skeleton of the state stripped of all misleading ideologies."
Following Schumpeter, the budget debates illustrate the kind of life that the rich and powerful wish on the rest of society. Get rid of the social safety net, destroy unions, turn the clock back to the nineteenth century. And yes, a bloated military to fight in every corner of the world.
The one area that the Obama is willing to rein in military spending is on medical care for the troops -- at least Robert Gates emphasized that approach.
What is weird is that virtually nobody with access to the public media is talking sense. Even the unions seem to be swallowing the Kool Aid.
Balancing the Budget by Magic
Tuesday, the House of Representatives will vote on, and likely pass, a conservative Republican plan called "Cut, Cap, and Balance." The package will include some immediate, as-yet unspecified spending cuts, a statutory cap to keep spending below 18 percent of GDP, and a promised separate vote on a Constitutional amendment that requires Congress to maintain a balanced budget, but essentially forbids any future tax increases.
Unspecified spending cuts is right! Taking the 2010 figures from the Bureau of Economic Analysis for various types of Federal spending as a percent of GDP, we have the following: (1) defense purchases at 5.6%; nondefense purchases at 2.7%, interest payments at 2%, and transfer payments (mainly Social Security, Medicare, and Medicaid) at 15.9%. So how is the sum of all of this supposed to magically be reduced to only 18%?
Transfer payments as a share of GDP will decline a bit if we ever return to full employment. Of course, the GOP zest for immediate spending cuts – if politically successful – could trigger another recession. But even under the most optimistic assumptions, transfer payments as a share of GDP will remain fairly high if we do not slash and burn our SocialSecurity MedicareMedicaid system, which is not going to happen. So what do these Republicans “leaders” propose we cut? Certainly not defense spending. But unless they are proposing to do away with all nondefense Federal purchases, this notion that we can limit Federal spending to 18% of GDP is nothing more than bad arithmetic.
Me On Debt Ceiling On Local NPR
Blaming it on the Economists
Now it is true that, if the question is whether, to reach a particular deficit target, it is better, ceteris paribus, to cut spending or raise taxes, economic research won't give you a clear signal—but that’s not the question.
The first question is whether we should be talking about tightening fiscal policy on the brink of a second dip, in the midst of a nonrecovery from a balance sheet recession. Textbook economics says no.
The second question is whether it makes sense for a country near the bottom of the OECD in tax revenues as a percent of GDP to burrow down even further. Unless you think the rest of the world is wrong and only Friedrich Hayek (or Ayn Rand) knows the score, you would find this dubious on its face.
The third question is whether there is actually much scope for deficit reduction even in the medium to long run as long as the US runs enormous current account deficits. And how are we going to balance our current account unless the rest of the world lets the dollar devalue drastically, or we accept permanent austerity—or we wake up and begin making the investments in human capital and infrastructure that a competitive economy needs? And that third option means borrowing and spending more in the short run.
Incidentally, you can tell the author of the article has no clue about the topic when he writes, “The key point of contention is whether the government should pay any part of its debts by raising revenue, or solely by spending less.” Aside from its larger conceptual problems, this sentence confuses stock and flow. Fiscal tightening can cut the deficit, but no one is talking about the budget surplus that would be required to pay off existing debts. “Paying back the debt” is the sort of thing that only the economically uninformed say, since budget surpluses are extremely rare, and debts are hardly ever reduced. You grow or inflate your way out of a debt overload, or you get whomped.
Sunday, July 17, 2011
Italy Versus Japan, External Deficit Versus External Surplus
A question (to which I don’t have the full answer): why are the interest rates on Italian and Japanese debt so different? As of right now, 10-year Japanese bonds are yielding 1.09%; 10-year Italian bonds 5.76%.The short answer has to be that Italy is a deficit country, and Japan is a surplus country. To wit:
Invoke the macro identity: the current account equals the sum of private and public net saving. Japan is a net saving country; the savings of its households and firms exceeds the borrowing of its government. As long as Japanese savers and financial institutions are willing to stockpile Japanese bonds, interest rates will remain low. This willingness results not only from general financial sentiment, but also institutional linkages between public and private institutions, which are commingled at a deep level.
Italy in recent years has increasingly become a deficit country. It is not as chronic a case as some of the Eurozone strugglers, but it is headed south. It depends on external creditors whose evaluation of its financial soundness includes the fact that it depends on external creditors.
In short, capital is not yet borderless. It is easier to borrow domestically than from abroad. Japan and Italy are on different sides of the current account divide.
Saturday, July 16, 2011
What Is Public Capital?
Helaba is outraged that the E.B.A. will not count “hardened silent participations” as core capital. And what is that? As near as I can tell, it amounts to promises by the two states that own the bank that the states will put up more money if needed....This makes it sound as though Helaba is a band of sharp operators trying to hide how overleveraged they are—like some of the Wall Street players that blew up in 2008. There is a lot you could say about the landesbanken, but sharp is not what comes to mind.
The fact that these arguments are going on does provide some evidence that the stress tests are more credible than previous ones. They also remind us that one of the games that banks have played in the past — often with support from bank regulators — has been to count some pretty dubious things as capital. When the crisis hit, a lot of that “capital” turned out to not be of much use.
The first thing you need to know is what the state banks like Helaba are. They are publicly owned entities that rest on top of a pyramid of thousands of municipally owned savings banks. If you add in the specialized publicly owned real estate lenders, about half the total assets of the German banking system are in the public sector. (Another substantial chunk is in cooperative savings banks.) They are key tools of German industrial policy, specializing in loans to the Mittelstand, the small-to-medium size businesses that are at the core of that country’s export engine. Because of the landesbanken, small firms in Germany have as much access to capital as large firms; there are no economies of scale in finance. This also means that workers in the small business sector earn the same wages as those in big corporations, have the same skills and training, and are just as productive.
But the EU doesn’t like the landesbanken. They denounce the explicit and implicit public subsidies that state ownership entails, saying they violate the rules of competition policy. For over a decade they have fought to have the system privatized. In the end, the dispute is simply ideological: if you think that public ownership should only be an exception, narrowly crafted to address specific market failures, you want to see the landesbanken put on the auction block. If you think an economy should be organized to meet socially defined needs, you would want a large part of capital allocation to be responsive to public input, and you’d fight to keep the landesbanken the way they are. (There is a movement afoot in the US to promote public banking.)
One result of the EU attack has been pressure on the landesbanken to demonstrate competitive rates of return. The folks who move money in these banks are public servants, very good with forms and checklists in hallowed German tradition, but not very savvy in nouveau finance. Sadly, some of these naive beamters loaded up on the mortgage-based securities that collapsed in the financial crisis, since the returns were what Brussels was demanding, and, well, they were AAA.
But on to the topic at hand. What constitutes equity for the landesbanken? For a privately owned bank, capital is raised by drawing on private funds, for instance through a share offering. For a public bank, capital is the financial commitment authorized by the public institutions that guarantee the bank’s liabilities. It’s pretty obvious when you think about it, and that’s the position taken by Helaba and the other landesbanken.
According to the EBA, however, public commitments don’t count. They don’t think there should be public banks in the first place, and they don’t want to legitimize the financial structure of the German public banking system. In other words, their opposition isn’t about whether the landesbanken can cover their liabilities, but is pure ideology.
My guess is that Norris is unaware of the battle lines that have formed around the landesbanken and has adopted the EU position by reflex, out of distrust for all financial institutions. The cynicism that serves so well in the US, however, has to be translated into the European context before you can understand why Helaba is so stressed about its stress test.
Thursday, July 14, 2011
Sex, Lies, and Economics: please help
Consciousness Lost. Looking back at 1972
1972 – The World3 'reference run' projected that the industrial output per capita (IOPC) would reach its all-time peak in 2013 and then would steeply decline through 2100. Moreover, the duration of Industrial Civilization (as measured by the leading and lagging IOPC 30% points) came out to be about 105 years. [Industrial Civilization, defined herein, began in 1930 and is predicted to end on or before the year 2030.] 
1972 Conference on the Human Environment. The Stockholm deliberations were confused by the fact that the luckier nations which happened to achieve industrial prodigality before the earth's savings became depleted had already infected the other nations with an insatiable desire to emulate that prodigality. The infection preceded recognition of the depletion. The result of this sad historical sequence was the pathetic quarrel over whether the luxury we cannot afford is economic growth or environmental preservation. Neither was a luxury; worse, neither was possible on a global scale. 
1972 – 1981 – The price of oil increased nine-fold. This fueled stagflation. Important changes occurred within the World Bank as a result of the energy crisis. It moved from supporting protection for infant industries and state planning and lending for state-owned enterprises to a commitment to trade liberalization and abandoned its support for public enterprises.
1972 – December. John Kenneth Galbraith restates that the neglect of power in economics serves conservative political and social functions. The state is the only social entity that could exercise countervailing power to the corporate oligarchy but this situation is problematic given the state’s ‘consanguinity’ to the very corporate oligarchy that must be challenged. 
 THE PEAK OF WORLD OIL PRODUCTION AND THE ROAD TO THE OLDUVAI GORGE
Richard C. Duncan, Ph.D.1
Pardee Keynote Symposia
Geological Society of America
November 13, 2000
 Industrialization: Prelude to Collapse
by William Catton
(Excerpt from Overshoot: The Ecological Basis of Revolutionary Change)
 jkissing on April 23, 2006 - 7:24pm
 Galbraith and Robinson's second crisis of economic theory.
Publication: Journal of Economic Issues
Publication Date: 01-MAR-08
Author: Wrenn, Mary ; Stanfield, James Ronald ; Carroll, Michael
COPYRIGHT 2008 Association for Evolutionary Economics
Ambient Stupidity Alert: Opinion Polling about the Federal Budget Deficit
My contribution today is to make yesterday’s Five Thirty Eight column in the New York Times disappear, cognitively at least.
Nate Silver, who really knows his polling numbers, processes a recent Gallup poll on policies to reduce the federal budget deficit. Here’s the question Gallup asked:
Now let’s try to cut through the noise. Why should a rational person have a preference for how to cut the budget deficit before deciding whether to cut the deficit? As the most recent employment and job vacancies numbers make clear, the economy is treading water at best, and, as the last remaining stimulus funds are spent, budget policy at both state and federal levels is dangerously procyclical. On top of that, our trade deficit just bumped up to an annualized rate of $600B, and that means that, between them, households, firms and the federal government will have to borrow more if that trend continues. The external deficit is identically and simultaneously a flow of borrowing, and the only question is who goes into hock. How about a poll question about that?
But it gets worse. Gallup asks abstractly about “spending cuts” and “tax increases”, as if it were rational to have monolithic preferences about these wildly heterogeneous categories. If I wanted to cut the budget deficit, the very first thing I would do is put a quick end to counterproductive wars and provocative military spending projects. The last thing I would do is cut the social safety net when un- and underemployment are wreaking havoc. I would certainly favor increased taxes on above-median earners (which includes me incidentally), but I would be against raising them for those in the bottom slice. So how am I supposed to answer Gallup’s brain-dead questions?
Here’s a hypothesis: When the Gallup interviewer asks what people think about “tax increases”, most of them translate that into “tax increases on me”, and they don’t like them. What if you asked them about tax increases only on those at the top of the heap, whose income is well above most of the respondents? I’m not saying that soak-the-rich would push aside all the other choices, but it would fare better than soak-yourself.
And another: What if, instead of asking about “spending cuts”, Gallup gave people a short list of spending categories, how much is in each of them, and ask, how much would you want to cut from them? Don’t ask if people want to cut “foreign aid” with no clue about how much money is at stake—show them the money, alongside the amounts in the other categories, and let them make at least a potentially reasoned choice.
Reading this column was like getting sucked into an alternate universe, where pod people with blank expressions mumble strange things about economics. Wake up, before you become one of them.
Wednesday, July 13, 2011
Obama, Social Security, My Totalled Car
I had read that Hyundai was making good low cost cars. We went to see them yesterday. I was appalled how much of the car was made of cheap plastic that was very vulnerable and sure not to last. It seemed like a disposable vehicle.
The article about the quality of the GM cheap car struck home.
The car made me think about the CPI. I am sure that such quality deterioration will not show up in the cost of living, speeding up Obama's plan for undermining Social Security via the Consumer Price Index.
My Latest Book Published!
An oddity is that they left the "Jr." off my name on both the cover and the copyright page, which means that some people may think the book is by my late father. However, ironically, a recent reprint of his most famous book, Logic [for Mathematicians], is being advertised by eBay on the internet as being by "J. Barkley Rosser, Jr." and somebody has put into my father's Wikipedia entry that the book is by "John B. Rosser," ugh, with neither he nor I ever using our first name(s) in any of our publications of any sort ever. Oh well, darned computer software and who knows what all.
For a Stochastic Jubiliee
But credit systems are inherently unstable. Without going into Minskyan detail, it is enough to say that loans sometimes fail to work out as intended, and that systemic overleveraging and herd dynamics can lead to massive, rogue waves of default. This “can” is actually a “will”: you can be certain that, from time to time, major credit disruptions will occur.
The financial crisis of 2007-8 was such an event. It is not over, as the Eurozone credit overhang builds to a potentially disorderly default. Large scale defaults are dangerous, posing enormous technical management challenges and even greater political-economic ones. The one we are in has been very bad and is sure to get worse. Everything we know about credit systems tells us that it won’t be the last.
What to do?
There is an ancient idea that is almost right. The Book of Leviticus calls for the freeing of all slaves and the annulling of debts every 50 years. Today we would not wait so long to restore freedom, but the idea of a periodic debt annulment is attractive. The big problem is that the biblical solution to annulment risk is not practical. God, at this early stage of economic analysis, thought that it would be possible to price in the risk, so that implicit interest rates would rise as the jubilee year approached. Clearly this is wrong. With a fixed date for wiping out debt obligations, the economy would come to a standstill many years in advance.
The solution is obvious: rather than fixing a date for the jubilee, it should be a random draw with a 2% chance in any given year. This would necessitate an additional 2% risk premium on all contracts—a burden to be sure, but one that is bearable, especially since monetary authorities could compensate in part by targeting lower policy rates than they do at present. (This expedient falls short in a liquidity trap, but such a trap would be far less likely if debt overhangs were periodically drained via jubilees.)
It would be an interesting empirical project to simulate a global stochastic jubilee using data from, say, 1950 from the present. Suppose the 2% draw were introduced at the beginning of this period, and suppose, for the sake of simplicity, that monetary authorities were able to fully offset its interest rate effect so as to neutralize its impact on the real economy. Do a Monte Carlo to see the impact of different jubilee dates on the debt accumulation profiles of the runs compared to that which actually occurred. How would these differences have altered the consequences of crunch points like 1982, 1997 and 2007?
One way to think about the agonizing negotiations taking place in Europe today is that they are attempting to work out the dimensions and modalities of a partial jubilee in real time under crisis conditions. Wouldn’t it be a lot easier to work out a preventive system that operates routinely and, except for its timing, predictably?
Tuesday, July 12, 2011
Sex, Lies, and Economics Video
I was invited to give a lecture to the Annual Summer Institute of the History of Economic Thought. The people there mostly tend to be followers of Hayek or James Buchanan, who was the keynote speaker. Although the people there are very conservative, every one of them was open to constructive dialogue, making the eperience very constructive and very enjoyable.
Here is the video of my lecture.
A Partial Cure for the “Is Consistent With” Syndrome
Fine: but nothing in this approach addresses the far larger problem of how likely it is that this result could occur even if the theory is wrong. That’s the real issue for Type I error minimization. While there is no formal test for this problem, there is a procedure which can address it and even turn it to some advantage.
A researcher has a theory, call it X1, that can be expressed as a model of how some portion of the world works. Among other things, this theory predicts an outcome Y1 under a specified set of circumstances. There is a dataset that enables you to ascertain that these circumstances apply and to identify whether or not Y1 has arisen. How should this test be interpreted?
My proposal is simply this: the researcher should be expected to consider how many other plausible theories, X2, X3 and so on, also predict Y1. This should take the form of a section in the writeup: “How Unique Is this Prediction?” or something like that. If X1 is the only plausible theory that predicts, or better permits, Y1—if Y1 is inconsistent with all X except X1—the empirical test is critical: it decisively scrutinizes whether X1 is correct. If, however, there are other X’s that also yield Y1, the test is much weaker. It will accurately determine if X1 is false only if all the other X’s are false as well.
The first point, then, is that this additional part of the writeup will indicate to the reader how much weight to place on the demonstration that X1 has passed the Y1 test.
The second point is perhaps even more valuable. By giving some thought to the alternative theories that also explain Y1, the researcher may notice other predictions that enable her to discriminate between them. It may be that X2 predicts Y1, but only X1 predicts both Y1 and Y2. This moves the test closer to criticality, depending on how many other X’s there are in the game. Getting into the habit of testing theories not in a vacuum, but in relation to other, competing theories would be a huge advance. As a further bonus, it would push researchers in the direction of expanding their knowledge of competing theoretical traditions.
I’m going to begin making this suggestion in all theory-plus-empirical-test articles I review from now on.
Monday, July 11, 2011
Korean Interview with Michael Perelman
Saturday, July 9, 2011
Prepare To Declare The Debt Ceiling Unconstitutional
Well, the rumors of what they are willing to give (cuts in social security?), along with the prospect that this game will be played again in the future (talk about moral hazard), suggests to me that the administration had better be prepared to play the game fully now. Indeed, the debt ceiling has been ignored since its imposition in 1917 precisely because it has always been nearly routinely raised (including ten times since 2001, most recently in Feb. 2010). It is completely incoherent to have budgets passed mandating spending and taxes that breach the debt ceiling and then demand that it be enforced by somebody other than Congress that did the mandating. The administraion should prepare to declare the debt ceiling unconstitutional and do so in order to save the world economy, not to mention Obama's own reelection.
How does a fiscal stimulus work these days?
In my hometown in the 1950s a bit of extra money received by families would have improved the lives of many people. There were - at this time - plenty of resources from which to draw to expand the production of food and other commodities and services. (An energy shortage was a concept we didn't give a moments thought to.)
In the middle of the 20th century a large range of economic activity was locally based. The milkman three miles down the road (and the father of a family friend) delivered his product to the back door as did the local baker (my aunty and uncle). The wheat was grown in the paddocks surrounding the town and bread was baked in a small central shop in the main street and so were the pies and cakes we gobbled up for school lunch. The local butcher obtained his meat from grazing farmers just outside of the town boundary. Cuts of meat were prepared onsite, usually only few hours before the townsfolk purchased their weekly supply. My mother preserved many jars of fruit for the winter from fresh supplies of pears and peaches obtained from orchards in a nearby town. As I walked home from school I passed the local cordial factory and the enterprising neighbourhood bottle recycler. At the local picture theatre my sisters and I spent money in the intermission between the two movies at the owner-operated fish and chip shop.
At home, eggs were often purchased from a neighbour across the street.
Today, all but one of those small local businesses have disappeared. The bakery remains. The milkman, butcher, many farming graziers and local orchards have been replaced by the provision of pre-packaged food in a supermarket owned by investors that probably live in a different country. The products we buy are not made locally and their origin and quality is often impossible to trace. A fish and chip shop was replaced a few years ago by a McDonalds restaurant and the last picture show in the Sanger Street 'flicks' happened sometime in the late 1960s.
More money spent at one of Australia's oligopoly supermarket chains and at McDonalds would mostly flow straight out of the town and go to absentee investors somewhere else.
So how does a stimulus work these days?
What More to Say?
The US economy is clearly floundering, and elementary macroeconomics says we need fiscal stimulus, yet both Obama and the Republicans are debating how to strangle the public sector in order to raise a debt limit that makes no sense in the first place. Eurozone politicians crow over their success in imposing yet another austerity-cum-bailout package on Greece, one that no independent economic observer, much less the financial markets, have the slightest faith in. (As if rounding up the rating agencies and sending them to some Euro-Guantanamo will keep peripheral sovereign rates from marching ever upward.)
There are lots of interesting, complex issues in political economy. None of that matters now: the world is in the hands of politicians governed by expediency calculations whose time horizon can be measured in weeks. As far as I can tell, the gross illogic of their policies is simply beside the point.
Friday, July 8, 2011
Happiness and miscellaneous
There is no theory in the piece, but they pithily sum up the most plausible explanations of the paradox: " the escalation of material aspirations with economic growth, reflecting the impact of social comparison and hedonic adaptation."
Readers of The Theory of Moral Sentiments will know that Adam Smith would not have been at all surprised by the paradox. On the contrary - remember his description of the poor man striving all his life to become rich who, when he finally succeeds, finds he is no happier than he began? But for Smith - and I agree - the paradox is in itself no critique of economic growth, as it has been wielded in contemporary debate: Smith thinks it a good thing (I'm paraphrasing, my TMS is in the office 20 miles down the road) that we Nature (I think it's capital N Nature, or it may be capital P Providence) deludes us in to thinking that more income will make us happier, because all this striving under this delusion has produced, well, Civilization! "Turned mighty ocean into a broad highway" and such - you know the passage. The larger point, though is this: why should happiness or utility be the desideratum of economic growth? Just as they had an objective, rather than a subjective, theory of value, The Classical economists generally, I suggest, had an objective rather than a subjective theory of well-being. In Senian terms, economic growth increases our capabilities. What we do with them is another thing.
By the way, in this last point I am echoing to some extent Deirdre McCloskey, whose latest book, Bourgeois Dignity, may well be her best. I was not a fan of its predecessor, Bourgeois Virtue, but any economist concerned with explaining the explosive nature of modern growth ( the famous hockey-stick) need to read this book. It is mostly an attack on all the explanations that have been offered so far. Later work will make her positive case that it was a change in ideology, not in itself explicable by material conditions, to wit, the change in the valuation of innovation and the bourgeoisie generally, the giving of dignity to such activity that occurs in the Netherlands and England 1650-1800 that explains the industrial revolution and the break-out form the Malthusian trap. The take-down of Gregory Clark's "eugenic materialism" is alone worth the price of the book. If you've read any of her work, you know that she is a wonderful and astonishingly erudite writer - even when you disagree with her. Highly Recommended!
Finally, along with all of you I am sure, I am confident that the medicine The Republicans and - say it isn't so - Obama, are preparing for the sick Economy, LEECHES, will work as it always has. Sad beyond words -
Monday, July 4, 2011
My former student on the front page of the New York Times
I have been virtually incommunicado for a while, giving papers at conferences, having my electronics from my suitcase after I checked it in at the South Bend airport, and now trying to catch up with the backlog of deadlines.
I briefly awoke from my slumber with today's New York Times article regarding Congressman Mike Thompson, who was a outstanding student of mine. He also used to keep my tractor repaired and his wife would sometimes babysit for us. Both were very, very nice people.
Mike earned an internship with a powerful representative in the state legislature, who taught him the ropes. Later, he ran for state Sen. in our district against the Republican who should have been a shoe-in. Republican, however, got caught up in a scandal and Mike won the office. He later switched districts in order to be closer to his home in the Napa Valley. The congressional seat had switched back and forth between parties, ever since a long standing representative, Don Claussen, was defeated. Mike won and has held the office ever since.
He only contacted me a couple times many years ago and I have not heard from him since. He and Darrell Issa were the two representatives, who met with Saddam Hussein prior to the war, to see if hostilities could be prevented. I should have mentioned that he was also a Vietnam veteran.
I can't tell if the article is attacking him for being overly supportive of the wine industry or if he is self interested as a small wine grower. In reality, he was interested in the wine industry as a student. Consequently, nothing he says seems particularly scandalous.
I understand that Mike is a favorite of Nancy Pelosi. I recall that he identified himself as a blue dog. Our politics are obviously far apart, but I do remember him fondly as an excellent student and a friend, even though I'm not aware of any courageous stands he has taken, with the exception of the trip to Iraq.