Michael Perelman has suggested that banks may serve a public utility function and should be nationalized. I assume he means the functions of holding people's money as deposits and using it for some sort of basic investing, without getting into fees for packaging mortgages or other more exotic financial activities. I suggested in a comment on his post that a model of this might be the old postal savings banks of much of Europe and Japan, the latter being the largest in the world. I do think something along their lines, however owned, might offer an alternative, simple banks that do simple things.
As it is the current trend is for those old banks to be privatized in some form. This happened finally in Japan in October, 2007, to the Japan Post, which does more than serve as a bank. In today's NY Times is a story that there is a move by Post A.G., Deutsche Bank, and Swiss Reinsurance to take over the still nationally owned Post Bank A.G of Germany, their postal savings bank. See http://query.nytimes.com/gst/fullpage.html?res=9E02E7D91439F930A35753C1A063958260.
Sunday, February 8, 2009
McCain on the Fiscal Stimulus
The GOP 2008 nominee for the Presidency appeared on Face The Nation and made some incredibly stupid remarks:
Let’s take these in reverse order. Let’s suppose that by the time the recession bottoms out, the GDP gap is 8 percent or more. Even after a couple of quarters of modest growth, the GDP gap will still likely be massive but McCain would have us shift towards fiscal restraint?
McCain knows we need tax cuts and infrastructure but his own party is making sure that infrastructure spending is as small as possible to make room for more tax cuts. So what is it that he wants if “this is not it”. Incidentally, McCain says that he wants more bang for the buck but he concedes at the same time that the kind of tax cut we tried earlier during this recession has little impact on consumption. And yet he wants more tax cuts and less spending.
Now I will concede that an $800 billion fiscal stimulus is larger than anything we saw in the 1930’s in nominal aggregate terms. But nominal GDP was less than $100 billion back then. The proper comparison would have to be done either in real per capita terms or relative to GDP. But does Senator McCain not understand that we had very little fiscal stimulus during the New Deal, which is one reason why it took so long for the economy to get back to full employment? If McCain’s Republican colleagues have their way, we are going to repeat the policy mistake of not doing enough fiscal stimulus, which will insure that the current recession will be deeper and last longer.
Thank goodness we did not select this economic know-nothing to be President!
I think it’s a massive -- it’s much larger than any measure that was taken during the Great Depression ... I know America needs a stimulus. We need tax cuts. We need to spend money on infrastructure and on other programs that will immediately put people to work. But this is not it ... we got 44 votes, on a trigger, on a trigger that said that, once we have GDP growth for two quarters -- in other words, the economy recovers -- that we will stop the spending and we’ll put America on a path to a balanced budget.
Let’s take these in reverse order. Let’s suppose that by the time the recession bottoms out, the GDP gap is 8 percent or more. Even after a couple of quarters of modest growth, the GDP gap will still likely be massive but McCain would have us shift towards fiscal restraint?
McCain knows we need tax cuts and infrastructure but his own party is making sure that infrastructure spending is as small as possible to make room for more tax cuts. So what is it that he wants if “this is not it”. Incidentally, McCain says that he wants more bang for the buck but he concedes at the same time that the kind of tax cut we tried earlier during this recession has little impact on consumption. And yet he wants more tax cuts and less spending.
Now I will concede that an $800 billion fiscal stimulus is larger than anything we saw in the 1930’s in nominal aggregate terms. But nominal GDP was less than $100 billion back then. The proper comparison would have to be done either in real per capita terms or relative to GDP. But does Senator McCain not understand that we had very little fiscal stimulus during the New Deal, which is one reason why it took so long for the economy to get back to full employment? If McCain’s Republican colleagues have their way, we are going to repeat the policy mistake of not doing enough fiscal stimulus, which will insure that the current recession will be deeper and last longer.
Thank goodness we did not select this economic know-nothing to be President!
Could Someone Inform Alan Reynolds of the 1981-82 Recession?
NBER says we had a recession from July 1981 to December 1982 but I guess Alan Reynolds does not know this:
Reynolds uses this piece of disinformation as part of his attack on Paul Krugman. But let’s look at table 1.1.6 of the National Income and Product Accounts. From 1980QIII to 1981QIII, real GDP rose from $5107.4 billion to $5329.8 billion, which of course, is the recovery that NBER identifies. But Reynolds and other rightwing apologists for the Reagan recession omit this period in their discussion. From 1981QIII to 1982QIII, real GDP fell to $5185.2 billion before we saw the recovery that Paul Krugman discussed.
If one looked at the economy that Bush41 left Clinton to the one that Carter left Reagan, both would be described as economies that were slowly and tentatively recovering from recessions with similar unemployment rates. So if we looked at real GDP growth during the Reagan-Bush41 periods, we could be relatively assured that we would be picking up more of the long-term growth and less of Keynesian features. Real GDP growth during this period was 3% as compared to around 3.5% from thirty years before the Reagan-Bush41 era and 3.7% during the Clinton term. But Alan Reynolds wants to distort this fact and to do so, he has to deny the 1981-82 recession.
This suggests the entire period from early 1983 to mid-1990 was nothing more than a routine recovery from recession. That is wrong. Real GDP peaked in the first quarter of 1980 at $5,221.3 billion, measured in 2000 dollars. By the first quarter of 1983, real GDP reached $5253.8 billion; the economy had already passed from recovery to expansion. Industrial production hit 59.5 by 1984—well above the peak of 56.6 in 1979.
Reynolds uses this piece of disinformation as part of his attack on Paul Krugman. But let’s look at table 1.1.6 of the National Income and Product Accounts. From 1980QIII to 1981QIII, real GDP rose from $5107.4 billion to $5329.8 billion, which of course, is the recovery that NBER identifies. But Reynolds and other rightwing apologists for the Reagan recession omit this period in their discussion. From 1981QIII to 1982QIII, real GDP fell to $5185.2 billion before we saw the recovery that Paul Krugman discussed.
If one looked at the economy that Bush41 left Clinton to the one that Carter left Reagan, both would be described as economies that were slowly and tentatively recovering from recessions with similar unemployment rates. So if we looked at real GDP growth during the Reagan-Bush41 periods, we could be relatively assured that we would be picking up more of the long-term growth and less of Keynesian features. Real GDP growth during this period was 3% as compared to around 3.5% from thirty years before the Reagan-Bush41 era and 3.7% during the Clinton term. But Alan Reynolds wants to distort this fact and to do so, he has to deny the 1981-82 recession.
Saturday, February 7, 2009
Why Rescue Banks?
What is it that a bank really does? In college, many decades ago, I was taught that banks served to bundle many small investments to make them available for investors to create productive businesses. More recently, the idea became popular that banks specialized in accumulating information that made them ideally suited to determine which investment projects would be viable and which would lack merit. Of course, with the demise of Glass-Steagall, banks did accumulate massive amounts of information -- especially when the same company ran a person's bank, stockbroker, insurance company, and credit card. But that kind of information is something entirely different.
By the time this new idea of banks as information specialists became widely accepted, the business of lending to large corporations was shrinking. Large corporations were able to finance themselves by borrowing directly in the commercial paper market. To compensate for this lost business, banks began to see their future in collecting -- organizing mergers and acquisitions, bundling financial investments in novel ways, and, on the retail side, late fees from unwary customers. And yes, bundling subprime loans. Is any public purpose served by slicing and dicing financial paper?
We all know that until recently they were very successful, but the question is whether their success reflected any public purpose. We now know that the financial system was not particularly efficient in gathering information. If it was, TARP would not exist.
Why couldn't banks be more like a public utility, as they were supposed to be in the age of Glass-Steagall? Just as a public utility sends water or electricity to where it is needed, public banks could run checking accounts for the public, paying bills and accepting deposits.
By the time this new idea of banks as information specialists became widely accepted, the business of lending to large corporations was shrinking. Large corporations were able to finance themselves by borrowing directly in the commercial paper market. To compensate for this lost business, banks began to see their future in collecting -- organizing mergers and acquisitions, bundling financial investments in novel ways, and, on the retail side, late fees from unwary customers. And yes, bundling subprime loans. Is any public purpose served by slicing and dicing financial paper?
We all know that until recently they were very successful, but the question is whether their success reflected any public purpose. We now know that the financial system was not particularly efficient in gathering information. If it was, TARP would not exist.
Why couldn't banks be more like a public utility, as they were supposed to be in the age of Glass-Steagall? Just as a public utility sends water or electricity to where it is needed, public banks could run checking accounts for the public, paying bills and accepting deposits.
Friday, February 6, 2009
Hookah-Smoking Caterpillar Keynesians
by the Sandwichman
We are all Keynesians now but some are more Keynesian than others. Keynes was NOT a Keynesian. There are, nevertheless, New Keynesians, post-Keynesians, bastard Keynesians, Popular Front New Dealers, military-industrial complex Keynesians, StimPack™ salesmen and supply-side tax-cutting trickle-down voodoo economics crypto-Keynesians.
Most commonly encountered are the hookah-smoking Caterpillar Keynesians and the Humpty-Dumptians. It is conceivable -- indeed it is almost inevitable -- for a self-styled Keynesian to be both a Caterpillar and a Humpty-Dumptian simultaneously.
For the hookah-smoking Caterpillars, the federal budget is a mushroom, one side of which makes the economy grow taller and the other makes it shrink. For the Humpty-Dumptians, economic growth means "there's a nice knock-down argument for you!" When H-Ds use a multiplier it means just what they choose it to mean -- neither more nor less. Taken together -- the Humpty-Dumptians with the Caterpillars -- there is only one side of the mushroom that matters.
Astonishing as it may seem, there is a kernel of truth to the mushroom and multiplier story. To get at that kernel, though, it is best to eschew the platitudes and tautologies of the Caterpillars and Humpty-Dumptians themselves and listen (critically) to the Village Idiots instead. Peter Schiff is an Idiot. So is Niall Ferguson. Harold Cole and Lee Ohanian are certifiable Idiots. These people are Idiots because they find an inherent flaw in the conventional wisdom and they run with it -- not seeming to notice (or care) that there are parallel weaknesses in their own analyses and prescriptions.
Cole and Ohanian took it for granted that working fewer hours was a bad thing. Enough said. Ferguson rails against debt and then prescribes a wholesale "restructuring" of debt that would, in effect, amount to a substantial default on debt. As Ferguson acknowledges, one "objection to such a procedure is that it would reward the imprudent." He waves that objection away with the glib assurance that "bad behavior only matters if it is likely to be repeated" and the reckless assumption that such a restructuring would be a one-off bonanza. Not only would such a plan reward the imprudent, it would also bestow a windfall on prudent debtors while leaving prudent non-debtors out in the cold. So why not just gather everything up into one big pile and give an equal share to everyone?
Schiff worries that government intervention will only perpetuate a phony economy based on borrowing and spending. The Sandwichman has tremendous sympathy for Schiff's moral outrage against phoniness. So what is Schiff's prescription? Let the market run its corrective course and make people "take the tough medicine." After all, if it tastes like poison, it must be good for you. Oh, doctor! doctor! The attentive reader may notice that while Ferguson and Schiff share an aversion to prolonging the phony debt economy through deficit spending, they offer diametrically-opposed policy prescriptions -- even before reckoning with the political palatability of either of their approaches.
It is only through a process of elimination that the Caterpillars and Humpty-Dumptians remain standing as the "least daft". In my next post, I will propose a method for wringing a bit more of the daftness out.
We are all Keynesians now but some are more Keynesian than others. Keynes was NOT a Keynesian. There are, nevertheless, New Keynesians, post-Keynesians, bastard Keynesians, Popular Front New Dealers, military-industrial complex Keynesians, StimPack™ salesmen and supply-side tax-cutting trickle-down voodoo economics crypto-Keynesians.
Most commonly encountered are the hookah-smoking Caterpillar Keynesians and the Humpty-Dumptians. It is conceivable -- indeed it is almost inevitable -- for a self-styled Keynesian to be both a Caterpillar and a Humpty-Dumptian simultaneously.
For the hookah-smoking Caterpillars, the federal budget is a mushroom, one side of which makes the economy grow taller and the other makes it shrink. For the Humpty-Dumptians, economic growth means "there's a nice knock-down argument for you!" When H-Ds use a multiplier it means just what they choose it to mean -- neither more nor less. Taken together -- the Humpty-Dumptians with the Caterpillars -- there is only one side of the mushroom that matters.
Astonishing as it may seem, there is a kernel of truth to the mushroom and multiplier story. To get at that kernel, though, it is best to eschew the platitudes and tautologies of the Caterpillars and Humpty-Dumptians themselves and listen (critically) to the Village Idiots instead. Peter Schiff is an Idiot. So is Niall Ferguson. Harold Cole and Lee Ohanian are certifiable Idiots. These people are Idiots because they find an inherent flaw in the conventional wisdom and they run with it -- not seeming to notice (or care) that there are parallel weaknesses in their own analyses and prescriptions.
Cole and Ohanian took it for granted that working fewer hours was a bad thing. Enough said. Ferguson rails against debt and then prescribes a wholesale "restructuring" of debt that would, in effect, amount to a substantial default on debt. As Ferguson acknowledges, one "objection to such a procedure is that it would reward the imprudent." He waves that objection away with the glib assurance that "bad behavior only matters if it is likely to be repeated" and the reckless assumption that such a restructuring would be a one-off bonanza. Not only would such a plan reward the imprudent, it would also bestow a windfall on prudent debtors while leaving prudent non-debtors out in the cold. So why not just gather everything up into one big pile and give an equal share to everyone?
Schiff worries that government intervention will only perpetuate a phony economy based on borrowing and spending. The Sandwichman has tremendous sympathy for Schiff's moral outrage against phoniness. So what is Schiff's prescription? Let the market run its corrective course and make people "take the tough medicine." After all, if it tastes like poison, it must be good for you. Oh, doctor! doctor! The attentive reader may notice that while Ferguson and Schiff share an aversion to prolonging the phony debt economy through deficit spending, they offer diametrically-opposed policy prescriptions -- even before reckoning with the political palatability of either of their approaches.
It is only through a process of elimination that the Caterpillars and Humpty-Dumptians remain standing as the "least daft". In my next post, I will propose a method for wringing a bit more of the daftness out.
Mitt Romney Does Not Understand Ricardian Equivalence Either
I guess CNN felt compelled to allow Mitt Romney words to be aired because Romney was once a Presidential contender but the following is really stupid:
Maybe Romney is thinking along the lines of the Friedman permanent income hypothesis when he calls for permanent tax cuts but he also noted we have a huge deficit. Paul Krugman understands how to put the Friedman permanent income hypothesis together with the long-run government budget constraint and apply it to increases in government spending as well as tax “cuts” which are actually only tax deferrals:
The same logic falls under the heading of Ricardian Equivalence - a topic that Robert Barro understands. Yet- Mitt Romney gets this all completely backwards. I guess when he was running for President, he never quite grasped these basic topics even though Greg Mankiw was one of his economic advisors!
These are extraordinary times, and like a lot of Republicans I believe that a well-crafted stimulus plan is needed to put people back to work. But the Obama spending bill would stimulate the government, not the economy … We're on an economic tightrope. The package that passed the House is a huge increase in the amount of government borrowing. And we've borrowed so much already that if we add too much more debt, or spend foolishly, we could invite an even bigger crisis … First, there are two ways you can put money into the economy, by spending more or by taxing less. But if it's stimulus you want, taxing less works best. That's why permanent tax cuts should be the centerpiece of the economic stimulus.
Maybe Romney is thinking along the lines of the Friedman permanent income hypothesis when he calls for permanent tax cuts but he also noted we have a huge deficit. Paul Krugman understands how to put the Friedman permanent income hypothesis together with the long-run government budget constraint and apply it to increases in government spending as well as tax “cuts” which are actually only tax deferrals:
a temporary increase in government spending should have a larger impact on demand than a permanent increase, not a smaller impact. And that’s actually an important point: one way to explain why government spending is better than tax cuts as a stimulus is to say that temporary tax cuts aren’t effective at increasing demand, but temporary spending increases are. Here’s the logic (which follows directly from Milton Friedman’s permanent income hypothesis, by the way): suppose that the government introduces a new program that will cause it to spend $100 billion a year every year from now on. To pay for this, it will have to raise taxes by $100 billion a year, permanently — and if consumers take this into account, they might well cut their spending enough to offset the increase in government purchases. But suppose the government introduces a one-time, $100 billion program to repair bridges over the next year. The government will have to issue debt to pay for this, and will have to service that debt, requiring higher taxes — say, $5 billion a year. That’s a much smaller impact on consumers’ future after-tax income than the permanent program. So much less of the spending rise will be offset by a fall in consumer demand. (I’m not considering the effect of the spending in raising income, which would probably cause consumer demand to rise rather than fall.) So economic theory — Milton Friedman’s theory! — says that spending is a more effective form of stimulus than tax cuts.
The same logic falls under the heading of Ricardian Equivalence - a topic that Robert Barro understands. Yet- Mitt Romney gets this all completely backwards. I guess when he was running for President, he never quite grasped these basic topics even though Greg Mankiw was one of his economic advisors!
Australia’s catastrophic Summer of 2009
The image on the right is of a koala in South Australia that sought refuge from the extreme heat this last fortnight by climbing into a tub of water in a resident's back porch.This week 60 percent of the northern Australian state of Queensland is subject to flooding while the Southern state of Victoria is scorched with unprecedented record temperatures of 43 degrees Celsius. Tomorrow’s temperature is expected to reach 44 degrees in Melbourne and 46 degrees in rural Victoria, making it the hottest place on the planet. This extraordinary and unprecedented heat, combined with strong dry winds, is expected to worsen the fires in industrial tree plantation and native bush already raging in this state. The high temperature is also expected to lead to yet more large power blackouts so there’s a question mark tomorrow as to whether residents will be able to relieve their heat-stress by switching on their fans or air conditioners…or even their fridges? [1] Last Friday “half a million homes and businesses were blacked out, and patients were turned away from hospitals.” [2] The number of bodies being stored at the city’s morgue is witness to the fact that over three times as many people are dying at this time. [3]
The Melbourne heat has also caused an electricity substation to explode. That shut down the city's entire train service, trapped people in lifts, and blocked roads as traffic lights failed. [2] Further severe disruptions to the city’s train system is expected tomorrow as well and this is exacerbated by railway lines warping and becoming unusable as a result.
Victorian farmers have lost many crops this summer as vegetables died from the heat and fruit crops stewed on the trees. The situation for them was already bad. Last October it was reported that “a combination of high temperatures and close to no rainfall” had meant that “hundreds of farmers had then reached the point of no return.” The Mallee, Wimmera and north-east wheat crops were destroyed by a combination of the heat and dry winds and low irrigation allocations were then placing a question mark over continued production in the Victorian horticulture and dairy industries this summer. [4]
Even in my normally mild Tasmania the state suffered its second-hottest day in a row, as temperatures reached 42.2C in some areas. “Two days before, Adelaide hit a staggering 45.6C. After a weekend respite, more records are expected to be broken this week.” [2] Fish populations are under stress in the Murray-Darling Basin of Victoria, New South Wales, South Australian and Queensland. Low water levels and hot temperatures have resulted in fish kills in parts of the system. Water shortages also pose risks of algal blooms and severe damage to the ecosystems. [5]
Climate Change Minister Penny Wong said the record heat is yet another sign of global climate change scientists have forecasted."Eleven of the hottest years in history have been in the last 12, and we also note, particularly in the southern part of Australia, we're seeing less rainfall," Wong told reporters."All of this is consistent with climate change, and all of this is consistent with what scientists told us would happen." [6]
Many people around me are trying to change the way they live. They have a creeping conviction that they will not survive unless quick change occurs and have stopped waiting for government to take the lead. I pray that it’s not too late?
"Despite the very serious nature of the threat to environmental preservation, the inherent inertia of our system will probably block effective action at least until public concern is galvanised by some catastrophic disaster."
'Citizens' Action - Vital Force for Change', Wm. Michael Kitzmiller and Richard Ottinger, Center for a Voluntary Society 1971.
[1] Power switched off in heat wave
30th January 2009
http://www.abc.net.au/rn/breakfast/stories/2009/2477962.htm
[2] Parched: Australia faces collapse as climate change kicks in
Geoffrey Lean and Kathy Marks report on the worst heatwave in the country's history
Sunday, 1 February 2009
http://www.independent.co.uk/news/world/australasia/parched-australia-faces-collapse-as-climate-change-kicks-in-1522529.html
[3] Heat behind a crush at the mortuary
Erdem Koch, February 7, 2009
http://www.theage.com.au/national/heat-behind-a-crush-at-the-mortuary-20090206-7zzk.html
[4] Record heat destroys Victorian wheat crops
Wires, October 02, 2008 09:28am
http://www.news.com.au/heraldsun/story/0,21985,24434725-5017353,00.html
[5] Murray-Darling needs quick action: environmental group
Ξ February 5th, 2009
http://watersanity.com/?m=200902
[6] Australian Heat Wave To Last Six Days, Signaling Global Warming
Posted on: Thursday, 29 January 2009, 16:58 CST
http://www.redorbit.com/news/science/1631148/australian_heat_wave_to_last_six_days_signaling_global_warming/
The Rise in the Unemployment Rate Understates the Weakness in the Labor Market
BLS leads with some bad news in its January 2009 Employment Situation Summary:
The news further down paints an even darker picture:
The civilian labor force participation rate was 65.7% as of December 2008 and had been as high as 66.4% as of December 2006, which means the rise in the unemployment rate actually understates the fall in the employment-population ratio, which fell from 61% as of December 2008 to 60.5% last month. The employment-population ratio had been 63.4% as of December 2006. While some of us were unimpressed with the employment-population ratio being only 63.4% given that this ratio was at or above 64% for much of Clinton’s second term in office, I’d be incredibly happy if we could see the employment-population ratio approach this level in the next couple of years. Of course, this is not likely to happen unless Congress pass a stimulus bill over the objections of the Herbert Hoover faction.
Nonfarm payroll employment fell sharply in January (-598,000) and the unemployment rate rose from 7.2 to 7.6 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Payroll employment has declined by 3.6 million since the start of the recession in December 2007; about one-half of this decline occurred in the past 3 months. In January, job losses were large and widespread across nearly all major industry sectors.
The news further down paints an even darker picture:
The civilian labor force participation rate, at 65.5 percent in January, has edged down in recent months. The employment-population ratio declined by 0.5 percentage point to 60.5 percent over the month, and by 2.4 percentage points over the year.
The civilian labor force participation rate was 65.7% as of December 2008 and had been as high as 66.4% as of December 2006, which means the rise in the unemployment rate actually understates the fall in the employment-population ratio, which fell from 61% as of December 2008 to 60.5% last month. The employment-population ratio had been 63.4% as of December 2006. While some of us were unimpressed with the employment-population ratio being only 63.4% given that this ratio was at or above 64% for much of Clinton’s second term in office, I’d be incredibly happy if we could see the employment-population ratio approach this level in the next couple of years. Of course, this is not likely to happen unless Congress pass a stimulus bill over the objections of the Herbert Hoover faction.
We’re All Keynesians Now
Remember when Richard Nixon said this line. Daniel Gross does too:
Gross notes that those Republicans who are responsible for run state and local governments support the Obama stimulus but the current crop of Washingtonian Republicans support the Hoover approach. Speaking of Hoover - Dick Cheney got it right:
How come the only Washingtonian Republicans who seem to get this issue are also two of the most evil people ever to be allowed in the White House?
There are three options government can pursue when the economy goes south. First, the Fed can cut interest rates, buy up assets, and extend credit, all of which the central bank has already done. Second, Congress can cut taxes on businesses and consumers in the hope they will spend more. The first effort—last year's tax rebates—didn't have the intended effect since consumers used much of the windfall to pay down debt or save … The third option is for the government to directly purchase goods and services, to substitute the demand that consumers and businesses aren't providing. The Washington remnant of the Republican Party—40 senators and 178 representatives—is all for Options 1 and 2, cheap money and tax cuts. But they're having great difficulty with Option 3. They have forgotten Richard Nixon's famous line that "we're all Keynesians now." To them, spending government funds to goose the economy is unacceptable, not just because of the possibility of poor execution—i.e., pork. No, many are rejecting it as a matter of principle. Even though several Republican governors are pleading for assistance in the form of federal spending, Washington Republicans are saying no.
Gross notes that those Republicans who are responsible for run state and local governments support the Obama stimulus but the current crop of Washingtonian Republicans support the Hoover approach. Speaking of Hoover - Dick Cheney got it right:
Administration officials have been warning for weeks that failure to pass the bill could lead to an even deeper recession. That was the message Vice President Dick Cheney brought to a closed-door Senate GOP lunch Wednesday, reportedly warning that it’ll be “Herbert Hoover” time if aid to the industry was rejected, according to a senator familiar with the remarks.
How come the only Washingtonian Republicans who seem to get this issue are also two of the most evil people ever to be allowed in the White House?
Thursday, February 5, 2009
How to Set Up a Right Wing Think Tank
With the economy tanking and people having to scramble for good jobs -- here is an opportunity too good to be missed: How to set up a right wing think tank.
Read this & enjoy.
http://www.archive.org/details/HowToStartARightWingThinkTank
Read this & enjoy.
http://www.archive.org/details/HowToStartARightWingThinkTank
Stimulus Porn: Commonsense Observations
I do not pretend to be an expert on stimulus plan, but it seems to be too little, misdirected, too much infected with tax cuts, and filled with special interest nonsense.
The Republican speak authoritatively as if tax cuts are the best way to get investment going, but real investment, the kind that results in the production of goods has been terribly anemic in spite of decades of tax cuts.
I do note that one of the most direct ways during the recession is to eliminate costs, including debts, that hold the economy back. Letting assets falling value raises the rate of profit, once the realization sets in that the asset prices have hit bottom.
Leaving banks fail and writing off debts will cause some dislocation, but they will leave both the economy and society stronger.
In terms of getting money spent, putting it in the hands of the poor and the unemployed seems far more reasonable likely to create spending than to give to the rich, who may just pump up asset prices once they feel confident, undoing some of the stimulus.
In terms of public works, Gray Brechin, has been doing remarkable research showing how much the public works of the New Deal have contributed to the country to this present day. The government has the opportunity to sell bonds at less than 3%. Interest costs of public works represent a significant part of the total costs. Taking advantage of the bargain basement cost of credit now represents a major savings, increased jobs, plus the opportunity to make a significant contribution to both the economy and society.
The Republican speak authoritatively as if tax cuts are the best way to get investment going, but real investment, the kind that results in the production of goods has been terribly anemic in spite of decades of tax cuts.
I do note that one of the most direct ways during the recession is to eliminate costs, including debts, that hold the economy back. Letting assets falling value raises the rate of profit, once the realization sets in that the asset prices have hit bottom.
Leaving banks fail and writing off debts will cause some dislocation, but they will leave both the economy and society stronger.
In terms of getting money spent, putting it in the hands of the poor and the unemployed seems far more reasonable likely to create spending than to give to the rich, who may just pump up asset prices once they feel confident, undoing some of the stimulus.
In terms of public works, Gray Brechin, has been doing remarkable research showing how much the public works of the New Deal have contributed to the country to this present day. The government has the opportunity to sell bonds at less than 3%. Interest costs of public works represent a significant part of the total costs. Taking advantage of the bargain basement cost of credit now represents a major savings, increased jobs, plus the opportunity to make a significant contribution to both the economy and society.
Fiscal Stimulus: Are the Senate Moderates Consulting with Martin Feldstein?
The close of Martin Feldstein’s An $800 Billion Mistake had the right tone:
Getting the most bang for the buck has been a theme of Keynesians on the left so I find it hard to disagree with Feldstein’s overall objective even if I differ with him on some of the details such as:
Fortunately, I don’t see a lot of push from those with any leverage to greatly increase DoD spending. There are proposals to give tax breaks for homeowners and car buyers, but I’m not sure if those will get very far either. But Steve Benen is reporting on what might be the ultimate Senate deal with this (draw mainly from some excellent reporting from the gang at Talking Points Memo):
Some of us have argued for more Federal revenue sharing but Feldstein said this was not a good idea and the Senate may go along. The states have balanced budget restrictions so they may have to cut spending, which is Hoover economics – right? Feldstein counters with:
I guess the states could raise taxes. Given that state and local taxation tends to be less progressive than Federal taxation, we’d see the partial realization of the goal of some conservatives – shifting the tax burden from the rich to the working poor. Not only does this go against what most progressives would see as good policy, it might also be bad macroeconomics if those facing the tax increases are borrowing constrained. In other words, even temporary tax increases on such households could reduce consumption. No, I don’t agree with the details of the Feldstein op-ed even if the Senate moderates seem to be falling in line. Ahem!
Then again – we can be thankful that the Senate moderates are not taking the advice of Jeffrey Miron.
The problem with the current stimulus plan is not that it is too big but that it delivers too little extra employment and income for such a large fiscal deficit. It is worth taking the time to get it right.
Getting the most bang for the buck has been a theme of Keynesians on the left so I find it hard to disagree with Feldstein’s overall objective even if I differ with him on some of the details such as:
Instead, the tax changes should focus on providing incentives to households and businesses to increase current spending. Why not a temporary refundable tax credit to households that purchase cars or other major consumer durables, analogous to the investment tax credit for businesses? Or a temporary tax credit for home improvements? ... The largest proposed outlays amount to just writing unrestricted checks to state governments. Nearly $100 billion would result from increasing the "Medicaid matching rate," a technique for reducing states' Medicaid costs to free up state money for spending on anything governors and state legislators want. An additional $80 billion would be given out for "state fiscal relief." ... If rapid spending on things that need to be done is a criterion of choice, the plan should include higher defense outlays, including replacing and repairing supplies and equipment, needed after five years of fighting.
Fortunately, I don’t see a lot of push from those with any leverage to greatly increase DoD spending. There are proposals to give tax breaks for homeowners and car buyers, but I’m not sure if those will get very far either. But Steve Benen is reporting on what might be the ultimate Senate deal with this (draw mainly from some excellent reporting from the gang at Talking Points Memo):
it's not at all clear what kind of concessions were necessary to cross the 60-vote threshold. TPM, for example, obtained a staff paper circulated today with nearly $78 billion in cuts, with a lot less money for states, healthcare, and education. Did the Democratic leadership sign off on these cuts? (Maybe.)
Some of us have argued for more Federal revenue sharing but Feldstein said this was not a good idea and the Senate may go along. The states have balanced budget restrictions so they may have to cut spending, which is Hoover economics – right? Feldstein counters with:
Will these vast sums actually lead to additional spending, or will they merely finance state transfer payments or relieve state governments of the need for temporary tax hikes or bond issues?
I guess the states could raise taxes. Given that state and local taxation tends to be less progressive than Federal taxation, we’d see the partial realization of the goal of some conservatives – shifting the tax burden from the rich to the working poor. Not only does this go against what most progressives would see as good policy, it might also be bad macroeconomics if those facing the tax increases are borrowing constrained. In other words, even temporary tax increases on such households could reduce consumption. No, I don’t agree with the details of the Feldstein op-ed even if the Senate moderates seem to be falling in line. Ahem!
Then again – we can be thankful that the Senate moderates are not taking the advice of Jeffrey Miron.
Was last September's bailout dishonest?
"There was no credit crisis. What was happening was much more arcane: A few big institutions that had made bad bets were at risk of going bust, and that’s it. And if they had gone bankrupt, it wouldn’t have been the end of the world. In fact, there is huge excess capacity in financial services and there’s a need to focus on the healthy ones and let others fail. Meanwhile, business lending and consumer lending were still strong in September and October, and it’s still okay." [1]
"Maybe Bernanke and Paulson had information that they were not making public, but the available data simply did not support what they were saying....This was a lot like the run-up to the Iraq invasion in 2003. You had people in government saying: `We’re smart guys, trust us.’ But they were either wrong or they were lying." [2]
"Normally, when you’re going to spend a lot of money, you present the data and the economic theory to support it, yet here’s the biggest non-military government intervention in history since the Great Depression, and there was no evidence presented to support it, and no detailed economic argument made about what market failures this $700 billion was going to fix.....“If what we’re experiencing is a generic recession, all that money spent investing in the banks would be wasted, and that may be what this is: a generic recession.”" [3]
"With all the money that’s already been committed, it is going to be hard to get the stimulus money that is needed now,” she says. “Deficits are already so massive that at some point interest rates on long bonds are going to jump from 3% to 5%, and that will be good-bye mortgage markets." [4]
[1] Octavio Marenzi, founder of financial technology research and consulting firm Celent. As quoted in 'Follow the Money'
From the 2/1/2009 Issue of Treasury and Risk
By * Dave Lindorff
http://www.treasuryandrisk.com/Issues/2009/February%202009/Pages/Follow-the-Money.aspx
[2] V.V. Charri, an economist at the Minneapolis Fed. As quoted in 'Follow the Money'
From the 2/1/2009 Issue of Treasury and Risk
By * Dave Lindorff
http://www.treasuryandrisk.com/Issues/2009/February%202009/Pages/Follow-the-Money.aspx
[3] Patrick Kehoe, co-author of an article entitled: 'Facts and Myths About the Financial Crisis of 2008'. As quoted in 'Follow the Money'
From the 2/1/2009 Issue of Treasury and Risk
By * Dave Lindorff
http://www.treasuryandrisk.com/Issues/2009/February%202009/Pages/Follow-the-Money.aspx
[4] Yves Smith from the Naked Capitalism blog. As quoted in 'Follow the Money'
From the 2/1/2009 Issue of Treasury and Risk
By * Dave Lindorff
http://www.treasuryandrisk.com/Issues/2009/February%202009/Pages/Follow-the-Money.aspx
"Maybe Bernanke and Paulson had information that they were not making public, but the available data simply did not support what they were saying....This was a lot like the run-up to the Iraq invasion in 2003. You had people in government saying: `We’re smart guys, trust us.’ But they were either wrong or they were lying." [2]
"Normally, when you’re going to spend a lot of money, you present the data and the economic theory to support it, yet here’s the biggest non-military government intervention in history since the Great Depression, and there was no evidence presented to support it, and no detailed economic argument made about what market failures this $700 billion was going to fix.....“If what we’re experiencing is a generic recession, all that money spent investing in the banks would be wasted, and that may be what this is: a generic recession.”" [3]
"With all the money that’s already been committed, it is going to be hard to get the stimulus money that is needed now,” she says. “Deficits are already so massive that at some point interest rates on long bonds are going to jump from 3% to 5%, and that will be good-bye mortgage markets." [4]
[1] Octavio Marenzi, founder of financial technology research and consulting firm Celent. As quoted in 'Follow the Money'
From the 2/1/2009 Issue of Treasury and Risk
By * Dave Lindorff
http://www.treasuryandrisk.com/Issues/2009/February%202009/Pages/Follow-the-Money.aspx
[2] V.V. Charri, an economist at the Minneapolis Fed. As quoted in 'Follow the Money'
From the 2/1/2009 Issue of Treasury and Risk
By * Dave Lindorff
http://www.treasuryandrisk.com/Issues/2009/February%202009/Pages/Follow-the-Money.aspx
[3] Patrick Kehoe, co-author of an article entitled: 'Facts and Myths About the Financial Crisis of 2008'. As quoted in 'Follow the Money'
From the 2/1/2009 Issue of Treasury and Risk
By * Dave Lindorff
http://www.treasuryandrisk.com/Issues/2009/February%202009/Pages/Follow-the-Money.aspx
[4] Yves Smith from the Naked Capitalism blog. As quoted in 'Follow the Money'
From the 2/1/2009 Issue of Treasury and Risk
By * Dave Lindorff
http://www.treasuryandrisk.com/Issues/2009/February%202009/Pages/Follow-the-Money.aspx
CBO Does Not Agree With Brian Riedl
I normally do not cite the Washington Times as a good source for economics but in this case it does seem they are getting what the CBO has to say correct in the following sense:
It is true that the Washington Times also talked a lot about long-term crowding-out. Douglas Elmendorf writing for the CBO also notes long-term crowding-out:
This admission that a long-term fiscal stimulus that concentrated on government consumption rather than government investment would lead to long-term crowding-out follows what Elmendorf writes about the short-term effects:
As we noted, Brian Riedl tried to argue short-term crowding-out, which the CBO quite clearly says will not be the case. Even the most ardent Keynesian would concede that long-term fiscal stimulus leads to long-term crowding-out. Only those pseudo-economists who were apologists for the Bush43 fiscal stimulus would try to deny this. In my view, the ideal fiscal stance would be short-term stimulus followed by long-term fiscal restraint once the economy approached full employment. This was the policy of the Clinton Administration as I understand it – it is what is being recommended to President Obama by his economic advisors.
I guess we should thank the author of this Angrybear post for bringing to our attention the Washington Times somewhat misleading account of what CBO said – even if Sammy refuses to recognize the critical distinction between short-term Keynesian effects versus long-term classical effects.
CBO, the official scorekeepers for legislation, said the House and Senate bills will help in the short term ... CBO said there is no crowding out in the short term, so the plan would succeed in boosting growth in 2009 and 2010.
It is true that the Washington Times also talked a lot about long-term crowding-out. Douglas Elmendorf writing for the CBO also notes long-term crowding-out:
Even if the fiscal stimulus persisted, however, the short-run effects on output that operate by increasing demand for goods and services would eventually fade away. In the long run, the economy produces close to its potential output on average, and that potential level is determined by the stock of productive capital, the supply of labor, and productivity … In contrast to its positive near-term macroeconomic effects, the Senate legislation would reduce output slightly in the long run, CBO estimates, as would other similar proposals. The principal channel for this effect is that the legislation would result in an increase in government debt. To the extent that people hold their wealth in the form of government bonds rather than in a form that can be used to finance private investment, the increased government debt would tend to “crowd out” private investment—thus reducing the stock of private capital and the long-term potential output of the economy. The negative effect of crowding out could be offset somewhat by a positive long-term effect on the economy of some provsions—such as funding for infrastructure spending, education programs, and investment incentives, which might increase economic output in the long run. CBO estimated that such provisions account for roughly one-quarter of the legislation’s budgetary cost. Including the effects of both crowding out of private investment (which would reduce output in the long run) and possibly productive government investment (which could increase output), CBO estimates that by 2019 the Senate legislation would reduce GDP by 0.1 percent to 0.3 percent on net.
This admission that a long-term fiscal stimulus that concentrated on government consumption rather than government investment would lead to long-term crowding-out follows what Elmendorf writes about the short-term effects:
CBO estimates that the Senate legislation would raise output by between 1.4 percent and 4.1 percent by the fourth quarter of 2009; by between 1.2 percent and 3.6 percent by the fourth quarter of 2010; and by between 0.4 percent and 1.2 percent by the fourth quarter of 2011. CBO estimates that the legislation would raise employment by 0.9 million to 2.5 million at the end of 2009; 1.3 million to 3.9 million at the end of 2010; and 0.6 million to 1.9 million at the end of 2011.
As we noted, Brian Riedl tried to argue short-term crowding-out, which the CBO quite clearly says will not be the case. Even the most ardent Keynesian would concede that long-term fiscal stimulus leads to long-term crowding-out. Only those pseudo-economists who were apologists for the Bush43 fiscal stimulus would try to deny this. In my view, the ideal fiscal stance would be short-term stimulus followed by long-term fiscal restraint once the economy approached full employment. This was the policy of the Clinton Administration as I understand it – it is what is being recommended to President Obama by his economic advisors.
I guess we should thank the author of this Angrybear post for bringing to our attention the Washington Times somewhat misleading account of what CBO said – even if Sammy refuses to recognize the critical distinction between short-term Keynesian effects versus long-term classical effects.
Wednesday, February 4, 2009
Revoke Krugman's Nobel Prize!
Yes, I know, not only has no Nobel Prize ever been revoked for anything, but they certainly do not do so for idiotic statements made by winners after they have won. However, as the first winner of the prize for international trade in 31 years, I find it appalling that Paul Krugman has come out for the "buy American" provision in the fiscal stimulus package now under consideration in the US Senate, a provision not supported by President Obama, and roundly denounced by pretty much everybody outside the US, a provision that would violate promises made in November in Washington not to engage in protectionist actions for "at least a year," with at its worst the nightmare possibility of a rerun of the trade war of the 1930s following the US Smoot-Hawley tariff that exacerbated the Great Depression. While some may dismiss such a possibility now, the standing of the US in the world on economic policy may have never been worse, given the role of the collapse of our sub-prime market in the current troubles, and with world merchandise trade dropping at an annualized rate of nearly 45% in November. This is not the time to be playing with such irresponsible fire.
I did agree that Krugman was deserving of the prize as the person who applied an innovative idea to both trade and to regional economics (aka "economic geography"), as the last winner for trade did also, Bertil Ohlin. However, I was unhappy that it was not shared, and this unhappiness appears to be spreading, with a recent posting at voxeu by Jota Ishikawa on the matter. He named a number of others, but had the two I think most deserved to share it upfront. One is Avinash Dixit, given that the model that Krugman applied is the Dixit-Stiglitz model of industrial organization. The other is Masahisa Fujita, who was the first to apply the Dixit-Stiglitz model to urban and regional economics in a not widely read journal, Regional Science and Urban Economics in 1988, three years before Krugman's paper in 1991 in the Journal of Political Economy the Nobel committee recognized (and in which Krugman failed to cite Fujita). Frankly, in this area Fujita's work has been far more innovative and of far higher intellectual quality than that of Krugman, and I also note that nobody east of India has ever received the prize.
I close by also whining again that Krugman has long gotten away with seriously misrepresenting the state of affairs in economic geography and urban and regional economics, claiming that until he came along the discussion of agglomeration was all verbal and non-rigorous. He has to this day never admitted the existence of or cited the work of such individuals as Peter Allen, Roger White, Gunter Haag, or Wolfgang Weidlich, who were doing mathematically rigorous such models, some of them with close resemblance to later work of Krugman's, thoughout the 1980s, even before Fujita's work, who is an economist. These people were even easier to ignore as they are mostly physicists with an occasional geographer thrown in (White) and published their work in such places as Environment and Planning A, Geographical Analysis, and the Journal of Regional Science, easy to ignore for a publicity hound like Krugman, and easy for a sloppy Nobel Committee to miss that clearly did not do its homework very well.
I did agree that Krugman was deserving of the prize as the person who applied an innovative idea to both trade and to regional economics (aka "economic geography"), as the last winner for trade did also, Bertil Ohlin. However, I was unhappy that it was not shared, and this unhappiness appears to be spreading, with a recent posting at voxeu by Jota Ishikawa on the matter. He named a number of others, but had the two I think most deserved to share it upfront. One is Avinash Dixit, given that the model that Krugman applied is the Dixit-Stiglitz model of industrial organization. The other is Masahisa Fujita, who was the first to apply the Dixit-Stiglitz model to urban and regional economics in a not widely read journal, Regional Science and Urban Economics in 1988, three years before Krugman's paper in 1991 in the Journal of Political Economy the Nobel committee recognized (and in which Krugman failed to cite Fujita). Frankly, in this area Fujita's work has been far more innovative and of far higher intellectual quality than that of Krugman, and I also note that nobody east of India has ever received the prize.
I close by also whining again that Krugman has long gotten away with seriously misrepresenting the state of affairs in economic geography and urban and regional economics, claiming that until he came along the discussion of agglomeration was all verbal and non-rigorous. He has to this day never admitted the existence of or cited the work of such individuals as Peter Allen, Roger White, Gunter Haag, or Wolfgang Weidlich, who were doing mathematically rigorous such models, some of them with close resemblance to later work of Krugman's, thoughout the 1980s, even before Fujita's work, who is an economist. These people were even easier to ignore as they are mostly physicists with an occasional geographer thrown in (White) and published their work in such places as Environment and Planning A, Geographical Analysis, and the Journal of Regional Science, easy to ignore for a publicity hound like Krugman, and easy for a sloppy Nobel Committee to miss that clearly did not do its homework very well.
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