Let’s suppose for a moment that all this talk about ideology—about the evils of big government, the flood of debt that threatens our moral and economic collapse, and of course the line that must be drawn in the sand against any new taxes of any kind on anybody—is simply a fig leaf, and that Republicans are pursuing their own partisan advantage without any scruples whatsoever. What would such a strategy look like?
As an unpaid advisor to Boehner and company, here is what I propose:
Using any arguments at hand, however implausible, delay an agreement on raising the debt ceiling. At some point, just before moment of reckoning, the markets will be spooked, and interest rates will begin to take off. Use this crisis to reach a compromise that raises the ceiling, but only for a couple of months or so, signaling to the markets that default risk remains on the table. With luck, interest rates will stay relatively high. Continue doing this, again and again, until next year’s elections.
The advantages practically scream out to be heard. Above all, the interest rate spike will doom the economy, more or less guaranteeing a second, even more painful dip. Obama will have to go before the American people with the economy in tatters and unemployment at a post-FDR high. He might as well stay in bed.
Second, the added interest expense guarantees that there will be no resources for the government to initiate any new programs under Obama’s watch or even implement the few he has started. The public sector at all levels will be tied in knots.
Third, higher interest rates mean more transfers to the bondholders, a core constituency of the Republicans. True, at the moment it may look like a risk premium that simply compensates the rich for the added risk of default, but in reality the Republicans have their hands on the dial and can keep averting default at the last moment so that there is a real ex post transfer.
To put it bluntly, a perils-of-Pauline debt ceiling strategy will force the Democrats to run on a ruined economy, bleed them of fiscal resources and cleverly funnel yet more money to the rich. What’s not to like?
There is a risk, however, that the Democrats will be able to make the argument that Republican intransigence and guile has tanked the economy and made them unworthy of election. My assessment is that this risk is minimal for four reasons:
1. Democrats would have to be capable of taking a strong partisan stand. Simply by continuing to play the (illusory) negotiating game, and by presenting the image of a clash of honestly-held principles, they would undermine their ability to go partisan. If Republicans were using the debt ceiling standoff as a ruse to depress the economy, what were the Democrats doing?
2. It would have to be clear that Republican actions had caused the renewed economic slump. It is never so simple, however, because there are always lots of other things going on at the same time that might have an effect on recession and unemployment. There will almost certainly be more bad news coming out of the Eurozone, for instance, as well as natural and man-made disasters, corporate scandals, etc. It could be this or it could be that.
3. Above all, the public would have to acquire a sufficiently sophisticated understanding of financial and economic matters to see the connection between debt ceiling brinksmanship, interest rates and economic pain. Since the evidence is clear that they don’t have this understanding now, they would have to learn in a hurry. This is unlikely, especially since there will be a steady flow of analyses coming out of academia, think tanks and the mass media to cast doubt on truly valid explanations. The climate debate shows that this is entirely doable.
4. There remains the worry that business interests may become alienated from the Republicans due to the losses they incur as a result of this kill-the-economy strategy. Without doubt, some will see it this way and support the Democrats. By this point, most of this segment of the business community is already leaning to blue, so the net effect is likely to be small. The rest of the corporate and financial upper tier will have the discipline to recognize that short-term suffering is the price that has to be paid to restore complete conservative dominance of American politics. Come 2013, a Republican president and congress will go ape-Keynesian, slashing taxes and increasing spending on various emergency and national security initiatives. The economy will come back, and meanwhile a serious, unimpeded assault will begin on what remains of the public sector. The profit opportunities will be spectacular.
Sunday, July 24, 2011
Friday, July 22, 2011
Is Platinum Coin Seignorage A Way Out Of The Debt Ceiling Impasse?
So, the latest rumblings are that Obama and Boehner may be near a deal, but if they are not, or if it will not pass in time, there may be another way to get around the debt ceiling without provoking a constitutional crisis and possible impeachment by having Obama ignoring it, as I have supported, or in conjunction declaring it unconstitutional, which I also think it is, or violating the constitution by making arbitrary cuts in spending not approved by Congress. This is to coin one, or maybe several, platinum coins of very high value, depositing it or them in the NY Fed, and keep on paying bills.
This can be done due to a peculiar and little known act passed in 1996 that allows the US Treasury to mint platinum coins of arbitrary value, but no other metals. Why this was passed, I have no idea, but it is in the code apparently. A single one trillion dollar platinum coin deposited at the NY Fed by the Treasury would do the trick for some time.
I thank James Galbraith for bringing this to my attention. Apparently this was suggested initially some time ago by the commentator known as "beowulf." Matt Yglesias provides more discussion at http://tinyurl.com/6xub2ab .
This can be done due to a peculiar and little known act passed in 1996 that allows the US Treasury to mint platinum coins of arbitrary value, but no other metals. Why this was passed, I have no idea, but it is in the code apparently. A single one trillion dollar platinum coin deposited at the NY Fed by the Treasury would do the trick for some time.
I thank James Galbraith for bringing this to my attention. Apparently this was suggested initially some time ago by the commentator known as "beowulf." Matt Yglesias provides more discussion at http://tinyurl.com/6xub2ab .
Trigger Madness: A Clue to How Dumb the Debt Ceiling Deal Truly Is
Garry Kasparov not withstanding, life is not much like chess, but sometimes the wisdom of one does rub off on the other. One thing I learned in my playing days is that you are at your greatest risk of doing something dumb when you think you are being clever. A current case in point is the crucial role played by “triggers” in the emerging debt ceiling deal.
First, let’s look at it from the point of view of Obama. He thinks the problem is that credit markets may shift their sentiment regarding the long-range US fiscal position. Long rates on Treasuries are low right now, but how can we be sure they will stay that way? Wouldn’t it be better if we could lock in a decade-length deal that would stabilize public debt as a percentage of GDP?
But the problem is that we live in a democracy. Every two years there is an election, and the new politicos in charge may want to reverse the policies of their predecessors. How can we lock in any policy for the long run? This is the time consistency problem.
Ah, but there is an oh-so-clever solution: impose on yourself and your negotiating partner a horrible outcome that will come to pass unless you follow through with your commitments. This self-threat is the “trigger”.
Like many economists, I first heard about this strategy from Thomas Schelling. He describes a situation in which you are being held by a kidnapper. You want to be released, but the kidnapper is rationally afraid that you will reveal his identity. Of course, you could promise to never do such a thing, but how can the kidnapper know that you will keep this promise? Once you are released, it will be in your interest to go to the police: your incentives then will be different from what they are today. Schelling’s very clever solution is for you to share with the kidnapper some awful fact about your life that you want to keep secret. What this does is to keep your post-release incentives the same as your pre-release. The ability of the kidnapper to spill your secret is the trigger that keeps you honest. (I have always wondered how common it is for people to have a secret that is awful enough to do the job, but that’s another story.)
In effect, Obama and Boehner are offering to share secrets, to each bind their future selves to a long-term deal so that something horrible, like repeal of the Bush tax cuts (horrible to Boehner) or the removal of the health insurance mandate (horrible to Obama) doesn’t happen “automatically”. One convenient feature of this strategy is that the timing of the various aspects of the budget deal don’t matter. If the cuts come first, but the revenue increases don’t happen until several years from now, it’s not a problem because the triggers ensure that all aspects of the deal will eventually materialize.
Except that it’s all an illusion. The triggers being negotiated by Obama and Boehner are legislative, not constitutional. They can be undone by a future Congress or president. If Michele Bachmann is our new president come 2013 (gulp), I’m sure she will be happy to remove the tax increase trigger, especially if she has a Republican congress to work with.
The general point is that the hold-yourself-hostage trigger strategy does not solve the time inconsistency problem in a democracy, because part of the meaning of democracy is that new governing majorities have the power to undo the acts of those they replace. It is not possible for Obama to negotiate a ten (or more) year plan with the Republicans—period. He can push for actions to be taken during his term, and after that it’s up to the next president.
Of course, the markets know this well. Suppose there is a change in investor sentiment, and, against all logic, potential creditors decide that the US government is at risk of being unable to service its debts. Do you suppose they would be placated by promises to cut deficits several years down the road? Look at Greece and Italy. When interest rates shoot up, the only bone governments can throw is immediate austerity. Bondholders are perfectly aware of the time consistency problem, and promises mean nothing to them.
But that’s why the whole debt ceiling charade is so dumb. Bondholders are happy to hold Treasuries, even with long maturities. We don’t need austerity any time soon. And if the tide ever changes, distant promises will be irrelevant; the only thing that will matter will be fiscal policies at the moment of crisis.
The only thing we can do, although it is apparently too much for us, is to act intelligently in the present. Getting current fiscal policy right would be a good place to start, and addressing longer-term challenges through investments in people and infrastructure, along with cost controls in health care, would be a good way to continue.
First, let’s look at it from the point of view of Obama. He thinks the problem is that credit markets may shift their sentiment regarding the long-range US fiscal position. Long rates on Treasuries are low right now, but how can we be sure they will stay that way? Wouldn’t it be better if we could lock in a decade-length deal that would stabilize public debt as a percentage of GDP?
But the problem is that we live in a democracy. Every two years there is an election, and the new politicos in charge may want to reverse the policies of their predecessors. How can we lock in any policy for the long run? This is the time consistency problem.
Ah, but there is an oh-so-clever solution: impose on yourself and your negotiating partner a horrible outcome that will come to pass unless you follow through with your commitments. This self-threat is the “trigger”.
Like many economists, I first heard about this strategy from Thomas Schelling. He describes a situation in which you are being held by a kidnapper. You want to be released, but the kidnapper is rationally afraid that you will reveal his identity. Of course, you could promise to never do such a thing, but how can the kidnapper know that you will keep this promise? Once you are released, it will be in your interest to go to the police: your incentives then will be different from what they are today. Schelling’s very clever solution is for you to share with the kidnapper some awful fact about your life that you want to keep secret. What this does is to keep your post-release incentives the same as your pre-release. The ability of the kidnapper to spill your secret is the trigger that keeps you honest. (I have always wondered how common it is for people to have a secret that is awful enough to do the job, but that’s another story.)
In effect, Obama and Boehner are offering to share secrets, to each bind their future selves to a long-term deal so that something horrible, like repeal of the Bush tax cuts (horrible to Boehner) or the removal of the health insurance mandate (horrible to Obama) doesn’t happen “automatically”. One convenient feature of this strategy is that the timing of the various aspects of the budget deal don’t matter. If the cuts come first, but the revenue increases don’t happen until several years from now, it’s not a problem because the triggers ensure that all aspects of the deal will eventually materialize.
Except that it’s all an illusion. The triggers being negotiated by Obama and Boehner are legislative, not constitutional. They can be undone by a future Congress or president. If Michele Bachmann is our new president come 2013 (gulp), I’m sure she will be happy to remove the tax increase trigger, especially if she has a Republican congress to work with.
The general point is that the hold-yourself-hostage trigger strategy does not solve the time inconsistency problem in a democracy, because part of the meaning of democracy is that new governing majorities have the power to undo the acts of those they replace. It is not possible for Obama to negotiate a ten (or more) year plan with the Republicans—period. He can push for actions to be taken during his term, and after that it’s up to the next president.
Of course, the markets know this well. Suppose there is a change in investor sentiment, and, against all logic, potential creditors decide that the US government is at risk of being unable to service its debts. Do you suppose they would be placated by promises to cut deficits several years down the road? Look at Greece and Italy. When interest rates shoot up, the only bone governments can throw is immediate austerity. Bondholders are perfectly aware of the time consistency problem, and promises mean nothing to them.
But that’s why the whole debt ceiling charade is so dumb. Bondholders are happy to hold Treasuries, even with long maturities. We don’t need austerity any time soon. And if the tide ever changes, distant promises will be irrelevant; the only thing that will matter will be fiscal policies at the moment of crisis.
The only thing we can do, although it is apparently too much for us, is to act intelligently in the present. Getting current fiscal policy right would be a good place to start, and addressing longer-term challenges through investments in people and infrastructure, along with cost controls in health care, would be a good way to continue.
Wednesday, July 20, 2011
Cut, Cap, and Balance Made Personal
The House of Representatives passed the “Cut, Cap, and Balance” Act, which Brian Beutler says (if it became law)
And I think Brian has this right. But going over Federal budget numbers might not quite drive my point home as to what should rightly be called Duck, Dodge, and Dismantle. So let me recast Jay Carney’s point by an analogy to a family in Manhattan struggling to make ends meet. The husband is making $70,000 (gross) a year on his primary job and is considering part-time work that would pay him an additional $30,000. The wife in addition to taking primary care of their two children – who both have medical conditions that cause them to spend $2000 a month on medical care – works receiving $50,000 a year. If the husband took the second job, their $150,000 in gross income would net $120,000 after taxes or $10,000 a month. While that might seem like a nice income – this is Manhattan and their apartment runs them $4000 a month, and they spend $1000 a month on food, $1000 a month on other necessities, and $1000 a month on entertainment.
The husband just happens to be a Republican and really does not understand why he needs to take this part-time job. After the wife – who just happens to be a Democrat – lays out the simple arithmetic of their budgetary situation, the husband replies by arguing that they could just reduce their spending by 20 percent. The wife – having counting to ten so she doesn’t scream in front of the kids – asks the husband where do they cut spending. After all, it is the husband who wants to stay in their Manhattan apartment and insists that they not cut back on the entertainment budget. She then points out that reducing the food and other necessities budgets by any feasible amount is not going to come close to making ends meet if the husband chooses not to take the part-time position.
Well – I guess the husband might suggest that they eliminate their medical spending but he should be forewarned that divorce attorneys in Manhattan are also expensive.
would slash federal programs deeply, and restrict dramatically the government's ability to do anything constructive for the country.
And I think Brian has this right. But going over Federal budget numbers might not quite drive my point home as to what should rightly be called Duck, Dodge, and Dismantle. So let me recast Jay Carney’s point by an analogy to a family in Manhattan struggling to make ends meet. The husband is making $70,000 (gross) a year on his primary job and is considering part-time work that would pay him an additional $30,000. The wife in addition to taking primary care of their two children – who both have medical conditions that cause them to spend $2000 a month on medical care – works receiving $50,000 a year. If the husband took the second job, their $150,000 in gross income would net $120,000 after taxes or $10,000 a month. While that might seem like a nice income – this is Manhattan and their apartment runs them $4000 a month, and they spend $1000 a month on food, $1000 a month on other necessities, and $1000 a month on entertainment.
The husband just happens to be a Republican and really does not understand why he needs to take this part-time job. After the wife – who just happens to be a Democrat – lays out the simple arithmetic of their budgetary situation, the husband replies by arguing that they could just reduce their spending by 20 percent. The wife – having counting to ten so she doesn’t scream in front of the kids – asks the husband where do they cut spending. After all, it is the husband who wants to stay in their Manhattan apartment and insists that they not cut back on the entertainment budget. She then points out that reducing the food and other necessities budgets by any feasible amount is not going to come close to making ends meet if the husband chooses not to take the part-time position.
Well – I guess the husband might suggest that they eliminate their medical spending but he should be forewarned that divorce attorneys in Manhattan are also expensive.
From Chaos To Catastrophe?
I once wrote a book entitled (partly) _From Catastrophe to Chaos_, which my interviewer on the NPR show kept mentioning. However, the way things are going, it looks like this situation regarding the debt ceiling may well be a matter of the chaos of a decisionmaking process leading to a catastrophe in the economy.
Tuesday, July 19, 2011
Quote of the Day
From the abstract to “Student Attitudes and Knowledge Change in an Introductory College Economics Course”:
I take back every cynical comment I have ever made about the student portion of the human race.
Students’ attitudes towards economics as well as their knowledge of economics before and after taking a college introductory economics class is examined using standardized multiple choice economics knowledge and attitude questions. Prior knowledge of economics, having a bank account, and other biographical information are used to hold constant many factors influencing pre/post performance in an economics class. Students who gained in economics knowledge appear to have a more negative attitude towards the subject compared to students who exhibited no knowledge gained.
I take back every cynical comment I have ever made about the student portion of the human race.
Whose Responsibility Is it that the Public Doesn’t Understand Public Finance?
While education wonks debate microscopic movements in the NAEP and other standardized measurements of student learning, those of us who care about the capacity of democracy in the modern world face data like this
:
Obviously, a great majority of the American people lack the elementary knowledge of government budgets to formulate a sensible answer—and, yes, there is only one sensible answer.There are at least three things they apparently fail to understand:
1. An increase in the debt ceiling simply follows through on the revenue and spending commitments that Congress has already made. Not raising it is like check kiting.
2. The only way the debt can fail to rise each and every year is if the government runs a budget surplus. Such a surplus is impossible this year, all but impossible for the next several, and has been a rare event not only in the US, but in every other modern economy. Moreover, there is no theoretical reason why such surpluses should be the norm, and many why moderate, intelligently directed borrowing should be.
3. Failure to raise the debt ceiling would lead to an immediate economic calamity. US Treasury bonds play a crucial role in the national and world economies, and all of us depend, directly or indirectly, on the income people get from government employment and social programs.
But there’s no point in complaining. The question is, how did we get into this political mess, and how can we get out of it? Real answers depend on real data, but in the meantime here are some speculations:
1. There is no functioning incentive in the media (print and electronic) from which most people get their information to be factually correct. Whether to portray the world as it actually is or make stuff up is a choice, and those who go for option #2 suffer no ill effects. Hence there is a vast amount of misinformation out there. The solution is not government regulation of the media, but a societal effort to build incentives for journalistic integrity. For instance, professional associations could not only give awards for exceptional service, but also black marks for incompetence and deceit. Teams of journalists could noncoercively “accredit” news outlets (including megablogs) the way colleges and universities are accredited, through an open process with transparent criteria.
2. Economists have collectively taken little responsibility for public education. For instance, I know of no attempts to identify the critical gaps in the public’s understanding of economics in order to mobilize a response. Even in the obvious places, like introductory textbooks, there is no systematic attempt to address economic illiteracy. If you think I’m exaggerating, show me the textbooks that speak to the three elementary observations made above—that make it clear that public debts are rarely capped, much less “repaid”, and that these debts are also economically vital assets.
3. There is a deep cognitive dimension to economic illiteracy. The term “national debt” is perceived by most people to be ominous and threatening, especially when numbers in the trillions are thrown around. They think governments are like households, going on consumption binges and waking up to debt bondage. In other words, they have a one-way view of causation, beginning with one’s own economic choices and leading to debt, and cannot see the other, from debt choices made by the government back to the economy, since each individual household’s insertion into the economy (their frame of reference) has only the first dimension. In addition, they see their own debts only from the liability side and not from the asset side. In other words, they are applying a personal, household template to the systemic terrain that economics is supposed to illuminate. Without getting more specific, all I can say is that a defective frame can be countered only by a better one: we need a coordinated effort to popularize a framework for visualizing the economy that is also based on us as a community, not just me as an atom.
4. The first three of these causal factors are exploited and amplified by a wealthy and politically powerful business-conservative coalition. They bankroll media that cynically make stuff up, and where none exist they create them. They reward economists who twist evidence and invent fanciful models that just happen to justify misinformation and cognitive errors regarding the real-world economy. And of course they make constant reference to images and framing devices that reinforce the inability of the public to think clearly about economic choices. Their political strategy is predicated on mass ignorance and error, so any movement for rationality and honesty has to be political as well.
:
Obviously, a great majority of the American people lack the elementary knowledge of government budgets to formulate a sensible answer—and, yes, there is only one sensible answer.There are at least three things they apparently fail to understand:
1. An increase in the debt ceiling simply follows through on the revenue and spending commitments that Congress has already made. Not raising it is like check kiting.
2. The only way the debt can fail to rise each and every year is if the government runs a budget surplus. Such a surplus is impossible this year, all but impossible for the next several, and has been a rare event not only in the US, but in every other modern economy. Moreover, there is no theoretical reason why such surpluses should be the norm, and many why moderate, intelligently directed borrowing should be.
3. Failure to raise the debt ceiling would lead to an immediate economic calamity. US Treasury bonds play a crucial role in the national and world economies, and all of us depend, directly or indirectly, on the income people get from government employment and social programs.
But there’s no point in complaining. The question is, how did we get into this political mess, and how can we get out of it? Real answers depend on real data, but in the meantime here are some speculations:
1. There is no functioning incentive in the media (print and electronic) from which most people get their information to be factually correct. Whether to portray the world as it actually is or make stuff up is a choice, and those who go for option #2 suffer no ill effects. Hence there is a vast amount of misinformation out there. The solution is not government regulation of the media, but a societal effort to build incentives for journalistic integrity. For instance, professional associations could not only give awards for exceptional service, but also black marks for incompetence and deceit. Teams of journalists could noncoercively “accredit” news outlets (including megablogs) the way colleges and universities are accredited, through an open process with transparent criteria.
2. Economists have collectively taken little responsibility for public education. For instance, I know of no attempts to identify the critical gaps in the public’s understanding of economics in order to mobilize a response. Even in the obvious places, like introductory textbooks, there is no systematic attempt to address economic illiteracy. If you think I’m exaggerating, show me the textbooks that speak to the three elementary observations made above—that make it clear that public debts are rarely capped, much less “repaid”, and that these debts are also economically vital assets.
3. There is a deep cognitive dimension to economic illiteracy. The term “national debt” is perceived by most people to be ominous and threatening, especially when numbers in the trillions are thrown around. They think governments are like households, going on consumption binges and waking up to debt bondage. In other words, they have a one-way view of causation, beginning with one’s own economic choices and leading to debt, and cannot see the other, from debt choices made by the government back to the economy, since each individual household’s insertion into the economy (their frame of reference) has only the first dimension. In addition, they see their own debts only from the liability side and not from the asset side. In other words, they are applying a personal, household template to the systemic terrain that economics is supposed to illuminate. Without getting more specific, all I can say is that a defective frame can be countered only by a better one: we need a coordinated effort to popularize a framework for visualizing the economy that is also based on us as a community, not just me as an atom.
4. The first three of these causal factors are exploited and amplified by a wealthy and politically powerful business-conservative coalition. They bankroll media that cynically make stuff up, and where none exist they create them. They reward economists who twist evidence and invent fanciful models that just happen to justify misinformation and cognitive errors regarding the real-world economy. And of course they make constant reference to images and framing devices that reinforce the inability of the public to think clearly about economic choices. Their political strategy is predicated on mass ignorance and error, so any movement for rationality and honesty has to be political as well.
Monday, July 18, 2011
Priorities in a declining empire
Schumpeter, Joseph A. 1954. "The Economic Crisis of the Tax State." International Economic Papers, 4; reprinted in Schumpeter, Joseph A. 1991. The Economics and Sociology of Capitalism, ed. Richard Swedberg (Princeton: Princeton University Press): pp. 99-140.
"... public finances are one of the best starting points for an investigation of society. The spirit of a people, its cultural level, its social structure, the deeds its policy may prepare -- and this and more is written in its fiscal history." He cites Goldscheid. 1917. Staatsozialismus order Staatskapitalismus. "the budget is the skeleton of the state stripped of all misleading ideologies."
Following Schumpeter, the budget debates illustrate the kind of life that the rich and powerful wish on the rest of society. Get rid of the social safety net, destroy unions, turn the clock back to the nineteenth century. And yes, a bloated military to fight in every corner of the world.
The one area that the Obama is willing to rein in military spending is on medical care for the troops -- at least Robert Gates emphasized that approach.
What is weird is that virtually nobody with access to the public media is talking sense. Even the unions seem to be swallowing the Kool Aid.
"... public finances are one of the best starting points for an investigation of society. The spirit of a people, its cultural level, its social structure, the deeds its policy may prepare -- and this and more is written in its fiscal history." He cites Goldscheid. 1917. Staatsozialismus order Staatskapitalismus. "the budget is the skeleton of the state stripped of all misleading ideologies."
Following Schumpeter, the budget debates illustrate the kind of life that the rich and powerful wish on the rest of society. Get rid of the social safety net, destroy unions, turn the clock back to the nineteenth century. And yes, a bloated military to fight in every corner of the world.
The one area that the Obama is willing to rein in military spending is on medical care for the troops -- at least Robert Gates emphasized that approach.
What is weird is that virtually nobody with access to the public media is talking sense. Even the unions seem to be swallowing the Kool Aid.
Balancing the Budget by Magic
Brian Beutler reports on the Republican “cuts, cap, and balance” fiscal proposal:
Unspecified spending cuts is right! Taking the 2010 figures from the Bureau of Economic Analysis for various types of Federal spending as a percent of GDP, we have the following: (1) defense purchases at 5.6%; nondefense purchases at 2.7%, interest payments at 2%, and transfer payments (mainly Social Security, Medicare, and Medicaid) at 15.9%. So how is the sum of all of this supposed to magically be reduced to only 18%?
Transfer payments as a share of GDP will decline a bit if we ever return to full employment. Of course, the GOP zest for immediate spending cuts – if politically successful – could trigger another recession. But even under the most optimistic assumptions, transfer payments as a share of GDP will remain fairly high if we do not slash and burn our SocialSecurity MedicareMedicaid system, which is not going to happen. So what do these Republicans “leaders” propose we cut? Certainly not defense spending. But unless they are proposing to do away with all nondefense Federal purchases, this notion that we can limit Federal spending to 18% of GDP is nothing more than bad arithmetic.
Tuesday, the House of Representatives will vote on, and likely pass, a conservative Republican plan called "Cut, Cap, and Balance." The package will include some immediate, as-yet unspecified spending cuts, a statutory cap to keep spending below 18 percent of GDP, and a promised separate vote on a Constitutional amendment that requires Congress to maintain a balanced budget, but essentially forbids any future tax increases.
Unspecified spending cuts is right! Taking the 2010 figures from the Bureau of Economic Analysis for various types of Federal spending as a percent of GDP, we have the following: (1) defense purchases at 5.6%; nondefense purchases at 2.7%, interest payments at 2%, and transfer payments (mainly Social Security, Medicare, and Medicaid) at 15.9%. So how is the sum of all of this supposed to magically be reduced to only 18%?
Transfer payments as a share of GDP will decline a bit if we ever return to full employment. Of course, the GOP zest for immediate spending cuts – if politically successful – could trigger another recession. But even under the most optimistic assumptions, transfer payments as a share of GDP will remain fairly high if we do not slash and burn our SocialSecurity MedicareMedicaid system, which is not going to happen. So what do these Republicans “leaders” propose we cut? Certainly not defense spending. But unless they are proposing to do away with all nondefense Federal purchases, this notion that we can limit Federal spending to 18% of GDP is nothing more than bad arithmetic.
Me On Debt Ceiling On Local NPR
This afternoon between 3 and 4 I shall be on Virginia Insight discussing the debt ceiling. This is NPR covering western Virginia and is a call-in show.
Blaming it on the Economists
So what was the New York Times supposed to say? Economists agree that the Republican Party is acting like a bunch of lunatics? No, you can’t do that. So they came up with an analysis piece that says that there is economic support for all sides in the debt ceiling debate. It’s like climate change: you have some scientists over here who say we’re in trouble, and over there are others who say not to worry. You aren’t allowed to tell the public who to believe, and you certainly can’t say that a party led by climate deniers is in the hands of idiots.
Now it is true that, if the question is whether, to reach a particular deficit target, it is better, ceteris paribus, to cut spending or raise taxes, economic research won't give you a clear signal—but that’s not the question.
The first question is whether we should be talking about tightening fiscal policy on the brink of a second dip, in the midst of a nonrecovery from a balance sheet recession. Textbook economics says no.
The second question is whether it makes sense for a country near the bottom of the OECD in tax revenues as a percent of GDP to burrow down even further. Unless you think the rest of the world is wrong and only Friedrich Hayek (or Ayn Rand) knows the score, you would find this dubious on its face.
The third question is whether there is actually much scope for deficit reduction even in the medium to long run as long as the US runs enormous current account deficits. And how are we going to balance our current account unless the rest of the world lets the dollar devalue drastically, or we accept permanent austerity—or we wake up and begin making the investments in human capital and infrastructure that a competitive economy needs? And that third option means borrowing and spending more in the short run.
Incidentally, you can tell the author of the article has no clue about the topic when he writes, “The key point of contention is whether the government should pay any part of its debts by raising revenue, or solely by spending less.” Aside from its larger conceptual problems, this sentence confuses stock and flow. Fiscal tightening can cut the deficit, but no one is talking about the budget surplus that would be required to pay off existing debts. “Paying back the debt” is the sort of thing that only the economically uninformed say, since budget surpluses are extremely rare, and debts are hardly ever reduced. You grow or inflate your way out of a debt overload, or you get whomped.
Now it is true that, if the question is whether, to reach a particular deficit target, it is better, ceteris paribus, to cut spending or raise taxes, economic research won't give you a clear signal—but that’s not the question.
The first question is whether we should be talking about tightening fiscal policy on the brink of a second dip, in the midst of a nonrecovery from a balance sheet recession. Textbook economics says no.
The second question is whether it makes sense for a country near the bottom of the OECD in tax revenues as a percent of GDP to burrow down even further. Unless you think the rest of the world is wrong and only Friedrich Hayek (or Ayn Rand) knows the score, you would find this dubious on its face.
The third question is whether there is actually much scope for deficit reduction even in the medium to long run as long as the US runs enormous current account deficits. And how are we going to balance our current account unless the rest of the world lets the dollar devalue drastically, or we accept permanent austerity—or we wake up and begin making the investments in human capital and infrastructure that a competitive economy needs? And that third option means borrowing and spending more in the short run.
Incidentally, you can tell the author of the article has no clue about the topic when he writes, “The key point of contention is whether the government should pay any part of its debts by raising revenue, or solely by spending less.” Aside from its larger conceptual problems, this sentence confuses stock and flow. Fiscal tightening can cut the deficit, but no one is talking about the budget surplus that would be required to pay off existing debts. “Paying back the debt” is the sort of thing that only the economically uninformed say, since budget surpluses are extremely rare, and debts are hardly ever reduced. You grow or inflate your way out of a debt overload, or you get whomped.
Sunday, July 17, 2011
Italy Versus Japan, External Deficit Versus External Surplus
Paul Krugman asks
Invoke the macro identity: the current account equals the sum of private and public net saving. Japan is a net saving country; the savings of its households and firms exceeds the borrowing of its government. As long as Japanese savers and financial institutions are willing to stockpile Japanese bonds, interest rates will remain low. This willingness results not only from general financial sentiment, but also institutional linkages between public and private institutions, which are commingled at a deep level.
Italy in recent years has increasingly become a deficit country. It is not as chronic a case as some of the Eurozone strugglers, but it is headed south. It depends on external creditors whose evaluation of its financial soundness includes the fact that it depends on external creditors.
In short, capital is not yet borderless. It is easier to borrow domestically than from abroad. Japan and Italy are on different sides of the current account divide.
A question (to which I don’t have the full answer): why are the interest rates on Italian and Japanese debt so different? As of right now, 10-year Japanese bonds are yielding 1.09%; 10-year Italian bonds 5.76%.The short answer has to be that Italy is a deficit country, and Japan is a surplus country. To wit:
Invoke the macro identity: the current account equals the sum of private and public net saving. Japan is a net saving country; the savings of its households and firms exceeds the borrowing of its government. As long as Japanese savers and financial institutions are willing to stockpile Japanese bonds, interest rates will remain low. This willingness results not only from general financial sentiment, but also institutional linkages between public and private institutions, which are commingled at a deep level.
Italy in recent years has increasingly become a deficit country. It is not as chronic a case as some of the Eurozone strugglers, but it is headed south. It depends on external creditors whose evaluation of its financial soundness includes the fact that it depends on external creditors.
In short, capital is not yet borderless. It is easier to borrow domestically than from abroad. Japan and Italy are on different sides of the current account divide.
Saturday, July 16, 2011
What Is Public Capital?
Floyd Norris really missed the boat this morning in his column on the European Banking Authority’s latest round of stress tests. There are big issues with the stresses EBA elected to test, but that’s a story for another day. For now, focus on Norris’ criticism of Helaba, the state bank (landesbank) for Hesse and Thuringia:
The first thing you need to know is what the state banks like Helaba are. They are publicly owned entities that rest on top of a pyramid of thousands of municipally owned savings banks. If you add in the specialized publicly owned real estate lenders, about half the total assets of the German banking system are in the public sector. (Another substantial chunk is in cooperative savings banks.) They are key tools of German industrial policy, specializing in loans to the Mittelstand, the small-to-medium size businesses that are at the core of that country’s export engine. Because of the landesbanken, small firms in Germany have as much access to capital as large firms; there are no economies of scale in finance. This also means that workers in the small business sector earn the same wages as those in big corporations, have the same skills and training, and are just as productive.
But the EU doesn’t like the landesbanken. They denounce the explicit and implicit public subsidies that state ownership entails, saying they violate the rules of competition policy. For over a decade they have fought to have the system privatized. In the end, the dispute is simply ideological: if you think that public ownership should only be an exception, narrowly crafted to address specific market failures, you want to see the landesbanken put on the auction block. If you think an economy should be organized to meet socially defined needs, you would want a large part of capital allocation to be responsive to public input, and you’d fight to keep the landesbanken the way they are. (There is a movement afoot in the US to promote public banking.)
One result of the EU attack has been pressure on the landesbanken to demonstrate competitive rates of return. The folks who move money in these banks are public servants, very good with forms and checklists in hallowed German tradition, but not very savvy in nouveau finance. Sadly, some of these naive beamters loaded up on the mortgage-based securities that collapsed in the financial crisis, since the returns were what Brussels was demanding, and, well, they were AAA.
But on to the topic at hand. What constitutes equity for the landesbanken? For a privately owned bank, capital is raised by drawing on private funds, for instance through a share offering. For a public bank, capital is the financial commitment authorized by the public institutions that guarantee the bank’s liabilities. It’s pretty obvious when you think about it, and that’s the position taken by Helaba and the other landesbanken.
According to the EBA, however, public commitments don’t count. They don’t think there should be public banks in the first place, and they don’t want to legitimize the financial structure of the German public banking system. In other words, their opposition isn’t about whether the landesbanken can cover their liabilities, but is pure ideology.
My guess is that Norris is unaware of the battle lines that have formed around the landesbanken and has adopted the EU position by reflex, out of distrust for all financial institutions. The cynicism that serves so well in the US, however, has to be translated into the European context before you can understand why Helaba is so stressed about its stress test.
Helaba is outraged that the E.B.A. will not count “hardened silent participations” as core capital. And what is that? As near as I can tell, it amounts to promises by the two states that own the bank that the states will put up more money if needed....This makes it sound as though Helaba is a band of sharp operators trying to hide how overleveraged they are—like some of the Wall Street players that blew up in 2008. There is a lot you could say about the landesbanken, but sharp is not what comes to mind.
The fact that these arguments are going on does provide some evidence that the stress tests are more credible than previous ones. They also remind us that one of the games that banks have played in the past — often with support from bank regulators — has been to count some pretty dubious things as capital. When the crisis hit, a lot of that “capital” turned out to not be of much use.
The first thing you need to know is what the state banks like Helaba are. They are publicly owned entities that rest on top of a pyramid of thousands of municipally owned savings banks. If you add in the specialized publicly owned real estate lenders, about half the total assets of the German banking system are in the public sector. (Another substantial chunk is in cooperative savings banks.) They are key tools of German industrial policy, specializing in loans to the Mittelstand, the small-to-medium size businesses that are at the core of that country’s export engine. Because of the landesbanken, small firms in Germany have as much access to capital as large firms; there are no economies of scale in finance. This also means that workers in the small business sector earn the same wages as those in big corporations, have the same skills and training, and are just as productive.
But the EU doesn’t like the landesbanken. They denounce the explicit and implicit public subsidies that state ownership entails, saying they violate the rules of competition policy. For over a decade they have fought to have the system privatized. In the end, the dispute is simply ideological: if you think that public ownership should only be an exception, narrowly crafted to address specific market failures, you want to see the landesbanken put on the auction block. If you think an economy should be organized to meet socially defined needs, you would want a large part of capital allocation to be responsive to public input, and you’d fight to keep the landesbanken the way they are. (There is a movement afoot in the US to promote public banking.)
One result of the EU attack has been pressure on the landesbanken to demonstrate competitive rates of return. The folks who move money in these banks are public servants, very good with forms and checklists in hallowed German tradition, but not very savvy in nouveau finance. Sadly, some of these naive beamters loaded up on the mortgage-based securities that collapsed in the financial crisis, since the returns were what Brussels was demanding, and, well, they were AAA.
But on to the topic at hand. What constitutes equity for the landesbanken? For a privately owned bank, capital is raised by drawing on private funds, for instance through a share offering. For a public bank, capital is the financial commitment authorized by the public institutions that guarantee the bank’s liabilities. It’s pretty obvious when you think about it, and that’s the position taken by Helaba and the other landesbanken.
According to the EBA, however, public commitments don’t count. They don’t think there should be public banks in the first place, and they don’t want to legitimize the financial structure of the German public banking system. In other words, their opposition isn’t about whether the landesbanken can cover their liabilities, but is pure ideology.
My guess is that Norris is unaware of the battle lines that have formed around the landesbanken and has adopted the EU position by reflex, out of distrust for all financial institutions. The cynicism that serves so well in the US, however, has to be translated into the European context before you can understand why Helaba is so stressed about its stress test.
Thursday, July 14, 2011
Sex, Lies, and Economics: please help
I have just finished my introduction to the book, which is shaping up. I would very much appreciate any comments.
http://michaelperelman.files.wordpress.com/2011/07/intro.doc
http://michaelperelman.files.wordpress.com/2011/07/intro.doc
Consciousness Lost. Looking back at 1972
I experienced 1972 as another letdown year of revived 'business as usual'. The shutdown of the alternative press and progressive environmental and social thought was pretty obvious in the mass media at the time and it has continued to this present day. It is so hard to imagine, for those born in latter decades, that open discussion and heated debate on our most important and vital issues did occur for a short and glorious few years in the 1960s. Then blackout.
1972 – The World3 'reference run' projected that the industrial output per capita (IOPC) would reach its all-time peak in 2013 and then would steeply decline through 2100. Moreover, the duration of Industrial Civilization (as measured by the leading and lagging IOPC 30% points) came out to be about 105 years. [Industrial Civilization, defined herein, began in 1930 and is predicted to end on or before the year 2030.] [1]
1972 Conference on the Human Environment. The Stockholm deliberations were confused by the fact that the luckier nations which happened to achieve industrial prodigality before the earth's savings became depleted had already infected the other nations with an insatiable desire to emulate that prodigality. The infection preceded recognition of the depletion. The result of this sad historical sequence was the pathetic quarrel over whether the luxury we cannot afford is economic growth or environmental preservation. Neither was a luxury; worse, neither was possible on a global scale. [2]
1972 – 1981 – The price of oil increased nine-fold. This fueled stagflation. Important changes occurred within the World Bank as a result of the energy crisis. It moved from supporting protection for infant industries and state planning and lending for state-owned enterprises to a commitment to trade liberalization and abandoned its support for public enterprises.[3]
1972 – December. John Kenneth Galbraith restates that the neglect of power in economics serves conservative political and social functions. The state is the only social entity that could exercise countervailing power to the corporate oligarchy but this situation is problematic given the state’s ‘consanguinity’ to the very corporate oligarchy that must be challenged. [4]
REFERENCES:
[1] THE PEAK OF WORLD OIL PRODUCTION AND THE ROAD TO THE OLDUVAI GORGE
Richard C. Duncan, Ph.D.1
Pardee Keynote Symposia
Geological Society of America
Summit 2000
Reno, Nevada
November 13, 2000
http://dieoff.org/page224.htm
[2] Industrialization: Prelude to Collapse
by William Catton
(Excerpt from Overshoot: The Ecological Basis of Revolutionary Change)
Unrecognized Preview
http://dieoff.org/page15.htm
[3] jkissing on April 23, 2006 - 7:24pm
http://www.theoildrum.com/story/2006/4/22/23169/4783
[4] Galbraith and Robinson's second crisis of economic theory.
Publication: Journal of Economic Issues
Publication Date: 01-MAR-08
Author: Wrenn, Mary ; Stanfield, James Ronald ; Carroll, Michael
http://www.accessmylibrary.com/coms2/summary_0286-34227679_ITM
COPYRIGHT 2008 Association for Evolutionary Economics
1972 – The World3 'reference run' projected that the industrial output per capita (IOPC) would reach its all-time peak in 2013 and then would steeply decline through 2100. Moreover, the duration of Industrial Civilization (as measured by the leading and lagging IOPC 30% points) came out to be about 105 years. [Industrial Civilization, defined herein, began in 1930 and is predicted to end on or before the year 2030.] [1]
1972 Conference on the Human Environment. The Stockholm deliberations were confused by the fact that the luckier nations which happened to achieve industrial prodigality before the earth's savings became depleted had already infected the other nations with an insatiable desire to emulate that prodigality. The infection preceded recognition of the depletion. The result of this sad historical sequence was the pathetic quarrel over whether the luxury we cannot afford is economic growth or environmental preservation. Neither was a luxury; worse, neither was possible on a global scale. [2]
1972 – 1981 – The price of oil increased nine-fold. This fueled stagflation. Important changes occurred within the World Bank as a result of the energy crisis. It moved from supporting protection for infant industries and state planning and lending for state-owned enterprises to a commitment to trade liberalization and abandoned its support for public enterprises.[3]
1972 – December. John Kenneth Galbraith restates that the neglect of power in economics serves conservative political and social functions. The state is the only social entity that could exercise countervailing power to the corporate oligarchy but this situation is problematic given the state’s ‘consanguinity’ to the very corporate oligarchy that must be challenged. [4]
REFERENCES:
[1] THE PEAK OF WORLD OIL PRODUCTION AND THE ROAD TO THE OLDUVAI GORGE
Richard C. Duncan, Ph.D.1
Pardee Keynote Symposia
Geological Society of America
Summit 2000
Reno, Nevada
November 13, 2000
http://dieoff.org/page224.htm
[2] Industrialization: Prelude to Collapse
by William Catton
(Excerpt from Overshoot: The Ecological Basis of Revolutionary Change)
Unrecognized Preview
http://dieoff.org/page15.htm
[3] jkissing on April 23, 2006 - 7:24pm
http://www.theoildrum.com/story/2006/4/22/23169/4783
[4] Galbraith and Robinson's second crisis of economic theory.
Publication: Journal of Economic Issues
Publication Date: 01-MAR-08
Author: Wrenn, Mary ; Stanfield, James Ronald ; Carroll, Michael
http://www.accessmylibrary.com/coms2/summary_0286-34227679_ITM
COPYRIGHT 2008 Association for Evolutionary Economics
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