The Wall Street Journal reports on the spread of homes with negative equity. As of a year ago, estimates were that 7% of mortgages that originated in 2004 through 2006 the amount owed was more than their homes were worth, but housing prices have fallen nearly 5% since then and are predicted to fall further. [In the comment below, Molnar pointed out that my original commentary was in error. Thanks for keeping me honest].
Hagerty, James R. 2007. "Price Indexes Will Map Out Spread of 'Negative Equity." Wall Street Journal (22 December): p. A 2.
http://online.wsj.com/article/SB119829696940946747.html?mod=todays_us_page_one
"Last March, First American CoreLogic, a housing- and mortgage-data supplier in Santa Ana, Calif., calculated that nearly 7% of 32 million U.S. households studied as of December 2006 owed more than their homes were worth, based on computer estimates of the property values. The homes studied had mortgages originated in 2004 through 2006, around the peak in the housing market. Since the end of 2006, U.S. home prices on average have fallen nearly 5%, said Mark Fleming, chief economist at the firm. That suggests that about 11% of the homes studied now would have negative equity. An additional 5% or so probably have equity of less than 5%. That doesn't leave much cushion at a time when prices are still falling and most economists don't expect the market to hit bottom for at least another year."
"Economists at Merrill Lynch say home prices are likely to fall 10% in 2008 after slipping 5% this year. Mark Zandi, chief economist of Moody's Economy.com, a research firm in West Chester, Pa., recently forecast that on average U.S. house prices will decline about 13% by the second quarter of 2009 from a peak in the second quarter of 2006. Declines will be much larger in Florida, California, Arizona and Nevada, as well as in the metropolitan areas of Washington, D.C., and Detroit, he said."
Sunday, December 23, 2007
Friday, December 21, 2007
The WTO, Gambling, and Intellectual Property
The United States Puritanical values collided with its neoliberal ideology in passing a law that prevented online gambling. Several companies -- Microsoft, Google, Yahoo -- just paid fined for posting ads for Internet gambling. Antigua and Barbuda protested since the US allows other forms of domestic gambling. They demanded huge compensation for their loss of business. The WTO judgment offers a much smaller amount, but it gives the country the right to violate intellectual property up to $21 million.
Kanter, James and Gary Rivlin. 2007. "In Trade Ruling, Antigua Wins a Right to Piracy." New York Times (22 December).
http://www.nytimes.com/reuters/washington/politics-trade-wto-gambling.html
"Antigua and Barbuda won compensation from the United States on Friday in a long-running trade dispute about gambling, but the amount was far lower than the tiny Caribbean nation had been seeking. A World Trade Organization (WTO) arbitration panel granted Antigua's request to levy trade sanctions on U.S. intellectual property, for instance by lifting copyright on films and music to sell it themselves, prompting concern from Washington."
"The WTO panel said Antigua was entitled to compensation of $21 million a year from the United States for being shut out of the U.S. online gambling market. The ruling is only partial consolation for the former British colony, which built up an Internet gambling industry to replace declining tourism revenues, only to find itself shut out of the world's biggest gambling market."
"The award falls far short of what Antigua had demanded -- $3.44 billion in "cross-retaliation," allowing it to seek damages outside the original services sector. Washington had argued Antigua was entitled to only $500,000 in compensation."
Kanter, James and Gary Rivlin. 2007. "In Trade Ruling, Antigua Wins a Right to Piracy." New York Times (22 December).
http://www.nytimes.com/reuters/washington/politics-trade-wto-gambling.html
"Antigua and Barbuda won compensation from the United States on Friday in a long-running trade dispute about gambling, but the amount was far lower than the tiny Caribbean nation had been seeking. A World Trade Organization (WTO) arbitration panel granted Antigua's request to levy trade sanctions on U.S. intellectual property, for instance by lifting copyright on films and music to sell it themselves, prompting concern from Washington."
"The WTO panel said Antigua was entitled to compensation of $21 million a year from the United States for being shut out of the U.S. online gambling market. The ruling is only partial consolation for the former British colony, which built up an Internet gambling industry to replace declining tourism revenues, only to find itself shut out of the world's biggest gambling market."
"The award falls far short of what Antigua had demanded -- $3.44 billion in "cross-retaliation," allowing it to seek damages outside the original services sector. Washington had argued Antigua was entitled to only $500,000 in compensation."
Words That Could Go Down In History
"But I won't be unsupervised! I'll be with the basketball team!!"
Thursday, December 20, 2007
A Million Refugees from Iraq Since Surge Started
Juan Cole reports through a link to McClatchy that a million refugees have fled Iraq since the surge began, with 500,000 leaving during the July to October period of greatest troop runup, a fifth of these having experienced torture or other violence. This rather offsets the happy talk stories about people dribbling back recently, most of them because they have run out of money and the Syrians want them to leave.
Link is http://www.mcclatchydc.com/iraq/story/23159.html.
While we are at it, after a meeting this past weekend in Baghdad, the Kurdish leaders are threatening to leave the Maliki government. Remains ongoing differences over oil laws and contracts, aggravated by invasion from Turkey of Kurdistan, apparently supported by the US. While still denouncing the Kurdish oil contracts as illegal, the Iraqi oil minister is now negotiating contracts with big majors like BP and Shell under the old Saddam-era oil law (see iraqioilreport.com).
Link is http://www.mcclatchydc.com/iraq/story/23159.html.
While we are at it, after a meeting this past weekend in Baghdad, the Kurdish leaders are threatening to leave the Maliki government. Remains ongoing differences over oil laws and contracts, aggravated by invasion from Turkey of Kurdistan, apparently supported by the US. While still denouncing the Kurdish oil contracts as illegal, the Iraqi oil minister is now negotiating contracts with big majors like BP and Shell under the old Saddam-era oil law (see iraqioilreport.com).
David Wessel and Mark Thoma on The Summers Call for Fiscal Stimulus
Update: At the end of my post, I noted Sudeep Reddy’s argument that state and local fiscal policy will bail us out of this recession. If this claim struck you as odd, Menzie Chinn also found this to be odd as well.
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My EconoSpeak colleague Brenda Rosser seems to more pessimistic than even Lawrence Summers as she argues that a $75 billion fiscal stimulus may not be enough. David Wessel also seems to think a fall in aggregate demand is likely:
The policy mix to boost aggregate demand is indeed the hot topic of the day.
David starts with the usual reasons why we rely on a fast, nimble, and perhaps independent Central Bank and its monetary policy tools rather a sluggish and political Congress and its fiscal policy tools for aggregate demand management. David then makes a few arguments why monetary policy alone may not do the trick. One of these arguments strikes me as very odd:
To David’s credit, he picks up on the fact that easy money will tend to raise net exports. But given our massive current account deficit, isn’t dollar devaluation on its own not only desirable but necessary?
Mark Thoma seems to have a preference for using changes in government spending over tax policy if we need to turn to fiscal policy for stabilization purposes:
Then there is the view that all will be AOK:
Sudeep Reedy offers up five reasons why a recession may be averted. One comes from a usual White House silliness that job growth is still terrific, while another comes from the dubious claim that the slump in residential investment is over. A third – and more plausible - argument is that net export demand will pick up some of the slack. The last two come from the belief that easier monetary policy and increases in government spending are already in the works. Real government purchases for 2007QIII, however, were only 2.7% higher than they were for 2006QIII so Reedy’s claim focused on the increase in state and local spending. Why not also focus on the even larger percentage increase in defense spending while one is at this game? Reedy failed to note the important fact that real nondefense Federal purchases haven declined over the past year. It would seem the new found GOP fiscal discipline campaign is working against using fiscal policy as a stabilization tool.
*******************************************
My EconoSpeak colleague Brenda Rosser seems to more pessimistic than even Lawrence Summers as she argues that a $75 billion fiscal stimulus may not be enough. David Wessel also seems to think a fall in aggregate demand is likely:
That the economy needs help isn't at issue. The issue is whether to mix fiscal stimulus with monetary policy - whether the government should do something more than offer a little help to some struggling homeowners.
The policy mix to boost aggregate demand is indeed the hot topic of the day.
David starts with the usual reasons why we rely on a fast, nimble, and perhaps independent Central Bank and its monetary policy tools rather a sluggish and political Congress and its fiscal policy tools for aggregate demand management. David then makes a few arguments why monetary policy alone may not do the trick. One of these arguments strikes me as very odd:
The Fed can't cut rates because it fears a dollar crash. At the Fed, the gradual decline in the dollar is viewed as a tonic for the economy; it'll help boost exports, though it does exacerbate the central bank's inflation anxiety. But cutting rates too much too fast could trigger a market-rattling, confidence-shaking plunge in the dollar.
To David’s credit, he picks up on the fact that easy money will tend to raise net exports. But given our massive current account deficit, isn’t dollar devaluation on its own not only desirable but necessary?
Mark Thoma seems to have a preference for using changes in government spending over tax policy if we need to turn to fiscal policy for stabilization purposes:
If we are going to use tax cuts as a fiscal policy tool to stabilize the economy, we have to be willing to move the tax rate in both directions, up as well as down. We are quite willing, currently, to move the tax rate down but when people like Martin Feldstein call for a temporary tax cut to stimulate the economy, if such a policy were to be enacted does anyone doubt the difficulty of raising taxes again later even with automatic expiration provisions?
Then there is the view that all will be AOK:
Predicting the economy's path is especially difficult at turning points, and the economy is sending mixed signals. But here are some reasons why the economy might avoid the ditch
Sudeep Reedy offers up five reasons why a recession may be averted. One comes from a usual White House silliness that job growth is still terrific, while another comes from the dubious claim that the slump in residential investment is over. A third – and more plausible - argument is that net export demand will pick up some of the slack. The last two come from the belief that easier monetary policy and increases in government spending are already in the works. Real government purchases for 2007QIII, however, were only 2.7% higher than they were for 2006QIII so Reedy’s claim focused on the increase in state and local spending. Why not also focus on the even larger percentage increase in defense spending while one is at this game? Reedy failed to note the important fact that real nondefense Federal purchases haven declined over the past year. It would seem the new found GOP fiscal discipline campaign is working against using fiscal policy as a stabilization tool.
CGE: Is There a Defense?
I’ve been asked to review an article using computable general equilibrium (CGE) methodology. I’m likely to decline, but before I do I want to ask the vast universe that follows this blog: is there any defense against the argument that CGE and its offspring (DSGE) are simply bad economics?
There are two arguments actually:
1. CGE is an attempt to implement empirically a model that has been blown away theoretically. For 30 years we have known in precise terms why representative agent GE models are hogwash. We also know that the conditions for unique solutions are impossibly restrictive. Finally, while we have models that can translate modern, post-utility understanding of economic behavior into functional form, to do this throughout an economy, in every nook and sector, would be a gargantuan, and probably pointless, project. To put it bluntly, CGE modelers take as their starting point refuted theory.
2. CGE is false empiricism. It claims to generate results based on real-world data, but testing is nil, and I mean nil. Is there any literature out there I have missed in which past models are examined retrospectively against actual economic outcomes? If not, where is the falsifiability?
I will wait to send my rejection email. Maybe one of you can convince me that it is worth a few hours of my time to promote “better” CGE work.
There are two arguments actually:
1. CGE is an attempt to implement empirically a model that has been blown away theoretically. For 30 years we have known in precise terms why representative agent GE models are hogwash. We also know that the conditions for unique solutions are impossibly restrictive. Finally, while we have models that can translate modern, post-utility understanding of economic behavior into functional form, to do this throughout an economy, in every nook and sector, would be a gargantuan, and probably pointless, project. To put it bluntly, CGE modelers take as their starting point refuted theory.
2. CGE is false empiricism. It claims to generate results based on real-world data, but testing is nil, and I mean nil. Is there any literature out there I have missed in which past models are examined retrospectively against actual economic outcomes? If not, where is the falsifiability?
I will wait to send my rejection email. Maybe one of you can convince me that it is worth a few hours of my time to promote “better” CGE work.
Further Thoughts on Populism, With Application to Criticisms of Edwards’ Fancy Digs
Inspired by Barkley, I have more to say about populism. In a nutshell, the word has multiple connotations, and political opinion-molders manipulate the ambiguities for their own purposes. Let’s disentangle and shed some light.
I think the Wikipedia entry is right in identifying “the people” in populist thought as counterposed to an elite that insults and oppresses them. But what do populists propose as the remedy?
Long ago, in an article for a journal with no web presence and therefore no linkability, I wrote that there are three ways that political movements can claim to be democratic. (1) They can claim that their leading members are “of the people”, that they can be trusted to represent the majority because, by birth and life circumstances, they are part of it. I called this agent-based publicness. (2) They can claim that their programs would benefit the interests of the majority. This is akin to the utilitarianism of mainstream economics, particularly if metrics, such as median income, are used to take distribution into account. I called this interest-based publicness. (3) They can promote programs or institutions that expand the direct role of the majority in deliberation and decision-making in the public sphere: transparency, participation, etc. I called this process-based publicness.
In my view, all three have a role to play, and all of them have blind spots that need to be recognized and offset. What interests me right now is not the question of what mix would be best in general or in the US in 2008, but how these different approaches are confused in our current political discourse.
First, all three can be expressions of populism if they are presented as solutions to the dispossession of the people by the elites.
And what do they look like today?
Agent-based populism: A candidate has a personal style, including a method of speaking, that shows he or she is “like us”. This could mean anything from avoiding complicated academic language to making references to pop music, to going to NASCAR races (OK, not in 2008 any more) or on hunting trips. It can also mean being multi-racial if “the people” are seen as multi-racial. It depends, obviously, on who “we” are. Mike Huckabee’s populism is, as far as I can tell, almost entirely of this sort. South of where I normally sit (in an office in the US), one of the chief populist claims for Hugo Chavez and Evo Morales is that they really understand the poor, nonwhite majority because this is their heritage too.
Interest-based populism: Every reader of this blog knows that America has reached new depths of economic inequality under Reagan-Bush-Clinton-Bush. An interest-based populist in this context should be someone like Edwards who campaigns on this reality and proposes policies on the grounds that they would reverse it. (Whether those policies are adequate to the job is another matter.) It is possible, however, for someone to argue that the true interests of the people are not economic but cultural, the preservation of their prejudices, taboos, etc. This opens the door to populists like George Wallace or, today, Lou Dobbs—to take an example from the media.
Process-based populism: I make a big deal of this possibility because I believe it has much more to offer than it is given credit for, but I have to admit that it is barely visible on the current political landscape. A candidate could take up this mantle by championing democratic social movements, unions and greater direct public participation in government. Civil liberties largely fall within this framework as well, as they provide the foundation for popular activism against the state. There is much discussion of how to expand the capacity and role of civil society elsewhere—in Latin America and the EU especially—but hardly any in the US. Kucinich gives us a small taste of this, when we can find him, and Obama (very) obliquely hints at it.
So this brings us to the use of “populism” as a pejorative, and specifically as it pertains to Edwards. Those who say he is a false populist because he enjoys an upscale lifestyle are relying on populism #1: he is not truly of the people. But he could live in bourgeois luxury of the most extreme sort and still deliver on populism #2. Think FDR.
A second critique of populism goes directly at #2, I believe. It is argued that the immediate interests of the downtrodden are in conflict with sound economic policy. The poor want handouts, but this would bludgeon the budget, wipe out incentives for investment, etc. By appealing too openly to the multitudes, someone like Edwards is seen as being at risk of becoming beholden to their short-sighted demands. Here the underlying presumption is that the poor have little understanding of their long-term interests and are prone to being bought off. Indeed, there is a cynical form of populism, much practiced in Latin America, in which a few highly publicized giveaways are used to win support, while fundamental policies continue to favor the rich.
My judgment, for now, is that Edwards is not guilty of this second sin.
What we mostly lack, I think, is the third dimension, empowerment. Is it accidental that it is historically linked to socialism?
I think the Wikipedia entry is right in identifying “the people” in populist thought as counterposed to an elite that insults and oppresses them. But what do populists propose as the remedy?
Long ago, in an article for a journal with no web presence and therefore no linkability, I wrote that there are three ways that political movements can claim to be democratic. (1) They can claim that their leading members are “of the people”, that they can be trusted to represent the majority because, by birth and life circumstances, they are part of it. I called this agent-based publicness. (2) They can claim that their programs would benefit the interests of the majority. This is akin to the utilitarianism of mainstream economics, particularly if metrics, such as median income, are used to take distribution into account. I called this interest-based publicness. (3) They can promote programs or institutions that expand the direct role of the majority in deliberation and decision-making in the public sphere: transparency, participation, etc. I called this process-based publicness.
In my view, all three have a role to play, and all of them have blind spots that need to be recognized and offset. What interests me right now is not the question of what mix would be best in general or in the US in 2008, but how these different approaches are confused in our current political discourse.
First, all three can be expressions of populism if they are presented as solutions to the dispossession of the people by the elites.
And what do they look like today?
Agent-based populism: A candidate has a personal style, including a method of speaking, that shows he or she is “like us”. This could mean anything from avoiding complicated academic language to making references to pop music, to going to NASCAR races (OK, not in 2008 any more) or on hunting trips. It can also mean being multi-racial if “the people” are seen as multi-racial. It depends, obviously, on who “we” are. Mike Huckabee’s populism is, as far as I can tell, almost entirely of this sort. South of where I normally sit (in an office in the US), one of the chief populist claims for Hugo Chavez and Evo Morales is that they really understand the poor, nonwhite majority because this is their heritage too.
Interest-based populism: Every reader of this blog knows that America has reached new depths of economic inequality under Reagan-Bush-Clinton-Bush. An interest-based populist in this context should be someone like Edwards who campaigns on this reality and proposes policies on the grounds that they would reverse it. (Whether those policies are adequate to the job is another matter.) It is possible, however, for someone to argue that the true interests of the people are not economic but cultural, the preservation of their prejudices, taboos, etc. This opens the door to populists like George Wallace or, today, Lou Dobbs—to take an example from the media.
Process-based populism: I make a big deal of this possibility because I believe it has much more to offer than it is given credit for, but I have to admit that it is barely visible on the current political landscape. A candidate could take up this mantle by championing democratic social movements, unions and greater direct public participation in government. Civil liberties largely fall within this framework as well, as they provide the foundation for popular activism against the state. There is much discussion of how to expand the capacity and role of civil society elsewhere—in Latin America and the EU especially—but hardly any in the US. Kucinich gives us a small taste of this, when we can find him, and Obama (very) obliquely hints at it.
So this brings us to the use of “populism” as a pejorative, and specifically as it pertains to Edwards. Those who say he is a false populist because he enjoys an upscale lifestyle are relying on populism #1: he is not truly of the people. But he could live in bourgeois luxury of the most extreme sort and still deliver on populism #2. Think FDR.
A second critique of populism goes directly at #2, I believe. It is argued that the immediate interests of the downtrodden are in conflict with sound economic policy. The poor want handouts, but this would bludgeon the budget, wipe out incentives for investment, etc. By appealing too openly to the multitudes, someone like Edwards is seen as being at risk of becoming beholden to their short-sighted demands. Here the underlying presumption is that the poor have little understanding of their long-term interests and are prone to being bought off. Indeed, there is a cynical form of populism, much practiced in Latin America, in which a few highly publicized giveaways are used to win support, while fundamental policies continue to favor the rich.
My judgment, for now, is that Edwards is not guilty of this second sin.
What we mostly lack, I think, is the third dimension, empowerment. Is it accidental that it is historically linked to socialism?
Wednesday, December 19, 2007
The Payoff From Being Too Big to Fail?
The Wall Street Journal had an interesting piece suggesting that banks pay a premium for takeovers that bring their size up $100 billion. Maybe if the writeoffs get a bit bigger, Too Big To Fail status may pay off.
Two Federal Reserve economists, "Elijah Brewer III and Julapa Jagtiani, combed through 13 years of banking merger data to establish whether banks were willing to pay extra premiums to attain TBTF [Too Big To Fail] status, which they concluded was around $100 billion in assets."
"... the researchers found that premiums shot up when a bank did a deal that vaulted it over the $100 billion asset threshold. Overall, the nine banks that did such deals paid an additional $14 billion to $16.5 billion to get to that gold-plated TBTF status."
""It's more than Too Big To Fail. It includes all the benefits of being so big and powerful. These may not just be benefits from being bailed out, but being able to talk to the White House and Congress," Ms. Jagtiani said in an interview. "There is a lot of subsidy provided to really large banks," she added, noting that the study was the opinion of the authors and not the Federal Reserve. "It seems like we may be encouraging misallocation of resources." She did caution that "at the Federal Reserve, we don't have a list of Too Big To Fail banks"."
Cimilluca, Dana. 2007. "Can Banks Grow Too Big To Fail? Research Finds Lenders Would Pay More to Cross $100 Billion Threshold." (12 December): p. C 2.
http://online.wsj.com/article/SB119743338212123099.html
Two Federal Reserve economists, "Elijah Brewer III and Julapa Jagtiani, combed through 13 years of banking merger data to establish whether banks were willing to pay extra premiums to attain TBTF [Too Big To Fail] status, which they concluded was around $100 billion in assets."
"... the researchers found that premiums shot up when a bank did a deal that vaulted it over the $100 billion asset threshold. Overall, the nine banks that did such deals paid an additional $14 billion to $16.5 billion to get to that gold-plated TBTF status."
""It's more than Too Big To Fail. It includes all the benefits of being so big and powerful. These may not just be benefits from being bailed out, but being able to talk to the White House and Congress," Ms. Jagtiani said in an interview. "There is a lot of subsidy provided to really large banks," she added, noting that the study was the opinion of the authors and not the Federal Reserve. "It seems like we may be encouraging misallocation of resources." She did caution that "at the Federal Reserve, we don't have a list of Too Big To Fail banks"."
Cimilluca, Dana. 2007. "Can Banks Grow Too Big To Fail? Research Finds Lenders Would Pay More to Cross $100 Billion Threshold." (12 December): p. C 2.
http://online.wsj.com/article/SB119743338212123099.html
Who is a "Populist"?
In recent election cycles the term "populist" has been applied to such varied figures as John Edwards, Mike Huckabee, Patrick Buchanan, and Ross Perot, arguably sharing a sort of economic nationalism for the poor. Originating in anti-aristocratic agrarian movements in Europe, especially the Russian Narodniki of the late 1800s, the movement in the US attempted to encompass the urban working class as well, as symbolized by the rural Scarecrow marching along with the urban Tin Woodman on the Yellow Brick Road to defeat the Wicked Witch of the East, with populist heroine Dorothy and the Cowardly Lion stand-in for fundamentalist and anti-imperialist populist William Jennings Bryan, he of the "Cross of Gold" speech, in Baum's populist fantasy novel. The movement would be partly absorbed by the later Progressive and New Deal movements.
The movement has always had a deep divide, with race the central issue. So, on the one hand we have the progressive wing, symbolized by the remnant Democratic-Farmer-Labor Party of Minnesota and the presidential candidacy in 1948 of FDR's former Ag Secretary, Henry Wallace for the Progressive Party. On the other, in the Deep South, we got "Pitchfork" Ben Tillman in South Carolina, whose follower, Strom Thurmond, would run as the "Dixiecrat" in the 1948 presidential campaign. Today, this divide most clearly shows up in the struggle over immigration.
The movement has always had a deep divide, with race the central issue. So, on the one hand we have the progressive wing, symbolized by the remnant Democratic-Farmer-Labor Party of Minnesota and the presidential candidacy in 1948 of FDR's former Ag Secretary, Henry Wallace for the Progressive Party. On the other, in the Deep South, we got "Pitchfork" Ben Tillman in South Carolina, whose follower, Strom Thurmond, would run as the "Dixiecrat" in the 1948 presidential campaign. Today, this divide most clearly shows up in the struggle over immigration.
Summers: Increase Aggregate Demand Now
When Angrybear introduced me as a ProGrowthLiberal, he speculated that I tended to agree with Lawrence Summers on macroeconomic policy. So one might wonder if I agree with his latest:
I’ve been calling for a more expansionary monetary policy for while, but I have also been calling for long-term fiscal restraint. So do I agree with Larry’s recent call for fiscal stimulus?
When it finally became evident to most economists that we were in the midst of a business investment led recession back in 2001, this Rubinesque Bear suggested that we have a redux of the 1993 Clinton fiscal philosophy – a little short-term fiscal stimulus with a commitment that we would gradually move to long-term fiscal restraint. The hope was that a mix of short-term interest rates – which the Greenspan FED gave us in spades – combined with an acceleration of public and private consumption but the promise of higher national savings in the out years might help reverse the investment and general aggregate demand slump. What we got from the Bush White House was very little in short-term fiscal stimulus and a virtual guarantee that we would have long-term fiscal irresponsibility. It has always been my view that this upside fiscal policy was one reason why long-term interest rates took much longer to decline and why the business investment slump lasted so long. Sure, residential investment rose back then – but that only partially offset the dismal performance of business investment - as well as the export slump.
Today, business investment is stronger but residential investment has plummeted. If Dr. Summers is dusting off the 1993 Clinton fiscal philosophy, which was also what Robert Rubin had convinced a few moderate Republican and Democratic Senators to advocate back in late 2001, then I agree with him 100 percent. And maybe this time – the President might also work towards passing the recommended policy package rather than undermining at every turn like he did six years ago.
Hat tip to Mark Thoma.
Former Treasury Secretary Lawrence Summers, once a fiscal hawk among Clinton Democrats, said the government should consider a $50 billion to $75 billion tax-cut and spending package to stave off a deep recession. Mr. Summers, now a Harvard University professor and investment-fund manager, also urged the Federal Reserve to take more aggressive action to ensure that its rate cuts actually reduce consumers' interest charges and stimulate spending.
I’ve been calling for a more expansionary monetary policy for while, but I have also been calling for long-term fiscal restraint. So do I agree with Larry’s recent call for fiscal stimulus?
When it finally became evident to most economists that we were in the midst of a business investment led recession back in 2001, this Rubinesque Bear suggested that we have a redux of the 1993 Clinton fiscal philosophy – a little short-term fiscal stimulus with a commitment that we would gradually move to long-term fiscal restraint. The hope was that a mix of short-term interest rates – which the Greenspan FED gave us in spades – combined with an acceleration of public and private consumption but the promise of higher national savings in the out years might help reverse the investment and general aggregate demand slump. What we got from the Bush White House was very little in short-term fiscal stimulus and a virtual guarantee that we would have long-term fiscal irresponsibility. It has always been my view that this upside fiscal policy was one reason why long-term interest rates took much longer to decline and why the business investment slump lasted so long. Sure, residential investment rose back then – but that only partially offset the dismal performance of business investment - as well as the export slump.
Today, business investment is stronger but residential investment has plummeted. If Dr. Summers is dusting off the 1993 Clinton fiscal philosophy, which was also what Robert Rubin had convinced a few moderate Republican and Democratic Senators to advocate back in late 2001, then I agree with him 100 percent. And maybe this time – the President might also work towards passing the recommended policy package rather than undermining at every turn like he did six years ago.
Hat tip to Mark Thoma.
Green Gas Emissions, Risks and Uncertainty: When Kenneth Arrow Speaks – Just Listen
Kenneth Arrow explains the general issue thusly:
While Arrow notes that the critics of the Stern Report cite the role of uncertainty as their rational for taking no action, he fires back with his own analysis of the roles of uncertainty and risk.
Two factors differentiate global climate change from other environmental problems. First, whereas most environmental insults – for example, water pollution, acid rain, or sulfur dioxide emissions – are mitigated promptly or in fairly short order when the source is cleaned up, emissions of CO2 and other trace gases remain in the atmosphere for centuries. So reducing emissions today is very valuable to humanity in the distant future. Second, the externality is truly global in scale, because greenhouse gases travel around the world in a few days. As a result, the nation-state and its subsidiaries, the typical loci for internalizing externalities, are limited in their remedial capacity. (However, since the United States contributes about 25% of the world’s CO2 emissions, its own policy could make a large difference.)
While Arrow notes that the critics of the Stern Report cite the role of uncertainty as their rational for taking no action, he fires back with his own analysis of the roles of uncertainty and risk.
There is greater disagreement about how much to discount the future simply because it is the future, even if future generations are no better off than us. Whereas the Stern Review follows a tradition among British economists and many philosophers against discounting for pure futurity, most economists take pure time preference as obvious. However, the case for intervention to keep CO2 levels within bounds (say, aiming to stabilize them at about 550 ppm) is sufficiently strong to be insensitive to this dispute. Consider some numbers from the Stern Review concerning the future benefits of preventing greenhouse gas concentrations from exceeding 550 ppm, as well as the costs of accomplishing this. The benefits are the avoided damages, including both market damages and non-market damages that account for health and ecological impacts. Following a “business as usual” policy, by 2200, the losses in GNP have an expected value of 13.8%, but with a degree of uncertainty that makes the expected loss equivalent to a certain loss of about 20%. Since the base rate of economic growth (before calculating the climate change effect) was taken to be 1.3% per year, a loss of 20% in the year 2200 amounts to reducing the annual growth rate to 1.2%. In other words, the benefit of mitigating greenhouse gas emissions can be represented as the increase in the annual growth rate from today to 2200 from 1.2% to 1.3%. As for the cost of stabilization, estimates in the Stern Review range from 3.4% of GNP to -3.9% (since saving energy reduces energy costs, the latter estimate is not as startling as it appears). Let’s assume that costs to prevent additional accumulation of CO2 (and equivalents) come to 1% of GNP every year forever, and, in accordance with a fair amount of empirical evidence, that the component of the discount rate attributable to the declining marginal utility of consumption is equal to twice the rate of growth of consumption. A straightforward calculation shows that mitigation is better than business as usual – that is, the present value of the benefits exceeds the present value of the costs – for any social rate of time preference less than 8.5%. No estimate of the pure rate of time preference, even by those who believe in relatively strong discounting of the future, has ever approached 8.5%.
Tuesday, December 18, 2007
History Note: Chico Plane Hijacked to Arkansas
My home, Chico, California, is not often seen as the center of the world, but we do have some distinctions. For example, the first airline hijacking on US soil occurred here. It may also be the only time that anyone ever hijacked a plane to Arkansas.
http://blogs.ocweekly.com/navelgazing/main/another-california-first-hijac/
http://blogs.ocweekly.com/navelgazing/main/another-california-first-hijac/
Monday, December 17, 2007
Blood for Oil in Iraq Achieved! Now We Can Come Home!
Great news! As of this past week or so, for the first time oil production in Iraq has exceeded what it was under Saddam Hussein before the US invaded, a whopping 2.3 million
barrels per day!! For a country with the world's second largest oil reserves, this is a great achievement!!! Clearly, our goal there has been achieved, so now our troops can come home!!!
barrels per day!! For a country with the world's second largest oil reserves, this is a great achievement!!! Clearly, our goal there has been achieved, so now our troops can come home!!!
Sunday, December 16, 2007
Radio Interview Today
I was interviewed today on KPFK Los Angles on Ian Masters' Background Briefing for the last 20 minutes of his show. I did not get to discuss the Confiscation of American Prosperity very much because the publisher neglected to send him a copy.
http://64.27.15.184/parchive/mp3/kpfk_071216_110100bbriefing.mp3
http://64.27.15.184/parchive/mp3/kpfk_071216_110100bbriefing.mp3
Friday, December 14, 2007
Transfer Pricing Enforcement in China- the IRS Should Be Paying Attention!
On my long list of statements from tax officials that strike me as incredibly short sighted comes this:
The IRS was indeed very successful in arguing that some of the profits that British based Glaxo made on US sales of Zantac were attributable to the marketing efforts of Glaxo’s US subsidiary. But mind you that the tax planners for US based pharmaceutical companies with foreign marketing subsidiaries took notice of the IRS theory to successfully argue that some of the profits from US created drugs belonged offshore under arm’s length pricing. So if the Chinese are about to argue that distribution subsidiaries deserve a large share of the profits – wouldn’t this hold for US entities distributing products manufactured in China. Last year – the US exported only $55 billion of goods and services to China, while China sold almost $288 billion in goods in services to the US. Unless there existed no intangible profits from Chinese exports to the US and there were substantial intangible profits when US manufacturers sold goods to the Chinese, something tells me that China's State Administration of Taxation could come up with the short end of this stick.
It would seem that the Indian tax authorities successfully made a similar argument in a tax dispute with Rolls Royce. If this argument is turned on US based companies selling into India, let’s keep in mind that the India exports twice as much to the US as we export to them. With the US as a net importer of goods, any argument that the local distributor deserves a large slice of the profits is something the IRS should look forward to making in a bilateral way!
The China's State Administration of Taxation, emboldened by the Internal Revenue Service's result in the GlaxoSmithKline case, is directing its auditors in appropriate marketing intangibles cases to apply the residual profit split method to recompute royalty income.
The IRS was indeed very successful in arguing that some of the profits that British based Glaxo made on US sales of Zantac were attributable to the marketing efforts of Glaxo’s US subsidiary. But mind you that the tax planners for US based pharmaceutical companies with foreign marketing subsidiaries took notice of the IRS theory to successfully argue that some of the profits from US created drugs belonged offshore under arm’s length pricing. So if the Chinese are about to argue that distribution subsidiaries deserve a large share of the profits – wouldn’t this hold for US entities distributing products manufactured in China. Last year – the US exported only $55 billion of goods and services to China, while China sold almost $288 billion in goods in services to the US. Unless there existed no intangible profits from Chinese exports to the US and there were substantial intangible profits when US manufacturers sold goods to the Chinese, something tells me that China's State Administration of Taxation could come up with the short end of this stick.
It would seem that the Indian tax authorities successfully made a similar argument in a tax dispute with Rolls Royce. If this argument is turned on US based companies selling into India, let’s keep in mind that the India exports twice as much to the US as we export to them. With the US as a net importer of goods, any argument that the local distributor deserves a large slice of the profits is something the IRS should look forward to making in a bilateral way!
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