Thursday, January 31, 2013

GDP Gap Stuck at 6%

Dean Baker gets it right with respect to the latest news on GDP:
A sharp drop in government spending, heavily concentrated in defense, coupled with a decline in inventories caused GDP to shrink at a 0.1 percent rate in the 4th quarter. Government spending fell at a 6.6 percent annual rate, driven by a 22.2 percent decline in defense spending, subtracting 1.33 percentage points from the growth rate in the quarter. A 40.3 drop in the rate of inventory accumulation reduced growth by another 1.27 percentage points. Without these factors, GDP would have grown at a 2.5 percent annual rate in the quarter. Pulling out these extraordinary factors, the GDP data were largely in line with prior quarters.
Inventory changes often turn out to be transitory events while I have faith that those military Keynesians in the Republican Party will push for more defense spending pork. But let’s be clear about what is going on with the GDP gap. While it did fall from 7.5% in mid 2009 to around 6% at the end of 2010, it has been basically stuck at 6% ever since. So recent GDP growth has been insufficient. Dean also rightfully turns on our fiscal policy prospects:
There is little evidence in this report to believe that the economy will diverge sharply from a 2.5- 3.0 percent growth path, except for the impact of the deficit reductions that Congress is considering or already put in place. Higher tax collections from the ending of the payroll tax holiday are likely to knock around 0.5 percentage points from growth. The sequester, or whatever cuts are put in place in lieu of the sequester, are likely to have an even larger impact on growth beginning in the second quarter.
Fiscal austerity has been a large part of the reason why we have been stuck at a 6% GDP gap. Many economists have been strongly recommending fiscal stimulus but I guess our political leaders choose not to listen.

Tuesday, January 29, 2013

Joe Scarborough on the Deficit

After his interview with Paul Krugman this morning Joe Scarborough wrote:
Mr. Krugman's view is that Americans would be better off if its government ran deeper deficits and ignored its longterm debt.
To suggest that Keynesians like Paul Krugman ignore the long-term government budget constraint is either dishonest or shows that Mr. Scarborough does not understand what we are saying. Which is why Mr. Scarborough should check out this list of commentary on the current economics and fiscal situation compiled by Joe Weisenthal.

Did economic growth in the 1960s make us happy?

Maybe I'm wrong but I think it is now common knowledge that mainstream economic theory doesn't take account of the role of energy and other natural resources in making economic growth possible, or at least promoting it. In any case, I'm not sure that anybody really understands how the Gross Domestic Product of their nation was continuing to grow for decade after decade whilst  the quality of our lives was diminishing year by year.  Is economic growth merely a statistical measure?  If it is, why is it so important?  After all, government can fiddle the stats anytime.

Sure it's good for Government to have steadily-increasing revenues, but can't they simply put some extra digits on a balance sheet and bring into creation these revenues?  Such an action would drop the value of the domestic currency on the world's foreign exchange markets but that'll mean the nation's exports will be more competitive and that's good, isn't it?  Hmmmm, why didn't Greece, Ireland, Portugal and Spain think of that?  (What would happen if every nation devalued its currency this way?)

Private businesses, on the other hand, also want their profit base to be sustained and to grow.  However, haven't the world's big corporations long stopped producing anything of real value for people anyway?   Of course, any business that is Too Big to Fail can be bailed out with no questions asked, as was done in 2008 using trillions of dollars in the world's most prominent reserve currency under the US government's TARP program. These are certainly the days of financialisation.

Most monetary transactions today have very little to do with actually producing services and things of real value for people.  At the same time, the intensity of exploitation of humans and nature seems to be ramped up with every passing month.

In the 1960s, the vast excess of money had not yet thrown a monkey wrench into the machine of investment. [1]  It was a different world.  The level of production of real things sold per capita was much higher than it is now in the world's richest industrialised nations.

Therefore, I believe that it would be helpful for the baby boomers like myself to try and remember what the lives of our more privileged parents were like in their decades of so-called 'peak prosperity'. In their time, the purported social joy of the 'economic growth' experience was at its historical summit.  The 'happy days' of the 1960s was an era when a middle class family could be supported by one full time and secure job only.

Very Serious People Completely Missing The Boat On The Budget (Yet Again)

On Monday's Washington Post editorial page we have two of Washington's more self-important Very Serious People bloviating yet again on how the Most Important Thing that Obama must do if he is to be well regarded in history is to cut Social Security.  I am talking about WaPo ed page editor, Fred Hiatt (who gave this bum this job anyway?) and of course my favorite non-economist posing as one, Robert J. Samuelson.  Hiatt thinks the two big issues of the first term were the stimulus and health care, but is clearly upset that while Obama had apparently signaled early in his term that he was willing to cut SS benefits, he is not willing to do so now, which clearly Hiatt views as inimical to Obama's ultimate historical standing.  RJS discusses whether or not the 21st century will be another "American century," but finds the biggest threat to this to be that the US is in with Europe and Japan in that "Their welfare states are overwhelmed. Aging societies face a collision between promised benefits and acceptable taxes."  Acceptable taxes?  Gag me with a spoon.

As it is, both studiously ignore the much more reasonable column on the same page by E.J. Dionne who cites both Martin Wolf and Bruce Bartlett on how it is "madness" to be so worked up about the deficit.  The problem can be largely resolved if growth and jobs are able to be gotten back and a premature rush to sharply cut the deficit can lead to a failure to do that.  Indeed, the constant churning about deadlines for various fiscal cliffs is generating massive uncertainty that is damaging business activity and government agency planning, driving up costs needlessly.  Neither Hiatt nor Samuelson somehow notice this at all, nor do they notice that this churning is entirely due to inane tea party demands over the debt ceiling in Summer 2011, when the ridiculous sequester was cooked up, now being pushed by Paul Ryan and others as a tool to extract what H and S want, "entitlement" spending cuts.  That these threats are far more damaging than any social safety net expenditure to the economy somehow does not occur to these dim bulb VSPs.

Barkley Rosser

Friday, January 25, 2013

Benghazi Myths

Juan Cole has a post on "Top Ten Republican Myths on Benghazi that Justify Hillary Clinton's Anger," .  I am linking to this not for partisan reasons, as I am not all that big of a fan of substantial parts of Obama's foreign policy (and Hillary is reportedly more hawkish than he is), but because some of these myths are believed much more widely and are regularly repeated in the MSM as established fact.  So, while I urge readers to read all ten of them, I shall just list the top 4, which strike me as being the most important ones for policy purposes and also the ones that are mostly widely misunderstood by the broader public, including many Democrats and much of the media.

1. Various senators waxed indignant over how Susan Rice, Hillary, Obama and other administration figures did not just easily find out what was going on "in real time" and publicly tell everybody.  The main reason they did not do so, and that indeed full details of what went on remain unclear, is that the Benghazi consulate was essentially a CIA operation.  There were at least 40 people at the nearby CIA site, who were viewed as the security for the consulate.  They had clearly been running a long run covert quasi-war with the radical Islamist elements in Benghazi, and two of them died in the firefight after the attack on the consulate, when the attackers moved on to attack the CIA site.  It is also the case that there was no real time camera or whatever for anybody at the State Department to watch, although this false claim has been widely and frequently repeated, particularly by Sean Hannity of Fox News, which has been an especially virulent purveyor of outright falsehoods and myths about Benghazi.  Clearly much of this prior to Nov. 2 was with the hope of embarrassing Obama in his election campaign, but apparently the continued efforts on this front are an effort to damage a future campaign by Hillary, including such nonsense as Rand Paul's claim that what happened there was the worst thing since 9/11.  Back to the more serious issue, it remains completely unreported and unclear what Ambassador Stevens was doing there, although it looks almost certain that he was coordinating in some way with the large and ongoing and at that time still officially secret CIA operation there, although certainly the people who attacked the consulate were fully aware of it.

2.  Despite their claims of worrying about leaks and security, various GOP congreespeople, most spectacularly Rep. Darryl Issa (CA-R), leaked names of people cooperating with the US in Benghazi, thus endangering their lives.  This goes along with the hypocrisy of their cutting of diplomatic security budgets while blaming the State Department for all sorts of supposed security failures.

3.  Perhaps the area where public perception and repeated assertions in the MSM are most off has to do with the matter of whether or not there was a demonstration at the time in Benghazi and the relation between the attack and the anti-Prophet Muhammed film that had inspired massive demonstrations in many Muslim nations, including Egypt, with many US embassies under attack.  The widely repeated argument is that there was no demonstration and that the attack had nothing to do with the film.  It was just a pure terrorist attack that somehow or other the State Department was supposed to have foreseen and defended against, although the CIA indeed did intervene within 20 minutes of the start of the attack, too late to save Ambassador Stevens and one other in the consulate, but soon enough to get two of its own people killed later at its own building.  In any case, there was an anti-film demonstration going on at the time of the attack, although local authorities had managed to keep it some distance from the consulate.  Also, there have been clear reports, supported by Gen. Petraeus from the CIA, that indeed what triggered the attack specifically was leaders of it watching the anti-film demonstration in Cairo on TV.  This was a terror attack inspired by the film, even if it was somewhat separate from the street demonstration going on at the same time in Benghazi.  The repeated assertions that it had nothing to do with the film are simply false.

4.  Also widespread is the belief that the attack was run by al Qaeda and that Benghazi in general is dominated by Salafist Islamists.  Both of these are false.  There were apparently as many as four AQIM people involved in the attack, but it was led by people from Ansar-el-Islam (although its leaders now deny this), a strictly local group not affiliated wtih al Qaeda.  This and several other groups had been engaging in scattered low level attacks on various facilities, but they had (and have) little real power in Benghazi.  There had been an election, and secularist liberal parties grateful to the US for its support against the Qaddafi regime had solidly won and are at least officially in power, if not fully in control of all parts of the city. It should be remembered that Benghazi was the original center of the anti-Qaddafi revolt and the operational capital of the rebel regime until Tripoli fell.  The Salafists, and more particularly the AQIM group that is al Qaeda-related, have little power (and AQIM is a bunch of Algerians anyway, as the more recent events in Mali have reminded us).

Monday, January 21, 2013

Why Britain Needs the EU Less than the Rest of Europe

This is the subject of a stimulating piece in The Current Moment.  The short version, embellished with my cynical spin, goes like this: more or less all of Europe inherited a mixed economy social contract from the ruins of WWII.  This remains generally popular among the public.  Nevertheless, elites want to unwind it.  In France, Germany and elsewhere the way to do this is through EU directives; this way you can make a show of resistance as if it were not your idea all along.  But Britain has gone neoliberal on its own, domestically, without any push from Brussels.  They don’t need the fig leaf.

My Breakfast with Helena

We were talking about evolutionary psychology and the problem of tribalism—that the cooperative impulses attributable to our biological heritage are inseparable from the impulse to punish defectors and threatening aliens.  Bowles and Gintis came up.

Then the conversation drifted to “Zero Dark Thirty”, which neither of us had seen but were both willing to analyze and assess.  I said that the filmmakers likely misjudged their audience.  They thought that gruesome footage of torture sessions would counterbalance the impression that the trail to Bin Laden passed through waterboarding: viewers, like good liberals everywhere, would be anguished.  What they failed to anticipate is that moral judgment, for the vast majority of us, is mediated by tribalism.  Torture is not bad in a universal sense; it is bad when inflicted on one of us.  Do it to one of them, one of those who have harmed and dishonored our tribe, and you can be a hero.  Reports have it that audiences have cheered this film as the final credits role.  They are not conflicted.

But Helena saw it differently.  The director was a woman, she pointed out.  Women (in her echo of a different voice) are not inclined to take a warrior’s view of violence and honor in the pursuit of victory.  They would judge torture on its own terms, as cruelty.  Women have difficulty imagining how men see the same acts.  The reception of this movie is probably deeply gendered, almost two different cognitive experiences.

Sunday, January 20, 2013

How Valuable Are Amazon’s Intangible Assets?

The income tax portion of Amazon’s 10K filing for fiscal year ended December 31, 2011 reads:
The effective tax rate in 2011, 2010, and 2009 was lower than the 35% U.S. federal statutory rate primarily due to earnings of our subsidiaries outside of the U.S. in jurisdictions where our effective tax rate is lower than in the U.S. Such earnings primarily relate to our European operations, which are headquartered in Luxembourg ... We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of tax audits ... We are under examination, or may be subject to examination, by the Internal Revenue Service (“IRS”) for the calendar year 2005 or thereafter. These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes or our net operating losses. In addition, while we have not yet received a Revenue Agent’s Report generally issued at the conclusion of an IRS examination, we have received Notices of Proposed Adjustment from the IRS for the 2005 and 2006 calendar years relating to transfer pricing with our foreign subsidiaries. The notices propose an increase to our U.S. taxable income that would result in additional federal tax expense over a seven year period beginning in 2005, totaling approximately $1.5 billion, subject to interest.
Amazon’s effective tax rate was 31.2% for 2011, 23.5% for 2010, and 21.9% for 2009. Reuters provides more on this IRS transfer pricing challenge:
Online retailer Amazon Inc is fighting the U.S. Internal Revenue Service over a $234 million international tax bill, a dispute similar to others in which the agency has struggled to collect corporate taxes. The case, filed on Dec. 28 in U.S. Tax Court in Washington, has implications for other technology companies with software assets that may prove difficult to value for tax purposes … Amazon argues that the IRS is overestimating the value of Amazon’s “intangible property,” which includes computer software, trademarks and marketing assets, according to the court filing … The IRS relied on an estimation method that was overturned in a 2009 court decision involving Veritas Software Corp, now part of Symantec Corp, Amazon said. The Veritas decision was a stinging loss for the IRS, prompting corporations to be more aggressive in fighting the IRS over transfer pricing.
Some excellent reporting from the Bureau of National Affairs provides even more details with respect to the transfer of intangible property from the US parent to its Luxembourg affiliate - Amazon Europe Holding Technologies SCS – back in 2005. While Amazon claimed the value of the European rights to their intangible assets was less than $217 million, the economists hired by the IRS are claiming the value was $3.6 billion. These economists are relying on an application of the discounted cash flow method based on assumptions that Amazon are now challenging. While the representatives of Amazon are claiming that this $3.6 billion valuation estimate based on this particular application of the discounted cash flow approach is above the fair market value – let me submit any reasonable application of the Market Capitalization approach would suggest that the IRS expert is being conservative. Some might be shocked that the IRS is asking for so little as at the current stock price just over $272 a share, the market value of equity exceeds $120 billion. OK, the Market Capitalization approach would have one deduct the relatively minor amount for book value of equity and add any the book value of intangible assets, which would make the value estimate just under $120 billion. With sales in 2011 at $48 billion, the value to sales estimate is well over two. But we also need to remember that the valuation date was closer to the end of 2005 when sales were running around $8.5 billion per year and the Market Capitalization approach was closer to $20 billion. Yes – Amazon has experienced considerable sales growth and a large increase in its market value over the past seven years. We also need to remember that the Luxembourg entity did not receive the U.S. rights to the intangible assets. With US sales running at 55 percent of worldwide sales takes a large chunk of this $20 billion. And I’m sure the lawyers for Amazon will argue that not all of the bundle of intangible assets in the foreign region was created by the US parent given this statement:
Amazon discovered that it could not “simply re-launch the website in foreign countries” but rather, had to launch sites that were “specifically tailored to the browsing practices, purchasing habits, and language and cultural preferences” of its European market. It also needed to develop new technology to support those sales.
Even so – the $3.6 billion estimate put forth by the IRS expert’s discounted cash flow model still appears to be conservative in comparison to any reasonable application of the Market Capitalization approach. Of course, taxpayers often argue that their market valuations reflect irrational exuberance. It is true that Amazon’s operating margin was a mere 5 percent so its market valuation reflected an incredibly high price-earnings ratio. But also remember that Amazon has experienced very high growth during the past 7 years. Which is interesting in light of the other complaint about the IRS expert’s discounted cash flow model:
This disparity in valuation, according to the petition, reflects in part the company's determination that the pre-existing intangibles had a limited useful life of seven years or less, whereas IRS presumed that the intangibles had a perpetual useful life ... The discounted cash flow was based on the projected profits of the European websites from 2005 to 2011 and a terminal growth rate of 3.8 percent.
Given the high current price-earnings ratio, one could readily argue that the market is expecting a much high growth rate than 3.8 percent post 2011. Unless one wants to continue to argue that the current stock price of $272 a share is again reflecting irrational exuberance. Does Amazon management really want its tax attorneys to claim their shareholders are paying way too much for their shares in the company?

Saturday, January 19, 2013

Do 2007 Fed Transcripts Make Yellen Frontrunner To Succeed Bernanke?

I think maybe so.  There is a large photo of her above today's story in the Economy & Business section of the Washington Post entitled "Caught between two outlooks: Fed slow to abandon optimism even as a few sounded alarm, 2007 transcripts show."  Next to the photo of her is a quote by her from the Dec. 2007 meeting in which it is clear that she was one of the far-sighted ones who "sounded alarm" but failed to convince the FOMC to loosen monetary policy more vigorously at the time, when she was still President of the San Francisco Fed.  Bernanke was apparently torn, although he had made warning noises in the summer about deterioration of the markets.  Those who also "sounded alarm" with Yellen are identified as being Tim Geithner, then New York Fed President, Eric Rosengren, then a Fed governor, and Frederic Mishkin, author of the most widely used Money and Banking textbook, then also a governor.   Given that Janet Yellen is currently Vice Chair and apparently in good graces with Bernanke, and Obama is being fingered as a possible sexist, and that aside from being identified by Richard Shelby as an "inflation dove" (and he voted against her appointment), and she has avoided saying anything embarrassing in public or making many enemies, it would appear that she may well now be the frontrunner to replace Ben Bernanke as Fed Board Chair next year.  I would certainly support it.

Ironically, her most serious rival might prove to be fellow Wise Person, Geithner, if he is interested, now stepping down as Treasury Secretary.  He has been viewed by many as kind of a front man of the big banks and also somewhat dissed for not having an academic and professional background in economics, like Bernanke or Yellen have (although neither Greenspan or Volcker did).  However, there is reason to believe that he might well have been ahead of the rest of those in the inner Fed decisionmaking circles in worrying that the decline of the housing bubble could lead to a major financial crisis and economic downturn.  This would have been due to his deeper association with the New York financial markets and is given in a speech he gave on Sept. 15, 2006 in Hong Kong in which he mostly said optimistic things, but devoted several paragraphs near the end to warning that if there were a crisis he would be unable to get everybody in a room and just cut a deal to solve it the way his predecessor, McDonough did during the 1998 LTCM crisis. He noted that the links in the financial system through complex derivatives had become too obscure and global.  This speech can be found at .

While he was not identified in this article, other sources have identified a main opponent of the Yellen-Geithner-Rosengrim-Mishkin position as being Jeffrey Lacker, then and now the President of the Richmond Federal Reserve Bank.  Apparently there were specifically sharp arguments between him and Geithner over bank regulation, with Geithner seeing himself as having a national responsibility, whereas Lacker was protective of his oversight of the Bank of America and Wachovia Bank, both of which had their HQs in Charlotte, NC in his district.  Of course, more recently he has been the hawkish dissenting vote on the FOMC, although he has now stepped off it as a voting member.  An irony of this is that he was a Ph.D. student of Donald Hester at the University of Wisconsin-Madison, who is an old Keynesian and student of James Tobin's at Yale, where he crossed paths with Janet Yellen.  Curiously, Hester defends Lacker and his policy arguments, despite Lacker's apparent capture by the long-time monetarist research staff at the Richmond Fed.

In any case, here is one voice in support of the candidacy of Janet Louise Yellen to be the next Chair of the Board of Governors of the Federal Reserve System of the United States of America!  

Mitigation Versus Adaptation in Climate Change

Today I will take a stab at dispelling what I think is widespread confusion over what constitutes mitigating climate change, as against adapting to it.  Both are necessary, of course, but effective policy depends on understanding which is which.

Begin with the following stylized fact: reducing the severity of future climate change is essentially about keeping fossil fuels in the ground.  It is true that there are some benefits from tweaking carbon exchange (the carbon cycle that operates across the atmosphere and terrestrial and marine ecosystems)—for instance, by planting a forest—but the impacts are relatively small (not big enough to do most of the job) and of uncertain duration.  And someday there might be a feasible method for pulling the carbon out of the fuels we burn and re-sequestering it for near-eternity.  But for now these options are of limited value.  As Carbon Tracker noted last year, about 80% of hydrocarbon reserves have to be foregone if we are to achieve a reasonable likelihood of limiting warming to 2º C.

This gives us a rough and ready definition of mitigation: reducing the extraction of fossil fuels.  Everything else is adaptation.

But wait.  What about renewable energy?  Efficiency improvements?  Aren’t these about reducing the buildup of greenhouse gases?

To answer this it helps to distinguish between two types of adaptation: adaptation to climate change and adaptation to climate change policy.  An example of the first is reinforcing seawalls and dikes to minimize storm surges despite rising sea levels.  An example of the second is a wind farm.

A wind farm does not reduce carbon emissions.  What it does is to preserve energy services despite a decline in the rate of fossil fuel extraction.  In other words, it reduces the cost society has to pay in order to take the action that actually mitigates climate change, leaving the hydrocarbons in the ground.

The distinction is important.  Imagine a fossil fuel reserve with two uses, generating electricity and powering an industrial process.  Suppose we invest in a wind farm to replace the use of the fuel in electrical generation.  Now demand for the fuel drops, which lowers its price.  This may well lead to an increase in its industrial use—not fully offsetting of course, but partially offsetting.  The impact of the wind farm on climate mitigation is entirely measured by how much total fuel extraction is reduced, not by how much energy the farm produces.  Its principal function is to enable us to continue benefiting from electricity in the absence of burning fuels.

If you look at it this way, the accounting for carbon capping systems becomes much simpler.  It’s all about how much fuel (measured in terms of carbon equivalents) you do or don’t burn.  Everything else is about how to live with the consequences, both from limiting the use of fuels and from having to deal with climate change.  This is why a policy regime that offsets reductions in fuel combustion by granting credits to all sorts of green production investments is essentially trafficking in loopholes.

Friday, January 18, 2013

A Comment on What’s Causing the Rise in Inequality

I was at the ASSA session where Larry Mishel faced off against David Autor, and I came away thinking, like Jared Bernstein, that the EPI view of the world holds more water than the it’s-all-technology argument that Autor was defending.  The timing issues, including the discontinuities in the wage structure traceable to the early 1980s, are important, for instance.

Nevertheless, I think the whole debate suffers from insularity.  The critical technological developments of recent decades, especially digitization, computing and networking, have swept over the entire world.  They have transformed work in every developed country and much of the developing world.  Meanwhile, the dramatic rise in inequality, and the portions of the earnings distribution most impacted, differ tremendously.  You simply don’t see the same change in profile in most of continental Europe or Japan that you find in the US data.

Understanding these differences is where explanation would begin, in my opinion.  And here’s a hypothesis: analysts of income inequality in the US suffer from a dynamic, self-reinforcing lamppost effect.  They begin with a model of the world in which only the individual characteristics that workers bring to the market should matter for wage determination.  Then, to measure what’s taking place, they set up or utilize systems, like the CPS, to collect these individual data: your age, marital status, education, occupation and earnings.  Armed with this information, they crunch and recrunch the numbers to see which aspects of worker characteristics play the most important role.  The struggle to produce a convincing labor supply-based story generates demand for even more detailed individual-level observation on workers.  No doubt big data will be brought to bear shortly on this topic.

But what if the critical drivers of the wage structure have to do with the way work is organized in production systems?  I’m thinking here of decisions regarding how much autonomy workers can have at different levels within an organization, what monitoring and incentive mechanisms are adopted, how extensive are internal job ladders, etc.  All of these are affected by technology, of course, but only as refracted through organizational strategy, governance systems, market structure and the like.  We know about these things mostly through case studies because systematic data are not collected on them.  Anyone who has compared work organization and management across the “varieties of capitalism” knows that these matters are crucial, but it is difficult to construct formal tests in the absence of large sample data.  At best, matching workers to industry-level variables like age-adjusted average tenure and capital-labor ratios can generate proxies for what we really ought to measure directly but don’t.  (I have a little experience with the use of these proxies and am tempted to do more work with them.)

As for the policy implications, I think the change-in-the-nature-and-structure-of-firms story has rather radical implications.  How can we change how work gets done in America?

Addendum: This past week Gerald Davis’ book Managed by the Markets, has been the main assigned reading in the class I’m teaching.  It is excellent in describing, lucidly and concretely, how financialization has changed the American corporation.  This is the sort of account that could be written only by someone who has devoted a career to corporate finance and governance research.  It is a bit less effective when it strays into political theory and cultural criticism and also too Anglo-Saxon-centric, but at least what it says still makes sense if you know a bit about how the rest of the world is evolving.

Thursday, January 17, 2013

Monetary Policy: From Managing the Monetary Base to Setting an Interest Rate Floor

I have been following the exchange between Paul Krugman and Steve Randy Waldman with great interest.  For one thing, as a textbook author, I need to understand how the instruments of monetary policy are changing, if in fact the pattern of the last few years represents a fundamental shift.  Moreover, it seems to me that the changes in Fed operating procedure may be related to tectonic forces at work in the financial system.  See if you agree.

The old way of doing business is that the Fed, like any other central bank, would buy and sell bonds on the open market in order to inject or soak up liquidity.  Its open market operations would supply or withdraw reserves at member banks, and these reserves would constitute the raw material from which the money supply was generated.  (The money multiplier told us how much ultimate money would be created from these reserves, assuming the banks lent out everything they didn’t need to meet their required reserve ratio.)  The motive for lending excess reserves was that they didn’t pay interest, and almost any other use of money did.

Then 2008 happened, and the Fed wanted to unfreeze a number of financial markets—corporate paper, mortgage backed securities, you name it.  To bolster demand by putting these assets on its balance sheet, so-called quantitative easing, it was necessary to pump out vast amounts of reserves.  At this point the Fed began paying interest on excess reserves.  You could see this as a subsidy to the banking system (the Geithner doctrine: feed the beast) or a way of sterilizing its interventions in these markets or both.  In any case, banks now hold substantial excess reserves and, thanks to the return they get, they are in no hurry to shed them.  The irony has not been lost on some of us that, at a time when there is official consternation about the unwillingness of banks to finance small businesses and other ostensibly worthy borrowers, the Fed is paying them not to lend.

So what does the future portend?  At the very least, the Fed will use this new interest rate instrument to manage the unwinding of its portfolio.  If the economy picks up and banks begin to draw down their excess reserves, the Fed, if it worries about inflation, can slow down the process either by traditional open market operations or by raising the interest rate it pays on reserves.  The latter has the advantage of not risking unwanted impacts in the asset markets from which the Fed would otherwise be withdrawing.  And if it thinks that some of these markets are overheating, it can sell a portion of its portfolio while simultaneously lowering interest rates on reserves, a sort of reverse sterilization.  This much is clear.

But would it make sense for the Fed to undertake a permanent shift toward interest rate management as a substitute for open market operations?  Maybe yes.  Recall that the logic of OMO was based on a financial system in which the monetary base set a constraint on aggregate lending capacity.  We are now in a different world.  In shadow banking (a terrible misnomer—we need a new name) collateral serves this function across a wide range of nonbank institutions and nondepository functions within banks.  Securitization has its own multipliers, and aggregate activity can fluctuate with hardly a nod to whatever the level of the monetary base happens to be.  That said, the Fed can always diminish lending capacity via its interest rate floor, redirecting a portion of funds toward a class of assets (excess reserves) that do not multiply.  Of course, the floor can also be understood as a form of interest rate targeting that works on a different margin than OMO used to.  That will require a bit of institutional description in future textbooks, I suspect.

Paul Krugman is right to emphasize that there is a fiscal side to the interest rate floor: it reduces the income the treasury would otherwise receive from the Fed.  Stripped of all complexity, the government is paying wealth-holders to not invest.  This is unimpeachably logical in a world in which the government is also supplying an attractive put for all sorts of potentially dodgy institutions and activities.

The Difference Between Greenhouse Gas Accumulation and Social Insurance Commitments in One Word


Social insurance commitments are fungible across time; greenhouse gas accumulations in the atmosphere are not.  That’s why people who put up a big show about caring for future generations and do nothing about climate change are either oblivious or dishonest.

Monday, January 14, 2013

On Debt Ceiling Obama Speaks Loudly But Carries No Stick

Well, that really did it.  Obama has loudly declared that he will not negotiate with Congress over the debt ceiling.  He was riding high with the trillion dollar platinum coin gambit, only to hand it off to Treasury, which has now nixed it in conjunction with the Fed, even though Laurence Tribe had declared it legal.  Tribe had previously declared the other obvious weapon Obama could use against Congress blackmailing him into cutting entitlement program benefits unconstitutional, that is, for Obama to declare the debt ceiling unconstitutional, which it is. But now Obama is left with only some vague possibility of handing out some IOUs, which look less credible than either of the two now gone, or simply cutting a bunch of programs liked by the GOP in order to make interest payments on the debt if the ceiling is not raised.  His aides are claiming this gives him a strong hand because the GOP will be blamed if there is a default, but that is not of much comfort to those who are hoping to get jobs in an economy that for the moment is still growing, but might not be if there is a default.

Thursday, January 10, 2013

The Moral Imperative of a Debt Ceiling

From this morning's New York Times:
Representative Jerrold Nadler, Democrat of New York, signed on to the trillion-dollar [platinum] coin plan, telling Capital New York: “It sounds silly but it’s absolutely legal. And it would normally not be proper to consider such a thing, except when you’re faced with blackmail to destroy the country’s economy, you have to consider things.” 
But he might find resistance from Representative Greg Walden, Republican of Oregon, who said he would introduce legislation to close the loophole and end the debate once and for all. 
“My wife and I have owned and operated a small business since 1986. When it came time to pay the bills, we couldn’t just mint a coin to create more money out of thin air,” Mr. Walden said.
Dear Bank of America:

As a lender to my small business, you should be the first to know of a decision I’ve decided to take.  It wasn’t easy, and I’ve given it a lot of thought, but now I’m convinced it’s the right course of action.  I won’t be making my next monthly payment.

It is true that I have already ordered shipments of equipment and materials using the funds I’ve borrowed from you.  It is also true that I have adopted a pricing policy that’s designed to increase market share at the expense of current cash flow.  The result of these choices is that my financial obligations will exceed my revenues for an extended period of time.

I have a line of credit that can cover this shortfall; we discussed it at length in our meeting last month.  I appreciate your willingness to finance it at a negative real interest rate.  But I now believe that it is immoral for me to increase my debt, which could be a burden on my children and grandchildren.  As a result, I have imposed a debt limit on myself—a limit which I refuse to raise.

I’m sure you can understand the sound principles on which this choice is based: taking on more debt is evil.  That’s why I have chosen instead to default on your loan, as well as withhold wages I’ve promised to pay to my workers.  Please support me in this virtuous undertaking.

Sincerely yours.....

Wednesday, January 9, 2013

Virginia Governor McDonnell Goes Off Deep End On Transportation Policy

The top story on the front page of today's Washington Post bears the headline "McDonnell wants to end Va. gas tax" [current VA governor].  This may seem parochial/provincial, but I fear that this unprecedented and completely ridiculous proposal may become some new popular meme among Republicans around the nation.  While the gas tax would be eliminated, the sales tax would be increased, along with many driver related fees, including some on alternative fuel vehicles, although the tax on diesel fuel would be maintained.  I note one possibly good thing is that they might also actually help fund the extension of the Washington metro to Dulles airport.

The argument for this is that the gas tax is supposedly a "dinosaur tax" that has delivered a declining stream of revenue.  Hence it is considered to be a great breakthrough that a GOP governor and a GOP Speaker of the Assembly have come out for a growing possible future source of revenue, an increase in the sales tax, although they are also planning to raid other areas of the budget to help fund transportation, which is a major problem, particularly in Northern Virginia.  As it is, the gas tax rate has not been raised since 1986, and Virginia is now tied for 42nd among states in its gas tax rate.  Obviously some substantial increase in that could be done with little negative effect.

I have three broad objections to this.  Let me label them political-philosophical, economic, and moral.  On the first I think that there is something to be said for the "user pays" approach to public finance.  For many public services I am not enthusiastic, particularly when the users may be poor or the service simply must be supplied.   I am thinking about such things as eduction and health care.  However, funding for highways has applied this principle very widely and successfully in the US, which probably has the best highway system in the world.  All states have gas taxes, and I simply see no rationale for abandoning this principle in this case, except for political cowardice (and indeed Grover Norquist has already denounced this evil proposal because of its tax increase).

On the economic front I am really thinking about the environmental front, or if you will from the standpoint of just plain old neoclassical economics, internalizing externalities, particular air pollution from vehicles, most importantly right now, GHGs such as CO2.  Indeed, ironically, the second story on the top of WaPo's front page was headlined "Nation set record for heat last year."  Yet in the long story on the gas tax there was not a single mention of the environmental issue.  Maybe all of Richmond has fallen under the sway of GOP Attorney General and current gubernatorial candidate, Ken Cuccinelli, who infamously subpoeaned the University of Virginia for all of Michael Mann's emails from when he was on the faculty there in a search for that smoking gun we all know is not there that global warming is, you know, just a hoax.  So, I guess none of these clowns thinks anything about this.  As it is, at other levels people are talking about imposing a carbon tax, which would certainly show up as an increased gas tax, with a possible offset of a cut in income taxes.  But here they are proposing to go the other way: eliminate the gas tax entirely and raise the sales tax.

Which brings us to the moral or normative or fairness issue, particularly income distribution and who is paying for this.  So we are to go from a user pays tax to a sales tax, which are well known to be regressive.  Heck, VA has an income tax.  At least they could have proposed to raise that instead, but no, we have to go for the most regressive approach possible, along with raising fixed fees, which are even more regressive.  But we know what a bunch of Republicans care about that.  Finally, there is the matter of in-state versus out of staters.  Now people driving through the state using its highways will pay for part of their upkeep if they stop to buy gas here.  If this gets adopted, we shall see rich out of staters driving gas-hog vehicles and not paying at all with poor in-staters who do not drive having to cover for them.   All of this is simply and rankly unfair as far as I can see.

Every time I think we have seen the height of stupidity in new proposals, someone comes up with something else that is simply egregiously indefensible.  This is another example, and it is happening right here in my very own state.  Gag.

Saturday, January 5, 2013

Micro Up, Macro Down?

I have just read two posts, one by Justin Fox, the other by Paul Krugman, that make exactly the same point: microeconomics is doing just fine, but macro is riven by ideological disputes and insufficient use of evidence to resolve them.  Can this be true?

I certainly won’t argue with the take on macro.  Macro models draw on implicit social theory (what motivates individuals, how much deference we should give to their choices, how “social”, which is to say, interactive society actually is, etc.), and most empirical work is filtered through such models, so that testing merges with calibration.  It’s as bad as Fox and Krugman say it is.

But I’m basically a microeconomist, and I think economics is as ideologically driven and counterfactual in many of the topics I care about as it is in macro.  Apparently there is no evidence for this position: micro folks, as can be seen on display here in San Diego, are all in agreement, discussing each others’ papers in a friendly, collaborative way like monkeys grooming their neighbors’ furry backsides.  What does that imply about outliers like me?

In a nutshell, here is what I think is going on, based on my personal experience.  In the areas I work in, I find a lot of common ground with people trained in other social sciences, like psychology, political science and anthropology, and even more with those who have an applied policy background like education, labor relations and public health.  I am virtually unable to communicate on the same subjects with other economists, and I haven’t tried publishing in a “real” economics journal in decades.  (This is not an exaggeration.)

In other words, my view is that the crucial dividing lines in micro are drawn between economists and other kinds of researchers and not within the economics profession.  In macro, by contrast, the lines separate some economists from others.

I have avoided giving any specifics about what makes me such an apostate, since that would require a lot more writing, and I’m already late to an 8 am session I want to attend.  Let’s just say I find most economists' assessments of optimal this and preferred that to be based on implausible and repeatedly disconfirmed assumptions, and I think the substantive ends of policy should be taken instead from those who study ends substantively, like the aforementioned psychologists, public health specialists, environmental scientists, etc.  If you make that leap, you will have to cut the cord to a large part of economic theory, but you will fit in well enough with the hordes of people who don’t populate economics conventions.

Thursday, January 3, 2013


Brad Delong lays into Thomas Nagel's new book for its claim that Naturalism ultimately fails to make sense of the world. I haven't read Nagel's book yet, but I certainly agree with Nagel that naturalism is nonsense. This isn't because I am a super-naturalist, but because I am a normative realist:: a naturalist picture of the world doesn't allow for the reality of authoritative norms.  For naturalists, whether Humeans or (most but not all) Kantians, there is no fact of the matter about what we have reason to do.  If so,  science itself - because it depends on the objective authority of norms concerning what we have reason to believe - wouldn't make sense.  Economists in general are naturalists avant la lettre: they believe, almost to a person, that our reasons flow simply from our desires. This is normative nihilism. Normative realists believe that something's being good gives us a reason to want it, while a nihilist reverses this and makes its being good simply consist in our wanting it. Nihilism is absurd and should be rejected. If Delong wants to maintain his naturalism, he needs to answer not only Nagel, but Derek Parfit's new book, On What Matters - his masterpiece- which makes the case for normative (especially moral) realism (what he calls cognitivist non-naturalism ) better than I've ever seen it made.

Happy New Year, everyone!

Was That the Last Word on Taxes?

Senator McConnell:
Predictably, the President is already claiming that his tax hike on the “rich” isn’t enough. I have news for him: the moment that he and virtually every elected Democrat in Washington signed off on the terms of the current arrangement, it was the last word on taxes.
Economist Andrew Samwick:
In over eight years of blogging, you won't find a single word of praise for the Bush-Obama tax cuts. As a matter of revenue, we now permanently have a tax system that will not raise enough revenue to cover our expenditures.
Mind you – Dr. Samwick served as the chief economist on the staff of the Council of Economic Advisors in 2003 and 2004 (when George W. Bush was President). The question is not whether we will eventually have higher taxes – we will. The question is in what form will those extra taxes be and who will pay them. Naturally, we are not getting as much honesty on this score from Republican politicians as we are getting from Republican economists.

Wednesday, January 2, 2013

Manufacturing a criterion of judgement

Almost anyone who has viewed images such as those, for example, presented by Edward Burtynsky would probably feel a high degree of anxiety.  For surely, the implications behind the emergence of giant urban-industrial wastelands are staggering.  Nature has been "pronounced dead" and is "desacrilised".  Writer Theodore Roszak noted this observation 40 years ago in 1972.  

Roszak warned then that "as time goes on, the technocracy is bound to grow exquisitely adept at distracting protest and tranquilising anxiety.  He prophesied that "the bulk of our brainpower and governmental energy will one day be employed concocting cover stories, propagating ingenious alibis, and applying public relations" with a "vast mandarin establishment of professional obfuscators" "at the top of our society"[1].  

And so it passed. ...

The Big Issues For 2013

Tyler Cowen has presented 14 big stories to watch for 2013 and has provided links to similar stories at The Guardian and the Financial Times, .  I shall comment on a few of these both that he states and links to, as well as some I have on my own mind.

Given the passage of the minimalist fiscal cliff deal that raises some taxes but makes no major spending cuts, with the GOP supposedly now aiming to try to squeeze those out in a showdown later this year over raising the debt ceiling, I think that the top story for the US and world economy is indeed this forthcoming fight.  Cowen has as his fourth point a genuine concern that the fight will actually result in a failure to raise it on time and a default with potentially devastating consequences.  I agree that this is a real possibility and is indeed a serious danger to all of the above.  Maybe the coalition that passed the fiscal cliff bill will be reasonable on the debt ceiling, but some of those voting for it are lame ducks going out the door.  Obama has said that he will not stand for another replay of the insanity of what went down in August, 2011, but this will indeed require some drastic action.  The one that a lot of us have been urging is if the House goes bonkers  then he should move to shut this down once and for all by declaring the debt ceiling unconstitutional.  If he does not quite have he chutzpah for that, there is also the trillion dollar coin out, although I find that gimmicky.  If one is going to shut down this blackmail game once and for all, then eliminating the debt ceiling once and for all by declaring it unconstitutional is clearly the way to go.  In his speech this evening, Obama clearly has laid the ground by noting that the bills authorized by Congress must be paid.  In the end what may be holding him back on declaring it unconstitutional is that back in 2011 his old constitutional law professor at Harvard, Lawrence Tribe, declared it constitutional, but he needs to think about this very carefully and seriously.  If he screws up on this, and the House gets run by the loonies, things could indeed really go off the rails for the US and the world economies.

 Cowen's seventh point is that China needs to have a decent rebound.  Many may not realize how dicey things have gotten there.  Growth has decelerated to a 7.1% rate as of the third quarter of 2012.  Certainly China will need to adjust to having lower growth rates than it has had in the past, and this rate may be about what it can manage, although clearly many are hoping (and predicting) that it will rise again somewhat soon.  That would certainly aid global economic growth, but there remains a major fly in the ointment, aside from its overreliance on massive construction projects that seem to be increasingly of the diminishing returns variety, and that is its property bubble.  That may not burst, but there have been quite a few observers both in and out of China who have been very worried about this.  I would have to say that based on my own personal contacts, those in China have been more pessimistic about this situation than those outside of China.  I would say that a possible collapse of property values in China leading to a much more serious slowdown of the Chinese economy is probably the second (and possibly first) most serious threat to the global economy after the possibility of a screwup regarding the US debt ceiling.

His second point is concern about the Catalan independence movement in Spain.  This has not gotten much attention in the US, and there are a variety of ways that it could be resolved with little disruption to the world economy.  However, Spain remains the most crucial linchpin in the Eurozone, currently in a bad recession with youth unemployment at 50% and struggling to get its public finances sufficiently in order to keep the support from Germany and the various Eurozone financial institutions coming (and it should be kept in mind that prior to 2008, Spain was actually running a budget surplus, in contrast with Greece and some of the other troubled Eurozone economies).  While Cowen and others worry about Italy, I figure it will muddle through, but the Spanish efforts are completely complicated by the Catalan move to declare independence, both because it is one of the highest income parts of Spain, but also because its own debts are very large and it is likely that the EU may not even let it join, much less offer any assistance to it for dealing with them (arguments over Catalunya's ability control its own taxes is a central feature of its debate with the Spanish central government).  The bottom line is that the Spanish central government may simply be unable to negotiate successfully with both the Catalans and the Germans and other Eurozone powers.  A full bore Spanish default cannot be ruled out, and it is sufficiently large that this is the case that could really push the broader Eurozone situation into becoming the trigger for a broader global crisis.

Having mentioned China's problems, I note that more broadly the BRICS are not doing so well, and this will become a more serious problem in this coming year, although probably the problems of the other constituents of that group will not be bad enough to drag down the global economy.  But their collective problems constitute a dragging element where they had been a leading part of helping the world economy to recover from the Great Recession.  India's accumulating and multiple problems are Cowen's 12th point, and the possibility of a major political crisis in South Africa is his 7th.  Neither he nor his links mention Brazil or Russia, but the former has declerated to barely a 1% growth rate, which is far below what it has been doing in recent years.  Russia may be in the best shape of these, but if oil prices fall, it could also fall into difficulties, and clearly there is a serious political and corruption problem there that does not seem to disappear.

The Guardian provides discussons of both Iran and Israel, noting that both will have elections this year, with Israel's coming up quite soon.  Quite likely Netanyahu will be reelected, most likely with an even more hawkish coalition in his government.  Iran has a presidential election in June, and incumbent Ahmadinejad cannot run for reelection.  He has become quite alienated from the Mullah establishment, which will make it hard for him to get his favored candidate through.  Amazingly enough there is serious talk of relatively moderate former president Khatami running, although he will have to kowtow to the clerical establishment to do so.  This suggests the possibility of perhaps some opening to a settlement with the US over the nuclear issue that would keep the Israelis at bay from attacking.  Of course, the real leader is Vilayat-el-faqih Ali Khamene'i.  While hawks in Israel and the US have been warning for years that Iran will be at the point of being able to "break out" to build nuclear weapons quickly, there are more serious voices at this time saying that indeed this may be the year when that capability may be achieved.  If this is the case (or strongly perceived to be) and there is no agreement, there could be war, which could be catastrophic both economically and in other ways for the world economy and the world more generally.  However, it must be kept in mind that the US intelligence establishment, and even the Israeli one reportedly, agree that Khamene'i has not decided to build nuclear weapons and has issued numerous fatwas against having them at all.  It would be tragic if we go to war just on the possibility that they might have the capability of doing so.

Let me close this on a positive note.  I agree with Dean Baker and others that there is now a solid foundation for the US economy to continue to grow in a fairly solid, if unspectacular, way for the coming year, if it does not get derailed by one of the above potential crises, or something else not listed and possibly unforeseeable at this time.  There are two main sources for this optimism.  The most important one is that the crucial sector that generated the 2008 crisis has really hit bottom and now appears to be growing solidly, namely housing construction.  It will take a bad crisis to derail this recovery, which has been a long time coming, although it could happen (if a debt ceiling crisis resulted in an interest rate spike, that could do it). 

The other is the turnaround in the financial situation of most state and local governments, which unlike the federal government mostly face serious balanced budget rules.  The major source of decline in GDP and particularly of employment during the last two years has been this sector.  This decline now appears to be over.  While nobody is forecasting any noticeable increase coming from this sector (and a major move to austerity at the federal level could renew their decline), just having them not declining should help provide a support for the overall US economy to continue to grow in a reasonably solid way if one or another of the potential catastrophes lurking out there can be avoided.  And they could surprise everybody and actually engage in some expansion of spending and hiring.

So, happy new year one and all!

Tuesday, January 1, 2013

Mankiw – Soak the Middle Class

Mark Thoma reads Greg Mankiw so we don’t have to:
If people like Mankiw wanted cuts to social insurance so badly, why didn't they speak up and make this absolutely clear before the election? When Republicans accused Democrats of, for example, wanting to cut Medicare, why didn't Mankiw say yes, that's exactly what President Romney should do! I'm one of his advisors, I've made that clear, and here's his plan for cuts to Medicare, Social Security, Medicaid, and the like. Why pretend you are the defenders instead of the cutters? The answer is, of course, is that it's not what the public wants. The bipartisan budget wonks in Washington may have their own plan to cut social insurance, but guess what? We live in a Democracy, and the Romney/Mankiw view was rejected (so now Republicans try to get it through the back door by gumming up the legislative works and holding the economy hostage). It's not what people want. Acting like it is what they want through a misleading suggestion that it's in some bipartsan commission report that doesn't actually exist is contrary to the message the election delivered.
I’m not sure if Mark has read Greg’s latest NY Times oped yet:
Fairness, like beauty, is in the eye of the beholder. Unfortunately, people’s judgment is often based on anecdotes that distort rather than illuminate. The story of the undertaxed Warren Buffett and his overtaxed secretary looms larger in the public’s mind than it should ... These data suggest that the rich are not, as a general matter, shirking their responsibilities to support the federal government. To me, the current tax system looks plenty progressive. Others may disagree. One point, however, cannot be disputed: Even if President Obama wins all the tax increases on the rich that he is asking for, the long-term fiscal picture will still look grim. Perhaps we can stabilize the situation for a few years just by taxing the rich, but as greater numbers of baby boomers retire and start collecting Social Security and Medicare, more will need to be done. Which brings us back to the middle class … Ultimately, unless we scale back entitlement programs far more than anyone in Washington is now seriously considering, we will have no choice but to increase taxes on a vast majority of Americans.
Shorter Mankiw – if the middle class wants their Social Security and Medicare benefits, they must pay higher taxes as we already tax the rich way too much. Let’s be fair to Greg – there are a lot of Romney Republicans who privately agree with this sentiment. But this is not the public message that Mitt Romney campaigned on. Nor is it the message that the rest of the Republican political leaders wish to admit publicly.

After the Deal on Taxes – Where Are We Going on Expenditures?

Jonathan Weisman reports on the deal that passed the Senate:
In one final piece of the puzzle, negotiators agreed to put off $110 billion in across-the-board cuts to military and domestic programs for two months while broader deficit reduction talks continue ... Democrats were incredulous that the president had ultimately agreed to around $600 billion in new tax revenue over 10 years when even Mr. Boehner had promised $800 billion. But the White House said it had also won concessions on unemployment insurance and the inheritance tax among other wins.
Before spring arrives, we will have to face up to the issue of spending cuts. I suspect that the Republicans will insist that these cuts represent at least $600 billion over the next ten years and that none of these cuts come from the defense department. In other words, the Republicans will want cuts in Social Security, Federal expenditures on health care (think Medicaid and SCHIP), and a host of large cuts in other small Federal programs. But why not reduce defense spending? Progressives should call for all of this $600 billion over the next ten years – which turns out to be a mere 0.3% of the decade’s potential GDP. After all, current defense spending is running at 5.3% of GDP. Barney Frank recently made this case. Progressives need to continue to hammer this argument. We may not get all of the cuts in government spending from defense but if we don’t make this argument, I fear that the Republicans will get all they want at the end of the day.