by the Sandwichman
Here are questions submitted to the White House website asking about a shorter work week. Sandwichman is intrigued that 60% of the viewers who voted on these questions, "didn't like the question." The numbers in parentheses are the tallies of "like"-"don't like" votes.
"Any way to encourage a temporary 36 hour workweek (except for you and your staff), A 10% cut in regular hours would help deal with 10% unemployment."
RJK, NC - Jobs (361-566)
"Is a 35 hour work week not a solution for the lack of jobs?"
Yoyo, Paris, France - Jobs (199-283)
"What do you think of shortening the work week and job sharing as a solution to systemic unemployment? I would be happy to work fewer hours as long as I could get access to health care."
Kaller, Portland, OR - Jobs (82-75)
"I would like to know if the administration has considered as a possibility to improving our economy by reducing the fulltime work week frrom 40 hours to 30 hours or asking congress to look into revisiting the Black-connery bill of 1932?"
Justasking, Atlanta, GA - Jobs (125-184)
"Have you considered allowing the economy to contract? It seems to me that a lot of our current economic activity (cars, fossil fuel, defense, etc.) is wasteful. Why not make a 3-day work week and stop the wealthy from taking such a big cut?"
Thomas, New York - Jobs (79-136)
Wednesday, March 25, 2009
Cochrane is Wrong About Fiscal Policy Even if Ricardian Equivalence Holds
John Cochrane continues to show his ignorance of what the Barro reformulation of Ricardian Equivalence suggests:
Franco Modigliani was generally thought to be a Keynesian and Barro’s theorem is in part a reformulation of the Ando-Modigliani life-cycle theory of consumption. Barro added the sensible proposition that the present value of future taxes must cover the sum of the current government debt and the present value of government spending – but this proposition does NOT lead to the conclusion that any increase in government purchases will be completely offset by a reduction in consumption as Kevin Quinn notes:
Kevin’s point has also been recently made by Paul Krugman and yours truly. And yet – Cochrane ignores this aspect of what Brad DeLong rightfully refers to as “Ricardian Consumers and Fiscal Policy Once Again”.
Mark Thoma has a thoughtful post on why the Barro-Ricardian proposition about the ineffectiveness of tax cuts might fail, that is, why giving a tax cut to a borrowing-constrained households might still lead to an increase in aggregate demand. My only misgiving with Mark’s post was his lead:
Even if the Ricardian model did fit the real world, Cochrane’s proposition that increases in government purchases did not impact aggregate demand is wrong, that is, simply a failure of his ability to understand the implications of this particular theory.
Robert Barro's Ricardian equivalence theorem was one nail in the coffin. This theorem says that stimulus cannot work because people know their taxes must rise in the future … We cannot return to mechanically adding up today's consumption, investment and export demands, and prescribe the government demand necessary to attain some desired level of output. Every economist now knows that to get stimulus to work, at a minimum, government must fool people into forgetting about future taxes, an issue Keynes and Keynesians never thought of.
Franco Modigliani was generally thought to be a Keynesian and Barro’s theorem is in part a reformulation of the Ando-Modigliani life-cycle theory of consumption. Barro added the sensible proposition that the present value of future taxes must cover the sum of the current government debt and the present value of government spending – but this proposition does NOT lead to the conclusion that any increase in government purchases will be completely offset by a reduction in consumption as Kevin Quinn notes:
Ricardian equivalence, it is true, implies that deficit-financed tax cuts cannot affect demand. Deficit-financed temporary increases in Government spending, on the other hand, can. Consumption falls today, because the present value of future taxes is higher by the amount of the spending increase, but not by as much as G rises. The reduction in the present value of life-time income implies that the [present value of the] sum of reductions in current and future consumption will be equal to the increase in G, so the reduction today will be small.
Kevin’s point has also been recently made by Paul Krugman and yours truly. And yet – Cochrane ignores this aspect of what Brad DeLong rightfully refers to as “Ricardian Consumers and Fiscal Policy Once Again”.
Mark Thoma has a thoughtful post on why the Barro-Ricardian proposition about the ineffectiveness of tax cuts might fail, that is, why giving a tax cut to a borrowing-constrained households might still lead to an increase in aggregate demand. My only misgiving with Mark’s post was his lead:
This discussion at Brad DeLong's makes the point that Ricardian equivalence fails for deficit financed temporary changes in government spending. But what's not clear from the discussion is that there's no reason to expect Ricardian equivalence to hold in any case in practice, even for deficit financed tax cuts where it can be true in theory.
Even if the Ricardian model did fit the real world, Cochrane’s proposition that increases in government purchases did not impact aggregate demand is wrong, that is, simply a failure of his ability to understand the implications of this particular theory.
Price Discovery on the Big Rock Candy Mountain
Willem Buiter nails the latest Treas/Fed PPIP proposal with his usual acuity. His analysis is spot on regarding the relevance of Akerlof’s lemons, the unwholesome mixing of bad and toxic assets, the shabbiness of the measures taken to obscure the true costs to the public, and the colossal waste of the whole enterprise in light of the far superior alternative of establishing a good, new (public) bank. I would differ only with his final sentence, which calls for tax increases and spending cuts in the teeth of an effective demand crisis.
Now three additional observations:
1. The one genuinely beneficial potential of Geithner’s public-private partnership plan is that it can generate price discovery: the market process it jumpstarts will price the toxic assets that are purchased. Buiter and other critics note that this will be a biased subset of the total—this is where Akerlof comes in. I would add one more complication. The subsidy scheme Geithner is putting in place is asymmetric: capping losses on the downside but not earnings on the up. If the subjective probability functions of investors regarding the true value of these assets is normal and reasonably compact, the subsidies will result in minimal pricing distortion. I haven’t looked at Lucian Bebchuk’s analysis (he is the intellectual godfather of this price discovery scheme), so I don’t know if he took a position on subjective probability form, but the proposal makes the most sense this way. My suspicion, however, is that fundamental uncertainty clouds the perception of what complex, toxic derivatives will ultimately be worth. If so, the distribution is neither compact nor normal. With long, fat tails the asymmetry in the payoff structure becomes crucial, and exerts strong upward bias to the resulting bids. If this is true, the prices “discovered” in this arrangement will be a poor guide to what private sector buyers are willing to offer in the absence of subsidies.
2. Much of the evasiveness of the sequential bailout schemes can be traced to a simple political-economic fact: unlike European countries, such as Sweden, whose resolute responses to earlier financial crises are held up as models for the present, the US has a legislative-executive, not a parliamentary, system. Obama’s crew does not possess a guaranteed legislative majority; it has to charm or obfuscate to win support for each new measure. This alone can explain why decisive action, like nationalization, is off the table. (Even worse, of course, is the fragmented authority of the EU, which shows us what the US would be like if we had stuck with the Articles of Confederation.)
3. In the end, even the most comprehensive, expensive program of bailouts will not put the US or global economy back on its feet. We are not building a bridge back to 2006. Financial systems everywhere and households in many countries (including ours) are massively overleveraged and will be consolidating their balance sheets for years to come. There was real misinvestment on a grand scale, encompassing not only housing (and not only in the US), but also a distribution of manufacturing capacity that depended on global imbalances persisting to eternity. The process of writing all this off will be protracted and painful. Finally, a destructive feedback loop has taken hold, in which weak economic prospects dampen investment demand, and weak investment depresses incomes. Even unfrozen banks no longer stuffed with junk will lend gingerly at best.
This is why I think a rapid shift in policy toward public banking is essential. How it can be reconciled with (2) is unclear, however. How can we get from here to there?
Now three additional observations:
1. The one genuinely beneficial potential of Geithner’s public-private partnership plan is that it can generate price discovery: the market process it jumpstarts will price the toxic assets that are purchased. Buiter and other critics note that this will be a biased subset of the total—this is where Akerlof comes in. I would add one more complication. The subsidy scheme Geithner is putting in place is asymmetric: capping losses on the downside but not earnings on the up. If the subjective probability functions of investors regarding the true value of these assets is normal and reasonably compact, the subsidies will result in minimal pricing distortion. I haven’t looked at Lucian Bebchuk’s analysis (he is the intellectual godfather of this price discovery scheme), so I don’t know if he took a position on subjective probability form, but the proposal makes the most sense this way. My suspicion, however, is that fundamental uncertainty clouds the perception of what complex, toxic derivatives will ultimately be worth. If so, the distribution is neither compact nor normal. With long, fat tails the asymmetry in the payoff structure becomes crucial, and exerts strong upward bias to the resulting bids. If this is true, the prices “discovered” in this arrangement will be a poor guide to what private sector buyers are willing to offer in the absence of subsidies.
2. Much of the evasiveness of the sequential bailout schemes can be traced to a simple political-economic fact: unlike European countries, such as Sweden, whose resolute responses to earlier financial crises are held up as models for the present, the US has a legislative-executive, not a parliamentary, system. Obama’s crew does not possess a guaranteed legislative majority; it has to charm or obfuscate to win support for each new measure. This alone can explain why decisive action, like nationalization, is off the table. (Even worse, of course, is the fragmented authority of the EU, which shows us what the US would be like if we had stuck with the Articles of Confederation.)
3. In the end, even the most comprehensive, expensive program of bailouts will not put the US or global economy back on its feet. We are not building a bridge back to 2006. Financial systems everywhere and households in many countries (including ours) are massively overleveraged and will be consolidating their balance sheets for years to come. There was real misinvestment on a grand scale, encompassing not only housing (and not only in the US), but also a distribution of manufacturing capacity that depended on global imbalances persisting to eternity. The process of writing all this off will be protracted and painful. Finally, a destructive feedback loop has taken hold, in which weak economic prospects dampen investment demand, and weak investment depresses incomes. Even unfrozen banks no longer stuffed with junk will lend gingerly at best.
This is why I think a rapid shift in policy toward public banking is essential. How it can be reconciled with (2) is unclear, however. How can we get from here to there?
Private global corporations. Public and national bailouts.
Questions: How is it that national governments are organising for the protection of deeply-malfunctioning transnational corporations and their global conglomerates? Are these institutions being asked to give their rather considerable (domestic and international) assets to the national taxpayers who are funding them?
Why have the large troubled banks continued to purchase huge overseas enterprises even in the context of their obvious financial vulnerability? Who in the world is responsible for proper oversight of their contemporary acquisitorial dealings?
2001 - Citi became the owner of 23.2% of the Mexican loan market through its acquisition of Banamex. This came about because of the conditions imposed by the IMF and the US on the 1994 Mexican bailout package.[1]
2006 – June. Explaining premiums in restricted DR (depository Receipt) markets and their implications: the case of Infosys. Morgan Stanley has significant investments in this [Indian] firm.
2007 – October 4th. Citigroup lends to KKR to buy Citigroup’s Loans. (snake eating its tail).
2007 - October 9th. Chinese Corporations owned by Goldman Sachs
"...The consortium - CDH Investments has a takeover vehicle called Rotary Vortex in which Goldman holds a 46% stake (2007). Rotary Vortex acquired full control of Shineway Group, owner of China’s largest meat processor, from state-backed interests in China following a year of regulatory scrutiny...[2]
2007 – October 10th. A consortium made up of a fund advised by JP Morgan Asset Management and Australia’s Challenger Infrastructure fund as well as the merchant bank UBS buys Southern Water which is the 7th largest water and sewage company in England and Wales which provides water for 2.3 million people and waste water services to 4.3 million customers. This acquisition involves the taking on of 2.8billion pounds of debt. The consortium is called ‘The Greensands consortium of infrastructure investors and pension funds’. The balance will be held by a series of Australian pension funds, Hermes, which is owned by the BT pension scheme and infrastructure investor Paceweald (linked to Vincent Tchenguiz’s Consensus Business Group which, in turn, has a stake in Challenger). [3]
2007 – October 17th. JP Morgan “has gobbled up Chase Manhatten, Manufacturers Hanover, Chemical Bank, Bank One and more over the past two decades….”
2008 – October 3rd. Mitsubishi UFJ Financial Group Inc.'s $9 billion investment in Morgan Stanley
2009 – January 16th. Carlyle, TPG, KKR Bid for AIG Aircraft-Leasing Unit. The world’s buyout firms are looking for ways to put their estimated $400 billion of committed capital to work after the global credit crisis restricted leveraged lending and reduced LBOs by about 70 percent last year. Forced sales by financial companies may provide some of the best opportunities. “You have a situation where there’s a distressed seller and these are the times when private-equity funds get their best returns.”
2009 – February 5th. Executives at Goldman Sachs Group Inc., JPMorgan Chase & Co. and hundreds of financial institutions receiving federal aid aren’t likely to be affected by pay restrictions announced yesterday by President Barack Obama.[4]
[1] Excerpt from "Wall Street and Immigration: Financial Services Giants Have Profited from the Beginning," Peter Cervantes-Gautschi, December 4, 2007, Americas Policy Program, Center for International Policy (CIP)
[2] By Sundeep Tucker in Hong Kong
Published: October 9 2007 22:18 | Last updated: October 10 2007 05:40
http://www.ft.com/cms/s/0/edff5102-768d-11dc-ad83-0000779fd2ac.html
[3] JP Morgan consortium buys Southern Water
· £4bn paid for Kent, Sussex and Hampshire utility
· New owners refuse to rule out job cuts
http://www.guardian.co.uk/business/2007/oct/10/2
Mark Milner, industrial editor. * The Guardian * Wednesday October 10 2007
[4] Goldman, JPMorgan Exempt From Exec Salary Caps
Published on 02-05-2009 Source: Bloomberg
http://www.blacklistednews.com/news-3215-0-13-13--.html
Why have the large troubled banks continued to purchase huge overseas enterprises even in the context of their obvious financial vulnerability? Who in the world is responsible for proper oversight of their contemporary acquisitorial dealings?
2001 - Citi became the owner of 23.2% of the Mexican loan market through its acquisition of Banamex. This came about because of the conditions imposed by the IMF and the US on the 1994 Mexican bailout package.[1]
2006 – June. Explaining premiums in restricted DR (depository Receipt) markets and their implications: the case of Infosys. Morgan Stanley has significant investments in this [Indian] firm.
2007 – October 4th. Citigroup lends to KKR to buy Citigroup’s Loans. (snake eating its tail).
2007 - October 9th. Chinese Corporations owned by Goldman Sachs
"...The consortium - CDH Investments has a takeover vehicle called Rotary Vortex in which Goldman holds a 46% stake (2007). Rotary Vortex acquired full control of Shineway Group, owner of China’s largest meat processor, from state-backed interests in China following a year of regulatory scrutiny...[2]
2007 – October 10th. A consortium made up of a fund advised by JP Morgan Asset Management and Australia’s Challenger Infrastructure fund as well as the merchant bank UBS buys Southern Water which is the 7th largest water and sewage company in England and Wales which provides water for 2.3 million people and waste water services to 4.3 million customers. This acquisition involves the taking on of 2.8billion pounds of debt. The consortium is called ‘The Greensands consortium of infrastructure investors and pension funds’. The balance will be held by a series of Australian pension funds, Hermes, which is owned by the BT pension scheme and infrastructure investor Paceweald (linked to Vincent Tchenguiz’s Consensus Business Group which, in turn, has a stake in Challenger). [3]
2007 – October 17th. JP Morgan “has gobbled up Chase Manhatten, Manufacturers Hanover, Chemical Bank, Bank One and more over the past two decades….”
2008 – October 3rd. Mitsubishi UFJ Financial Group Inc.'s $9 billion investment in Morgan Stanley
2009 – January 16th. Carlyle, TPG, KKR Bid for AIG Aircraft-Leasing Unit. The world’s buyout firms are looking for ways to put their estimated $400 billion of committed capital to work after the global credit crisis restricted leveraged lending and reduced LBOs by about 70 percent last year. Forced sales by financial companies may provide some of the best opportunities. “You have a situation where there’s a distressed seller and these are the times when private-equity funds get their best returns.”
2009 – February 5th. Executives at Goldman Sachs Group Inc., JPMorgan Chase & Co. and hundreds of financial institutions receiving federal aid aren’t likely to be affected by pay restrictions announced yesterday by President Barack Obama.[4]
[1] Excerpt from "Wall Street and Immigration: Financial Services Giants Have Profited from the Beginning," Peter Cervantes-Gautschi, December 4, 2007, Americas Policy Program, Center for International Policy (CIP)
[2] By Sundeep Tucker in Hong Kong
Published: October 9 2007 22:18 | Last updated: October 10 2007 05:40
http://www.ft.com/cms/s/0/edff5102-768d-11dc-ad83-0000779fd2ac.html
[3] JP Morgan consortium buys Southern Water
· £4bn paid for Kent, Sussex and Hampshire utility
· New owners refuse to rule out job cuts
http://www.guardian.co.uk/business/2007/oct/10/2
Mark Milner, industrial editor. * The Guardian * Wednesday October 10 2007
[4] Goldman, JPMorgan Exempt From Exec Salary Caps
Published on 02-05-2009 Source: Bloomberg
http://www.blacklistednews.com/news-3215-0-13-13--.html
Tuesday, March 24, 2009
Austrian Banks, Yesterday and Today
The government of the Czech Republic has just fallen as a result of the economic crisis that is hitting many countries in Eastern Europe hard, such as Hungary, Romania, and Ukraine. In and several of these, many people borrowed Swiss francs or other foreign currencies at low interest rates and are now hurting for repaying as their currencies have collapsed. Many of the banks that have been doing this lending and are now in serious trouble are located in Austria, with Raffeisen, Erste, and Bank of Austria reportedly getting emergency loans from the Austrian government, which is viewed as not able to handle a much worse crisis involving them. At least the Creditanstalt is not reported to be among those getting these loans, which was reconstituted after major problems earlier in its history.
It was the Creditanstalt that failed on May 11, 1931, triggering the worst financial crisis in world history. Founded in 1855, it had become the biggest bank in Central and Eastern Europe by then. Its failure set off a cascade of falling dominos among banks that then also failed, starting in countries formerly a part of the old Austro-Hungarian Empire to the east, many of them in trouble now, including Hungary, Czechoslovakia, and Poland. The next to go was Germany, where the unemployment rate would reach a world high of 30% by the time Adolf Hitler came to power in 1933. Many banks there had links to the Creditanstalt, and many failed in the months thereafter, with ones in France and Britain following suit. US banks were also linked to the ones in Germany because of the many loans made by them to the German ones under the Dawes Plan of the 1920s, worked out to help Germany deal with its debts arising from its reparations payments made under the Versailles Treaty. But the pressure on the US would peak after Britain went off gold in August, 1931. In the US, bank deposits fell by over 10%, and unemployment soared from a bit below 9% in 1930 to over 15% in 1931, higher than anytime since the Great Depression. Indeed, it was this wave of bank failures across the globe that more than anything else made an unpleasant recession into the Great Depression, as described well in such works as A Financial History of Western Europe, by Charles Kindleberger.
Hidden conclusion here.
It was the Creditanstalt that failed on May 11, 1931, triggering the worst financial crisis in world history. Founded in 1855, it had become the biggest bank in Central and Eastern Europe by then. Its failure set off a cascade of falling dominos among banks that then also failed, starting in countries formerly a part of the old Austro-Hungarian Empire to the east, many of them in trouble now, including Hungary, Czechoslovakia, and Poland. The next to go was Germany, where the unemployment rate would reach a world high of 30% by the time Adolf Hitler came to power in 1933. Many banks there had links to the Creditanstalt, and many failed in the months thereafter, with ones in France and Britain following suit. US banks were also linked to the ones in Germany because of the many loans made by them to the German ones under the Dawes Plan of the 1920s, worked out to help Germany deal with its debts arising from its reparations payments made under the Versailles Treaty. But the pressure on the US would peak after Britain went off gold in August, 1931. In the US, bank deposits fell by over 10%, and unemployment soared from a bit below 9% in 1930 to over 15% in 1931, higher than anytime since the Great Depression. Indeed, it was this wave of bank failures across the globe that more than anything else made an unpleasant recession into the Great Depression, as described well in such works as A Financial History of Western Europe, by Charles Kindleberger.
Hidden conclusion here.
Correction to 'Outside of the Vortex' article
On the left is an image of current logging in the upper Florentine valley in southern Tasmania. It is termed 'low impact selective harvesting' by the 'forest' industry here.Please accept my apologies for an error I made in the 'Outside of the Vortex' article earlier this month. I referred to the very large Kinglake-Marysville (Murrindindi) fire complexes converging with the huge Churchill plantation-based fire further South East. These fires did not, in fact, converge. However the arc of fires between them were the most intense and concentrated in the state. (see the list of references below)
The corrected text:
"But the truth is that the Black Saturday fires entailed the convergence of two huge fire balls that erupted in a tree plantation estate at East Kilmore and joined with another fire front that appeared to begin at a timber mill in the Murrindindi complex of heavily logged native forest and extensive industrial tree plantations further east [18], [19].....An ominous line of closely spaced fire fronts stretched all the way from very large East Kilmore/Murrindindi merged inferno through the Bunyip State Forest down to Druoin and Warragul; to within approximately 40 kilometres of the other very large fire complexes around Churchill."
REFERENCES
Radar reflectivity image from the Melbourne radar (Laverton) at 1pm EDT on
7th February 2009:
http://www.bom.gov.au/weather/vic/sevwx/fire/20090207/20090207_bushfire.shtml
Radar reflectivity image from the Melbourne radar (Laverton) at 8pm EDT on
7th February 2009
http://www.bom.gov.au/weather/vic/sevwx/fire/20090207/20090207_bushfire.shtml
Fire map. Overview. 13th February 2009
http://www.cfa.vic.gov.au/incidents/images/news_image/state_overview_20090213_0500_21449.pdf
Noojee-Mount Toorong fire complex (13th February 2009)
http://www.cfa.vic.gov.au/incidents/images/news_image/state_overview_20090213_0500_going_21451.pdf
Delburn (near Morwell/Churchill. 13th February 2009)
http://www.cfa.vic.gov.au/incidents/images/news_image/state_overview_20090213_0500_21449.pdf
Map of the fires on 23rd February 2009:
http://www.rms.com/ClientResources/Catupdates/Resources/WF_Australia_%20AffectedAreas.jpg
http://www.rms.com/ClientResources/Catupdates/CatUpdatePublic.asp?event_id=2770&update_number=1
There were fires at the following places:
Drouin:
Victoria's bushfires: Fire at Druion.
Photographer: Alex Coppel, Tim Carrafa, Ian Currie, Reuters, AFP
http://tools.themercury.com.au/photo-gallery/photo_gallery_popup.php?category_id=2455&offset=74
Pakenham:
Victoria's bushfires: Jason Adams, Keith Adams and Elizabeth Adams watch
their livestock, and sought shelter near a dam at Pekenham.
Photographer: Alex Coppel, Tim Carrafa, Ian Currie, Reuters, AFP
Glenvale (near Lilydale):
Victoria's bushfires: A grader heads up the hill cutting a firebreak in the
Glenvale area in Victoria.
Photographer: Alex Coppel, Tim Carrafa, Ian Currie, Reuters, AFP
http://tools.themercury.com.au/photo-gallery/photo_gallery_popup.php?category_id=2455&offset=87
Christmas Hills/Yarra Glen
A koala emerges from the fire at Christmas Hills. Photo: Tina McCarthy
http://www.theage.com.au/news/photogallery/national/reader-pictures/2009/02/07/1233423551136.html
Yarra Valley fire (as seen from Tarrawarra)
A bushfire in the Yarra Valley, as seen from Tarrawarra. Photo: Brent Lukey
http://www.theage.com.au/news/photogallery/national/reader-pictures/2009/02/07/1233423551136.html
Bunyip State Park
Smoke from the Bunyip State Forest fire seen from Warragul. Photo: Debbie
Lyons
http://www.theage.com.au/news/photogallery/national/reader-pictures/2009/02/07/1233423551136.html
Warragul (Camp Hill)
Victoria's bushfires: Camp Hill in Warragul
Photographer: Alex Coppel, Tim Carrafa, Ian Currie, Ben Swinnerton, Stephen
Harman, Fiona Hamilton, Jon Hargest, Mark Smith, Reuters, AFP
http://tools.themercury.com.au/photo-gallery/photo_gallery_popup.php?category_id=2455&offset=31
Healesville (Long Gully Road)
Victoria's bushfires: Aftermath of bushfires in Healesville. CFA media
liaison officer Mark Sacco walking along Long Gully Road, at the far end
which is State Forrest.
http://tools.themercury.com.au/photo-gallery/photo_gallery_popup.php?category_id=2455&offset=20
Photo taken by Cara Frankish from McIntyre Lane, Healesville (Healesville is
east of Yarra Glen and South of Marysville). Taken at 10.15pm on 9/2/09.
http://www.news.com.au/heraldsun/gallery/0,22010,5037340-5006020-16,00.html
Labertouche
"Victoria's bushfires: A fire truck retreats fromthe massive fire front at
Labertouche near Pakenham, east of Melbourne.
Photographer: Alex Coppel, Tim Carrafa, Ian Currie, Reuters, AFP
Victoria's bushfires: The fire front close to Labertouche near Pakenham,
east of Melbourne.
Photographer: Alex Coppel, Tim Carrafa, Ian Currie, Reuters, AFP
http://tools.themercury.com.au/photo-gallery/photo_gallery_popup.php?category_id=2455&offset=84
http://www.myenvironment.net.au/index.php/me/content/download/1316/7713/file/media_map_kilmoreEast_murrindindi_20090303_0421_a4.pdf
"Nationalization" Or Buying Toxic Assets: A False Dichotomy
Furious debate has broken out over the Geithner Plan to use public-private entities to buy toxic assets from troubled banks. Advocates of "nationalization" say the plan is a payoff from taxpayers to the rich, and pose the Swedish plan as superior. But Sweden only nationalized one bank that had totally failed, and then only briefly, with another already state-owned bank getting recapitalization. Otherwise, the government simply guaranteed all deposits in banks. We have effectively already done the Swedish plan, with Indymac and AIG effectively nationalized, and guarantees on deposits increased. This sort of plan just helps the rich using taxpayer funds, just as does the Geithner Plan. These are both ways of using taxpayer money to pay off the rich, who have largely already taken a hit due to the collapse of bank stock prices.
So, the real alternatives would be a true nationalization that would keep ownership and take over management of the banks. This will not happen in the US. The alternative, which is sort of what we did with the S&L crisis, is to liquidate the troubled banks and pay off the depositers. However, the FDIC is not remotely able to do this, even with the $500 billion loan it received in the stimpack. The S&L thing "only" cost the taxpayers $175 billion 20 years ago, and while we think of depositers as "regular folks," the people with the really big deposits tend to be (hack, cough) rich people. Anyway, this is not likely to happen either.
So, the real alternatives would be a true nationalization that would keep ownership and take over management of the banks. This will not happen in the US. The alternative, which is sort of what we did with the S&L crisis, is to liquidate the troubled banks and pay off the depositers. However, the FDIC is not remotely able to do this, even with the $500 billion loan it received in the stimpack. The S&L thing "only" cost the taxpayers $175 billion 20 years ago, and while we think of depositers as "regular folks," the people with the really big deposits tend to be (hack, cough) rich people. Anyway, this is not likely to happen either.
Monday, March 23, 2009
False Scare on “Green Protectionism”
Nothing gets the New York Times into an ideological frenzy like threats to “free trade”. This obsession is worth a study in itself, but we’ll let it pass. For now, let’s just insert a modest correction into the record: there is nothing protectionist about border taxes designed to offset the difference in production costs due to differences in carbon regulation. First of all, the issue is pragmatic: unless such taxes are introduced, no country will unilaterally introduce a carbon cap or any other measure that increases the costs of carbon-intensive goods. And if they did, it is quite possible that the effect could be perverse—with production migrating from more regulated regions to unregulated ones, leading to more emissions overall. So there simply have to be border taxes based on carbon content.
But there is also no friction between practicality and principle. Look at it this way: considering the global emergency posed by climate change, any country that doesn’t begin to restrict its use of fossil fuels is actually subsidizing its producers. And we have the Times to tell us what a monumental threat subsidies pose to the world economy.
But there is also no friction between practicality and principle. Look at it this way: considering the global emergency posed by climate change, any country that doesn’t begin to restrict its use of fossil fuels is actually subsidizing its producers. And we have the Times to tell us what a monumental threat subsidies pose to the world economy.
Sunday, March 22, 2009
Judd Gregg Predicts That Federal Government Will Go Bankrupt
CNN claims that Judd Gregg is “known as one of the keenest fiscal minds on Capitol Hill”. Known by whom? After the following, one has to wonder how anyone can think he is fiscally keen:
Admittedly, the President’s own budget predicts that the debt held by the public will rise to around 67% of GDP by 2019, which is the same level it was in 1951. Of course, the U.S. Federal government did not go bankrupt back then either as financial markets saw U.S. fiscal policy as committed to eventually reduce Federal debt. As we eventually exit the current economic crisis, this Administration at least makes the claim that there are also committed to long-run fiscal sanity. What would Senator Gregg suggest – a return to fiscal sanity now ala Hebert Hoover economics.
Of course, the past Administration allowed the debt/GDP ratio to rise each year even when we were near full employment. Funny thing – I did not hear such dire predictions from Senator Gregg when U.S. fiscal policy was clearly irresponsible.
The practical implications of this is bankruptcy for the United States,” Gregg said of the Obama’s administration’s recently released budget blueprint. “There’s no other way around it. If we maintain the proposals that are in this budget over the ten-year period that this budget covers, this country will go bankrupt. People will not buy our debt, our dollar will become devalued. It is a very severe situation.
Admittedly, the President’s own budget predicts that the debt held by the public will rise to around 67% of GDP by 2019, which is the same level it was in 1951. Of course, the U.S. Federal government did not go bankrupt back then either as financial markets saw U.S. fiscal policy as committed to eventually reduce Federal debt. As we eventually exit the current economic crisis, this Administration at least makes the claim that there are also committed to long-run fiscal sanity. What would Senator Gregg suggest – a return to fiscal sanity now ala Hebert Hoover economics.
Of course, the past Administration allowed the debt/GDP ratio to rise each year even when we were near full employment. Funny thing – I did not hear such dire predictions from Senator Gregg when U.S. fiscal policy was clearly irresponsible.
Saturday, March 21, 2009
The AIG Bailout: Preventing a Resolution of Offsetting Claims?
James Kwak admonishes us to move from the nano-picture of bonuses to the big picture of counterparty bailouts in the AIG mess. I agree. Along those lines, I have a thought: perhaps the credit default swaps we the taxpayers are making good on are part of a larger, interconnected network of transactions, whose aggregate value, if you netted them out, would be a lot less than the sum of their individual values. My understanding is that this is true in a general way for the derivatives tangle; I don’t know if the CDS’s link to this in some way. Part of cleaning up the financial gridlock is resolving these offsetting claims, of course. But an arbitrary guarantee to pay out some subset would interfere with that process and virtually require that all obligations be carried out. It is in the individual interest of AIG’s counterparties to put the clamps on the US government to get every penny they can, but it is not remotely in the public interest to do anything that requires each individual claim to be settled separately.
I admit I don’t know the detail here. If any EconoListeners have a better handle on this, can they tell me if my worries are well placed?
I admit I don’t know the detail here. If any EconoListeners have a better handle on this, can they tell me if my worries are well placed?
Dean Baker's "Third Round"
by the Sandwichman,
Along with Jamie Galbraith, Dean Baker also believes "the economic crisis, and its solution, are bigger than you think." In a report issued Tuesday, Baker "makes the case for a third stimulus package to in the face of economic indicators signaling that the economy is in a deeper downturn than was expected based on previous projections."
Along with Jamie Galbraith, Dean Baker also believes "the economic crisis, and its solution, are bigger than you think." In a report issued Tuesday, Baker "makes the case for a third stimulus package to in the face of economic indicators signaling that the economy is in a deeper downturn than was expected based on previous projections."
To get money into the economy effectively and quickly, the report proposes a stimulus package consisting, in part, of two tax credits: an employer tax credit that would extend health care coverage and another per worker credit for employers increasing the amount of paid time off.Excerpt from The Housing Crash Recession and the Case for a Third Stimulus after the jump.
The other obvious mechanism for quickly boosting demand is employer tax credits for giving workers paid time off. The paid time off can take a variety of forms, such as paid family leave, paid sick days, paid vacation days or a shorter workweek. The idea is that the government would give an employer a tax credit of up to $2,500 per worker per year to cover the cost of a reduction in work hours of up to 10 percent of their work time.
This tax credit, like the health care tax credit, could be implemented with very little lead time and little bureaucracy. To qualify, an employer would need to post on a public website the reduction in paid work time that they have put in place. Since workers could see the work-time reduction claimed by their employer, they would be able to verify that the policy has in fact been put into place. The arithmetic on this is straightforward. Suppose that employers of 60 million workers reduce their work time through family leave, sick days, or shorter hours by an average of 5 percent, at an average cost of $2,000 per worker. Since demand will not have changed (workers are getting paid just as much as they had previously), employers will in principle want to hire an additional 3 million workers to make up for the lost labor hours. This would imply 3 million new jobs, or jobs saved (in many cases, it may prevent layoffs that would have taken place otherwise), for an expenditure of $120 billion.
The great virtue of this sort of tax credit is that it is both boosting GDP and also increasing the number of jobs for every level of GDP. If everyone in the economy worked 5 percent fewer hours, and we had the same level of output, then we would have 5 percent more people working. For this reason, it is the most efficient mechanism for bringing the economy back to full employment.
Friday, March 20, 2009
Republicans Tag Cap&Trade a Tax but That’s a Good Thing
Elana Schor presents us with a letter from the Senate Republicans on the environment committee:
While Elana appears to be critical of how these Republicans have tagged this to be a tax, the Senate Republicans are correct. But as conservative Greg Mankiw has often noted, we should place a Pigovian tax on items such as gasoline.
Specifically, the President's 2010 Budget proposal asks to collect $646 billion dollars in new "Climate Revenues" from the American people. The government will collect these new revenues through a cap and trade scheme in which " allowances" are sold to the highest bidder. The government won't tax consumers directly, but it will impose new costs on energy producers and users who will in turn pass those higher costs on to consumers, which will result in higher electricity bills, gasoline prices, grocery bills, and anything else made from conventional energy sources. In short, consumers will feel as if they are paying a new tax on energy.
While Elana appears to be critical of how these Republicans have tagged this to be a tax, the Senate Republicans are correct. But as conservative Greg Mankiw has often noted, we should place a Pigovian tax on items such as gasoline.
A Major Statement from Jamie Galbraith
If you haven’t read his sobering analysis in The Washington Monthly yet, read it now, and then come back here. Jamie absolutely nails the limited vision of the Obama economic team, and the lessons he draws from the Great Depression are urgently needed. On the policy front, however, I think there are pieces that need to be shored up.
The most important policy directive is to stop thinking “stimulus” and start thinking about a much larger role for public investment in the long term. The analogy is not stepping off a bus and running to catch up and hop on again, but what to do when the bus breaks down. We are in this for the long haul and have to fashion programs that can employ people who will otherwise have no economic prospects for years to come. Fortunately (in the strange calculus of demand-driven economics) we have crying needs to address, especially in rebuilding our industrial civilization along the lines of sustainability. Galbraith is superb on this.
He also has the measure of our “entitlement” situation: with the collapse of private pension systems (and perhaps even many state and local public pension funds), we need Social Security more than ever. Let’s make it bigger and stronger. Jamie’s take on the housing market is also dead-on.
I would have been in reader heaven if two additional elements had been added:
1. This is a crisis of the global economy. AIG’s counterparty list should remove any doubt, and global imbalances were a critical component of what got us into this mess in the first place. Vast sums were invested in a capital stock whose profitability depended on the ability of consumers in the US to borrow without limit to finance their imports; much of this investment will have to be written off. In other words, the collapse of the US credit bubble is having worldwide ramifications, which will ricochet back, and back again, via the mechanism of global financial integration. If we let this process run its course we are in for a long, tough ride.
2. On the domestic front, there is a shortcut to the decades-long rebuilding of private assets that Jamie envisions: public banking. There is an excellent theoretical case, in my opinion, for a financial system dominated by profit-making public intermediaries, and I’m convinced that the German experience (the Sparkassen especially) confirms it. Moving quickly to establish such a system offers the hope that financial impetus can be revived over a much shorter period, and it rescues us from the odious program of bailouts that now poisons both our economy and our democracy.
Incidentally, there are two routes to public banking. The most direct, which I have advocated in this blog since last September, is to simply set up the system from scratch right now and capitalize it with funds redirected from bailouts. I admit there are loose ends to be dealt with, especially having to do with resolving the international obligations of the existing system, but that’s to be expected with any program. The second route is to hang onto the existing banks after nationalizing them. I have argued against this idea, since it would put the liabilities of these institutions on the public ledger. Perhaps this downside could be reduced by giving the banks’ creditors and counterparties a Paulson-style haircut, but this strikes me as very difficult to pull off, and, at the limit, it simply converges with the “good new (public) bank” proposal I have been pushing.
So: (1) This is a fantastic article by Jamie. I hope it is widely read and discussed. (2) I think we need to be willing to go a little further on the financial front and to take more account of how economically interwoven our world has become.
The most important policy directive is to stop thinking “stimulus” and start thinking about a much larger role for public investment in the long term. The analogy is not stepping off a bus and running to catch up and hop on again, but what to do when the bus breaks down. We are in this for the long haul and have to fashion programs that can employ people who will otherwise have no economic prospects for years to come. Fortunately (in the strange calculus of demand-driven economics) we have crying needs to address, especially in rebuilding our industrial civilization along the lines of sustainability. Galbraith is superb on this.
He also has the measure of our “entitlement” situation: with the collapse of private pension systems (and perhaps even many state and local public pension funds), we need Social Security more than ever. Let’s make it bigger and stronger. Jamie’s take on the housing market is also dead-on.
I would have been in reader heaven if two additional elements had been added:
1. This is a crisis of the global economy. AIG’s counterparty list should remove any doubt, and global imbalances were a critical component of what got us into this mess in the first place. Vast sums were invested in a capital stock whose profitability depended on the ability of consumers in the US to borrow without limit to finance their imports; much of this investment will have to be written off. In other words, the collapse of the US credit bubble is having worldwide ramifications, which will ricochet back, and back again, via the mechanism of global financial integration. If we let this process run its course we are in for a long, tough ride.
2. On the domestic front, there is a shortcut to the decades-long rebuilding of private assets that Jamie envisions: public banking. There is an excellent theoretical case, in my opinion, for a financial system dominated by profit-making public intermediaries, and I’m convinced that the German experience (the Sparkassen especially) confirms it. Moving quickly to establish such a system offers the hope that financial impetus can be revived over a much shorter period, and it rescues us from the odious program of bailouts that now poisons both our economy and our democracy.
Incidentally, there are two routes to public banking. The most direct, which I have advocated in this blog since last September, is to simply set up the system from scratch right now and capitalize it with funds redirected from bailouts. I admit there are loose ends to be dealt with, especially having to do with resolving the international obligations of the existing system, but that’s to be expected with any program. The second route is to hang onto the existing banks after nationalizing them. I have argued against this idea, since it would put the liabilities of these institutions on the public ledger. Perhaps this downside could be reduced by giving the banks’ creditors and counterparties a Paulson-style haircut, but this strikes me as very difficult to pull off, and, at the limit, it simply converges with the “good new (public) bank” proposal I have been pushing.
So: (1) This is a fantastic article by Jamie. I hope it is widely read and discussed. (2) I think we need to be willing to go a little further on the financial front and to take more account of how economically interwoven our world has become.
Kudlow on TALF and Inflation
MediaMatters shows Lawrence Kudlow setting a dollar bill on fire during a CNBC show. Let’s see why he decided to do this:
Kudlow is suggesting that the Federal Reserve is running a very inflationary monetary policy, but what does the evidence say? While it is true that the monetary base was 89% higher as of February 2009 than it was a year earlier, the money supply (as measured by Kudlow’s cherished MZM measure) rose by only 12%. I would trust that Kudlow is aware that the money multiplier has declined.
But how has this translated into increases in the consumer price index? Well, it seems that the CPI in February 2009 was a mere 0.7% higher than it was in February 2008. The Federal Reserve has been trying to increase the money supply to offset a drop in aggregate demand and a deflationary spiral. And yet Lawrence Kudlow is worried about hyperinflation. Go figure.
[Sidenote and thanks to the reader who caught my error made in the wee hours of the morning when I was also listening to the March madness coverage. The rise in the CPI was for the latest 12 months and I have editted the text to make the reported increases in the monetary base and MZM measure of the money supply for the same period. Note to self - wake-up and don't watch basketball highlights when looking over FRED data for a simple blog post. DUH]
KUDLOW: The Fed is kicking off its highly anticipated TALF program later today. They're just going to throw more money at the economy. This is a day after announcing it will buy long-term treasuries and mortgage-backed securities. Nobody better to report on this one than our great friend, senior economics reporter Steve Liesman. More on the TALF. Are we going to do this in unison? You get your dollar bill? ... This is the value of our money. This is the value of our money.
Kudlow is suggesting that the Federal Reserve is running a very inflationary monetary policy, but what does the evidence say? While it is true that the monetary base was 89% higher as of February 2009 than it was a year earlier, the money supply (as measured by Kudlow’s cherished MZM measure) rose by only 12%. I would trust that Kudlow is aware that the money multiplier has declined.
But how has this translated into increases in the consumer price index? Well, it seems that the CPI in February 2009 was a mere 0.7% higher than it was in February 2008. The Federal Reserve has been trying to increase the money supply to offset a drop in aggregate demand and a deflationary spiral. And yet Lawrence Kudlow is worried about hyperinflation. Go figure.
[Sidenote and thanks to the reader who caught my error made in the wee hours of the morning when I was also listening to the March madness coverage. The rise in the CPI was for the latest 12 months and I have editted the text to make the reported increases in the monetary base and MZM measure of the money supply for the same period. Note to self - wake-up and don't watch basketball highlights when looking over FRED data for a simple blog post. DUH]
Thursday, March 19, 2009
Not Working is Another Subject
by the Sandwichman
The point where the human individual doesn't quite gel is the Subject itself. "[W]hat we know as reality is, in Lacan's view, simply the set of fantasies with which we fill in this constitutive hole at the heart of being."
Wrapping the former enigma in the latter riddle, the Subject of economics, homo economicus, 'works' only in the sense of foregoing leisure at some exogenously-determined opportunity cost whose variation studiously disregards the disproportion between productive inputs and outputs.
Clearly this homo economicus cypher is a some sort of bad joke. Political economy, Walter Bagehot argued,
Fantasies perform a kind of magic. They authorize a sort of amnesia about matters so fearful and chaotic they would otherwise paralyze us from taking action. But...
I stumbled across another Subject a few weeks ago while drafting a short essay for a guest post on another blog. In making "the case for shorter hours," it became obvious to me that the case for shorter hours had been made many, many times before but that it wasn't a single case. The key to understanding the case for shorter working time is to step back from the multitude of objective claims and consider the nature of the Subject implied or constituted by the totality of those claims.
That Subject -- who I will call the historical economic social colllective individual, or Hesci (pronounced he-she, the -sci as in Gramsci) is not the utility-maximizing, extrinsically-motivated rational actor of economic textbook lore. The subject posed by the case is human, acting, as circumstances require and/or permit, either collectively or as a social individual. Hesci is both producer and consumer wrapped into one, not exclusively one or the other. And Hesci simultaneously performs various reproductive roles as citizen, family member, etc.
What I will provisionally call the "working time literature" is an enduring counterstory to political economy and economics. Sometimes it appears within economic analysis but when it does it gets banished because, as a counterstory, it resists and thus cannot be subsumed by the dominant story.
Every signifying system, so Zizek claims, contains a kind of super-signifier whose function is just to point to the fact that the system can't be totalized. It is that system's point of internal fracture, marking the point where it doesn't quite gel. -- Terry EagletonThe point where economics doesn't quite gel is work. Attempts to quantify work fall back inevitably on the mysterious category of hours of labor, an input whose variation is demonstrably not proportional to the resulting output of goods or services.
The point where the human individual doesn't quite gel is the Subject itself. "[W]hat we know as reality is, in Lacan's view, simply the set of fantasies with which we fill in this constitutive hole at the heart of being."
Wrapping the former enigma in the latter riddle, the Subject of economics, homo economicus, 'works' only in the sense of foregoing leisure at some exogenously-determined opportunity cost whose variation studiously disregards the disproportion between productive inputs and outputs.
Clearly this homo economicus cypher is a some sort of bad joke. Political economy, Walter Bagehot argued,
...assumes a sort of human nature such as we see everywhere around us, and again it simplifies that human nature; it looks at one part of it only. Dealing with matters of 'business,' it assumes that man is actuated only by motives of business. It assumes that every man who makes anything, makes it for money, that he always makes that which brings him in most at least cost, and that he will make it in the way that will produce most and spend least; it assumes that every man who buys, buys with his whole heart, and that he who sells, sells with his whole heart, each wanting to gain all possible advantage. Of course we know that this is not so, that men are not like this; but we assume it for simplicity’s sake, as an hypothesis.The knowledge that "this is not so" has long ago been concealed behind the technical screen of mathematical models. Rather than a "hypothesis," assumed for "simplicity's sake," homo economicus, along with the rest of those fellows -- like Descartes's cogito, Marx's proletariat or the 19th century anthropologists' primitive man -- would be better appreciated as fantasies in the Lacanian sense. They are fantasies because the Real there is unnameable -- it doesn't quite gel -- not merely because the Real is too complex.
Fantasies perform a kind of magic. They authorize a sort of amnesia about matters so fearful and chaotic they would otherwise paralyze us from taking action. But...
The effects of magic must be to weaken intellectual inquisitiveness, to encourage the indulgence in vain procedures for controlling the universe, instead of the profitable application of developing a technique for specific ends; to substitute unreal for real achievement, imagination for action, and to breed an easy fatalism which will prevent the building of fences to keep off crocodiles, or the taking of suitable measures to prevent disease. . . . Magic is indeed a parasitic adjunct to technique which sometimes completely immobilizes it.Which is to say that sometimes we have to free ourselves from the very same magic that previously may have set us free. So how do we do that if it was the magic of a fantasy that enabled us to overcome the paralyzing void in the first place? The not-so of economic man is hardly a revelation. But one cannot oppose something with nothing, even if that something is somewhat of a nullity. Nemo contra deum nisi deus ipse. No one can stand against a universal Subject unless it is a universal Subject itself.
I stumbled across another Subject a few weeks ago while drafting a short essay for a guest post on another blog. In making "the case for shorter hours," it became obvious to me that the case for shorter hours had been made many, many times before but that it wasn't a single case. The key to understanding the case for shorter working time is to step back from the multitude of objective claims and consider the nature of the Subject implied or constituted by the totality of those claims.
That Subject -- who I will call the historical economic social colllective individual, or Hesci (pronounced he-she, the -sci as in Gramsci) is not the utility-maximizing, extrinsically-motivated rational actor of economic textbook lore. The subject posed by the case is human, acting, as circumstances require and/or permit, either collectively or as a social individual. Hesci is both producer and consumer wrapped into one, not exclusively one or the other. And Hesci simultaneously performs various reproductive roles as citizen, family member, etc.
What I will provisionally call the "working time literature" is an enduring counterstory to political economy and economics. Sometimes it appears within economic analysis but when it does it gets banished because, as a counterstory, it resists and thus cannot be subsumed by the dominant story.
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