John Maynard Keynes on Occupy Mitt Romney

"No man of spirit will consent to remain poor if he believes his superiors to have gained their goods by lucky gambling. To convert the business man into a profiteer is to strike a blow at capitalism, because it destroys the psychological equilibrium which permits the perpetuance of unequal rewards. The economic doctrine of normal profits, vaguely apprehended by everyone, is a necessary condition for the justification of capitalism. The business man is tolerable so long as his gains can be said to bear some relation to what, roughly and in some sense, his activities have contributed to society."

Who is Voting to Shrink the IRS?

On the whole, David Cay Johnston has a very important point:

Congress will spend a trillion dollars more than it levies this year, so how do Washington’s politicians respond to the 11th consecutive year of federal budgets in red ink? They plan to shrink the IRS … if you believe government is too big and that cutting everywhere is the best way to shrink government. But this is the staff that generates revenue, and there is easy money to be made.

But then he goes a little astray with the politics:

So why would President Barack Obama and Congress cut the IRS budget? Their actions illuminate the rise of corporate power and values, and the diminishing voice of Joe Sixpack, thanks partly to how we finance election campaigns.

The how we finance elections part may be right but let’s recall that Joe Sixpack votes Republican and it is mainly the Republican Party that wants to hamstring the IRS in its enforcement of the tax laws against the larger corporations.

Scott Sumner v. Paul Krugman on a Simple Identity

Sumner tried to tease out the proposition that a rise in government purchases has no effect on the real economy from an identity, which prompted Krugman to school him on comparative statics. Sumner replies by basically repeating himself:

If Krugman were right that consumption smoothing somehow refuted Cochrane’s argument, then it would be impossible for consumers to react to a $100 million dollar fall in after-tax income as follows: Spending on consumer goods falls by $20 million. Spending on new homes falls by $80 million. Or spending on inventory accumulation falls by $80 million. Now I’m not saying that would happen, but if it did it would validate Cochrane’s claim and yet would incorporate consumption smoothing. So consumption smoothing can’t be the issue; it plays no role in whether Cochrane is right or wrong.

Time to call a time out. It is not the existence of the national income identity that is at play here but rather Sumner’s claim that the rise in the sum of consumption and government purchases necessarily completely crowds out investment. Two points:

(1) Complete crowding-out would occur if we were at full employment or if we had some sort of insane Federal Reserve policy that mandated we stay as far below full employment as we are now. Of course, neither condition describes today’s economy.

(2) Even if we did have complete crowding-out, notice that Sumner left off the transmission mechanism here. In his example, real interest rates would rise to crowd out the investment spending. So there would be at least this real effect.

As the title of Sumner’s second post notes – it is what he didn’t say that is revealing.

Update: Noah Smith and Paul Krugman anticipated my argument. First Noah:

Accounting identities are mostly just definitions. Very rarely do definitions tell us anything useful about the behavior of variables in the real world.

Then Paul:

the question is how the identity gets reflected in individual motives — is it via the interest rate, via changes in GDP, or what?

The Irrelevance Of Bond Ratings

It was front page news today, top story in WaPo, that S&P downgraded France and Austria from AAA status. Eeeeek! Except that their bond yields fell in the wake of this. The same thing happened after the US downgrade. And Japan has been downgraded 13 times, only to have the world's lowest bond yields. Really.

United Airlines' New Frontier in Ripoffs

I had about $500 worth of electronics gear stolen from my luggage in June. I spent several hours figuring out how to download the claim forms. After I filled them out, I got a brief note indicating that they received my submission.

Then I heard nothing. I spent many hours -- my guess is more than 20, mostly spent on wait times -- trying to contact somebody. I could get to an Indian call center, which could not give me any information on what to do.

After several months, I was informed that I had not included the tag from my baggage, which I did. I resent it. Many weeks later, I learned that I never sent it according to their records. After several iterations, I learned that my claim was denied because the company never received the tags.

A lawyer friend sent a letter to United. Now in January, I received a letter informing me that United does not accept responsibility for lost electronics.

Monti’s Message

I won’t get into his “rescue” program for Italy, but Mario Monti is saying what needs to be said about the current moment in EU politics.  In a word, the situation is dangerous and moving in the wrong direction.

To begin with, the continent is clearly in recession.  Economies are in the process of contracting, and every indicator of future demand—fiscal policy, consumer sentiment, investment and exports—are pointing down.  Economic misery is already baked in for 2012.

The countries that will be hardest hit, like Greece, Italy, Spain, Portugal and Ireland, have no policy levers to defend themselves.  They gave up monetary policy when they joined the euro, and fiscal deficits can’t be financed.  They are in a terrible situation.

The combination of economic hardship and political blockage is a recipe for volatile politics.  People rightfully demand action to fight unemployment and cuts in services, but the established parties have nothing to offer.  Fringe groups will be the beneficiaries, and many of them will be practitioners of the worst forms of xenophobia.  Fascist movements, complete with paramilitary wings, are on the rise in Hungary and Greece, and I would be surprised if more countries are not added to this list in the coming year.

In this context, Monti’s urgent words need to be heard.  Germany in particular needs to listen, because resentment against German policy and its moralistic pronouncements (the grasshopper and ant business, the paranoia about printing presses) will only increase, with repercussions for the German position in Europe.  If the German public thinks that the post-WWII era of humility is over, they will be in for an unpleasant surprise.  This does not mean that Germany cannot behave as a “normal” country, but it cannot set itself up as the chief enforcer of economic punishment for what is seen elsewhere as the crime of being insufficiently German.  I am not taking sides: this is the real political context of European fracture.

On a practical level, Monti is also right about Eurozone policy.  The ECB has to step in and guarantee sovereign debt inherited from the past.  Without this, a massive wave of defaults, with all this implies for the fragile European banking system, is unavoidable.  It is a choice between a difficult but manageable situation and full-tilt disaster.  Why dither any longer?

Meanwhile, the recession demands a response: its economic as well as political costs are too great.  Most European countries are unable to finance the fiscal deficits rational economic policy now requires.  This means that those who can, like Germany and the other net exporters, need to do some of this lifting themselves.  Above all, it means that there is an urgent need for a Eurozone-wide fiscal entity that can carry on countercyclical policy as the situation requires.  The constitutional process for creating such an entity should be deliberative and methodical, but a temporary, ad hoc version can and should be put into place immediately.  The alternative is simply the breakup of the zone.

Behind these particulars lies the underlying political question: is there a European people corresponding to the institutions of the single market?  If there is, then there is a reservoir of solidarity to draw on and the basis for a politics that puts the common good above short-term self interest and pejorative moralizing.  If not, the European project was always an elite illusion, waiting to fail its first serious test.

Rush Limbaugh – the President Should Fire People

Newt Gingrich has taken a page from the Occupy Wall Street crowd as he goes after Mitt Romney. While I say welcome to our side Newt, Rush Limbaugh is quite upset. Fair enough but Democrats should really highlight this:

"So Romney is out there saying that he likes being able to fire people. Folks, don't we want somebody in the White House who's gonna fire people? How are we going to reduce the size of government? Don't we want somebody who loves firing people in the White House? Isn't that what we're all talking about here?" Limbaugh said.

So according to Rush – we need to layoff even more government workers. Isn’t that part of the problem, however? We are practicing Herbert Hoover economic policy by reducing government employment during a period of slack aggregate demand?

Economics and Fracture

On the plane back from Chicago I started reading Age of Fracture, the new book by Dan Rodgers on US intellectual history since the 1960s.  I had high hopes, since Atlantic Crossings, his earlier work on the origins of Progressive-era American policy activism in European (mostly German) reform, was a fantastic read.  And, to be honest, Rodgers kept me engaged on a redeye to Copenhagen, a layover, and a second leg to Amsterdam.  You can measure a book’s readability that way.

All the same, I felt misgivings on several fronts:

Making an ASSA out of U and ME

The 2012 ASSA meetings have come and gone, and I guess I’ll have to add my reactions to the heap already beginning to accumulate in the blogosphere.

Kudos—really!—to the AEA for its new ethics policy.  Using the publication lever is exactly right, in my opinion, and I hope the disclosure requirements are copied by non-AEA journals.

My worst experience—nothing else comes close—was attending a panel of economics bloggers.  Actually, it began well with an interesting, thoughtful and directly useful presentation by Jennifer Imazeki of Economics for Teachers.  I urge everyone who teaches this stuff at any level to check out her work.  After that it was pretty dismal.  None of the other panelists seem to have thought seriously about the practical issues involved in integrating blogs and teaching.  There was little reflection on the issue of boundary-busting, that entering the blogosphere means sharing intellectual space with people coming from different academic/cognitive/experiential backgrounds.  Quit the opposite: the other panelists (Alex Tabarrock, Jodi Beggs and especially Steve Leavitt) argued that the mission of economics bloggers should be to systematically push the viewpoint of incentives and markets because that’s what econ has to offer.  There was an amusing moment in which Leavitt, noting the disconnect between the arguments economists make on the web when they discuss current issues and the parade of models in the textbooks, considered the possibility that the textbooks might be irrelevant.  That moment lasted no more than ten seconds; he dismissed the heresy and recommended that teachers spend more time on the textbooks and less on the blogs.

I congratulate myself for not getting cranky.  I made a comment which was intended to be entirely constructive.  One point was that none of the panelists had mentioned Mark Thoma’s Economist’s View, which is an essential aggregator.  I considered mentioning that one of the virtues of Mark’s site is that he links to noneconomists that economists ought to be interested in, like Andrew Gelman, the Bayesian statistician, but decided not to in order to spare the feelings of Leavitt.

As usual, however, the real action was in the hallways and over dinner.  I got more gossip about the inner workings of the Bank and the Fund than I can hope to remember, and I met lots of actual human beings corresponding to the names I recognized from books, papers and blog posts.  One standout was a fascinating conversation with a prominent economist, who will go unnamed, who has knocked himself out to inject some rationality and honesty into policy debates and who now appears to have largely given up.  His discouragement was hard to argue with—but there were hordes of young, proto-rabble-rousers at many of the sessions and receptions I attended that left me with the feeling that a significant energy recharge is taking place in the world of dissident economics.

Incidentally, Europe is really not looking good, and a Europe/US financial decoupling is absolutely impossible.  2012 augurs to be a wonderful year for bloggers, if not for humans.

The Fed Is Financing the ECB's Support For European Banks

Perry Mehrling will probably be blogging on this soon, but I cannot resist getting this news out now. I saw him at Maurice Obstfeld's Ely lecture yesterday here at the AEA/ASSA meetings in Chicago. Obstfeld spoke on "Does the Current Account Still Matter?" Answer: It no longer determines overall balance of payments because of disconnect from ever larger capital flows, but does still matter in that a country with a current account deficit may be subject to a bop crisis, whereas a surplus country is not. But that is not what this post is about.

I asked Perry if the Fed was doing what it did for a period following the Sept. 2008 crisis, taking on ECB assets onto its balance sheet. The answer from him was yes, and this is a recent development, only a month old. He pulled it up on his android: as of Jan. 5 the Fed had acquired $99.8 billion in ECB assets, all within the past month. This is not small change.

I suspect what is going on is that the European banks are really struggling to adopt to the Basel III capital requirements in the continuing recessionary environment in Europe. Given the threat they face on sovereign debt, and the ECB wanting to limit its support for the sovereign debtors directly, it has been pumping money into the banks to keep them afloat. But this has become such a difficult enterprise, they have drawn on the old facility with the Fed that was renewed some time ago. Perry may disagree, but it looks to me that this is what lies behind this very striking and important recent development.

Belated In Memoriam

RIP Christopher Hitchens. I've always loved his writing. I think he went off the rails supporting Bush on Iraq, but I am reminded of what Auden wrote about Yeats:


Time that is intolerant
Of the brave and the innocent,
And indifferent in a week
To a beautiful physique,

Worships language and forgives
Everyone by whom it lives;
Pardons cowardice, conceit,
Lays its honours at their feet.

Time that with this strange excuse
Pardoned Kipling and his views,
And will pardon Paul Claudel,
Pardons him for writing well.

Romney’s Tax Proposal

The Tax Policy Center provides its review of which taxpayers will pay more and which ones will pay less under the tax proposal introduced by Mitt Romney. A really short summary goes as follows:


(a) The well to do will pay less in taxes;

(b) The working poor will pay more in taxes; and

(c) Overall tax revenue will be significantly reduced.

But wasn’t that also the case for the Herman Cain tax proposal as well as any other tax proposal from the Republican candidates for President? And the Republicans claim they are for fiscal responsibility!

There ought to be clowns

From today's Times: "The Federal Reserve will begin later this month to publish the predictions of its senior officials about their own decisions..."

FOMC minutes: February 2012

Chairman Bernanke predicted that he would start the meeting promptly at 10 and, indeed, his forecast was correct -the meeting started at 10. Yellen began with a forecast that she would be getting into it with Plosser and Kocherlakota soon if they persisted with their standard nonsense about inflation threats and "it's all structural so what's the big deal." Plosser forecast that he would in fact claim that it's all structural, so that Yellen's forecast was a good one. He then stated "it's all structural, ladies and gentleman. Our work is done." Yellen then got into it with him, as she had predicted. At this point, Bernanke predicted that he would be stepping out in a minute to use the gents, but predicted that he would be right back. After a minute, Bernanke proceeded to step out. But he came right back and predicted that the meeting would resume, as it did. Evans then forecasted that he would forecast that he would forecast that he would forecast that he would forecast.......... (People began to file out)


Respectfully Submitted With a Forecast That I will Sign my Name But Inadvertently Misspell it,

Kavin Quenn

War Whooping on Iran

So, it is bad enough that GOP pols like Santorum are calling for bombing Iran and that reportedly 50% of the US population agrees with this, but we also have the Obama administration about to implement a seriously intensive sanctions policy on the Iranian central bank that has gotten the Iranians all worked up and making threats about closing the Straits of Hormuz. Some of this is clearly just politics, with the US in an election year and war whooping on Iran popular, while Iran is coming up on a parliamentary election on March 2, with similar sorts of tough guy strutting going on there as well as here. Needless to say, Iran is unlikely to follow through on its threat, but enjoys watching oil prices spike with the threats, thus threatening the economic recovery Obama needs for his reelection.

Let us remember certain things. While the latest US National Intelligence Estimate moved somewhat away from its previous firm denials of there being any Iranian nuclear weapons program, that movement amounted to saying that they maybe had one going on longer than we had previously thought, but continued to say that there is not one going on now. The more recent IAEA report that seems to lie behind Obama's plicy basically only amplified that somewhat, with some more recent reported simulations by some scientists of nuclear explosions and some evidence of not being fully forthcoming in certain areas. Neither report says that they have an active program to build nuclear weapons, so the vast majority of the current talk is basically hysteria, less credible than the claims that Iraq had WMD.

While Juan Cole has long argued that they would like to have the capability to build nuclear weapons, what they have done so far is completely legal according to the NNPT to which they are a party. They have a civilian nuclear energy program, which they are allowed to have, and their ongoing uranium enrichment program is fully consistent with it and not the higher levels associated with a nuclear weapons program. IAEA inspectors are still in the country, and Cole points out that we would be able to figure out if they went active because of a variety of things the inspectors and other sources would observe. And, although many dismiss this, the supreme military commander and supreme leader, Vilayat-el-faqih, Khamene'i has issued fatwas against nuclear weapons. As long as he does not undo those and remains in charge, there will be no nuclear weapons program in Iran.

What I confess to being a bit mystified about is the attitude of some of the Western European countries, who seem to be quite eager for these heightened sanctions and this confrontation. I can sort of understand that they might fear more any possible nukes from Iran due to proximity, just as Israel does. But I also think that there intel agencies ought to be able to figure out what the US intel agencies know, and that reportedly the Isreali ones do as well, even though they get majorly ignored by their politicians, that there is no nuclear weapons program in Iran.

Indeed, I am really not at all clear what Obama or anybody else thinks is going to be acheived by these heightened sanctions. Are we actually demanding that they shut down their perfectly legal civilian nuclear weapons program? Presumably a negotiation would involve some sort of deal where they are allowed to have their civilian program if they promise not to have a military program. But that is already what they are doing and repeatedly declare that they are doing. Is this really about trying to achieve regime change? This will also not work, as sanctions simply reinforce the arguments of the hardliners, just as the US sanctions have done with regard to Cuba for a half a century. The only place I know where sanctions worked was maybe in South Africa, but they had a real problem and undid it, whereas what is being demanded of Iran is for them to stop doing something that they are not doing. Really, this war whooping is getting seriously out of hand. Do we really need to go into Iran now that we finally just got out of Iraq?

Oh, and hope to see some of you in Chicago, :-).

Oy! Deja-Voodoo Economics, and some Horn-Tooting

Here we go with the RE means fiscal policy is impotent meme again! Well, this blog was on the case early - PGL and I, along with Nick Rowe in the comments, sorted the whole thing out back when the Stimulus was being enacted, I think. And now, surely, it is a stylized fact that that the stimulus was effective compared to the counter-factual - no?

On a completely different subject: remember back in the campaign Obama made noises about raising revenue by lifting the cap on the payroll tax? That still seems like a good idea to me, and something that might have political legs in the wake of Occupy and all that. I await evisceration at the hands of my fellow bloggers, at least, who IMS didn't cotton much to the idea at the time.

Oh and Happy New Year!