The Recession Isn’t Over -- or Is it?

One complaint I often hear from people is that despite what economists say, the recession isn’t over! In technical terms, the semi-official measure of recessions created by the National Bureau of Economic Research indicates that the “Great Recession” that began in December 2007 ended in the middle of 2009. But reasonably enough, people point to the facts that incomes are still stagnant, paid employment is still at a very low percentage of the population, long-term unemployment is still high, and the like. They also point to their own personal experience. What people often miss, however, is that the standard definition of a “recession” refers only to the decline of the economy. It does not say anything about the period of stagnation that can occur after the NBER recession is over during which the economy can get stuck on the “floor.” That is, the standard definition of a “recession” describes it as being like the tide receding in the ocean – but doesn’t cover the possibility that the tide might stay low for a long time.

But there’s another way to look at this issue: what if we’ve used the wrong number to see what’s “recessed”? The standard measure used by the NBER is very complex but in practice fits pretty well with the journalist’s rule of thumb. The latter says that a “recession” occurs when inflation-corrected or “real” Gross Domestic Product falls for two or more quarters (of a year) in a row. This rule of thumb suggests an alternative measure, one much closer to home. Using this measure, the popular complaint about the recession not being over may be right on target.

What if we see recessions as measured by a fall in the “real” median household income? This is the income of a household that’s smack dab in the middle of the income distribution, with an income higher than the poorer half of households but worse than the richer half. Since only annual data are available, a “recession” refers to the fall of that number from the previous year. This means that if this kind of recession occurs, an "average" household is suffering. As seen in the table below, this calculation implies different years for recessions. Call this a “household income recession.” The table also represents the different dates for NBER recessions during recent decades. Because median household income is measured only from year to year, my dating of recessions cannot correspond exactly to the NBER dating.

“Recession A” really consists of two back-to-back NBER recessions (a double dipper). It should be dubbed the “Volcker recession,” because the gap between the two was so short (with a very weak recovery in-between) and they occurred due to the Federal Reserve’s war against inflation. (In fact, one way to define a "double dip" recession is by the fact that we see two NBER recessions within a period characterized by a single Household Income Recession.) The table indicates that the household income recession started earlier and lasted one year longer than the NBER recession: real household incomes kept falling going from 1982 to 1983. Pundits who focus on the NBER definition miss how bad the recession(s) were for people on Main Street.

The NBER recession of 1990-91 (under the guidance of the “Maestro,” Alan Greenspan) is often seen as being "small" since it was less than one year long. But like the Volcker recession, household incomes continued to fall after the NBER recession had ended, all the way into 1993. This approximately two-year delay helps explain candidate Clinton’s slogan “it’s the economy, stupid!” and the dissatisfaction with President Bush #1 that helped speed his ouster from the White House. Of course, it was also this recession which spawned the seemingly oxymoronic phrase “jobless recovery”: even though the economy was “recovering” by NBER standards, the availability of jobs was stagnant. The latter fits with the idea of the Household Income Recession continuing into 1993.

Recession C (still during the Maestro’s reign, at the end of Clinton’s term) is renowned among pundits for being short and perhaps even sweet. According to the NBER definition, it started after 2001 began and ended before 2002 had even started. But for the average household, incomes fell earlier (going into 2000) and then continued to fall all the way until 2004. This fits with what critics of the “Bush #2 recovery” have been saying for a long time. This was another jobless recovery. In addition, it suggests that the hype about Clinton’s success at the end of his term has been overblown.

Finally, there’s the “Great Recession” (at the end of #2's terms and the start of Obama's), which the NBER dates from Dec. 2007 to June 2009. When measured using real median household income, however, this recession continued into 2012, exactly as the popular critics say. However, our data can’t tell us whether the Household Income Recession is over or not, since the numbers for 2013 won’t be available until next year. That's why the title to this note ended with a question.
-- Jim Devine

PS: I didn't use per capita income to measure recessions because the high incomes of the rich are represented disproportionately. Ignoring other changes, for example, if the incomes of the Koch brothers doubles, but the incomes of the non-Kochs stay the same, that raises per capita income. The median household income would say the same.

(The numbers for median household income are from the U.S. Bureau of the Census at http://www.census.gov/hhes/www/income/data/historical/household/,  Table H-6.)

Roger Lowenstein’s Reason to Rule Out Janet Yellen

Lowenstein actually thinks we need a banker and not a qualified economist to lead the Federal Reserve:

President Barack Obama should look for a truly “post-crisis” candidate who can reassert the Fed’s independence and move away from the unusual policies of the last six years. During the credit crunch of 2007-2008 and its aftermath, it was proper and right that the Fed and the Treasury Department were joined at the hip: Both had an interest in easing the financial crisis, which took precedence over everything else. It was also proper for the Fed to aggressively lower interest rates -- a popular policy that the administration avidly supported. But the next chairman will have to decide when to trim the Fed’s portfolio, swollen with its extraordinary program of bond purchases. And it will have to raise short-term interest rates, which are currently near zero. It may be sooner, it may be later -- the moment will come. Money cannot be free forever.

I’m sorry but this argument is what I would expect from the National Review and not from Bloomberg. OK, Lowenstein is a financial journalist and not a member of the economics profession. So maybe he can be excused for not realizing that Janet Yellen is smart enough to reverse course on monetary expansion when the economy gets back to full employment. But we are still far away from full employment and with fiscal policy turning contractionary, this is not the time to raise interest rates. And yes – the best candidate for this job is one who recognizes what Roger Lowenstein refuses to. Count me as a member of Team Janet.

Please Give Us the "Kindly Grandmother" Now, Mr. President!

The withdrawal of Lawrence H. Summers from candidacy for Fed Chair has triggered a surge in world stock markets, as well as rejoicing among feminist groups, the labor movement, the left wing of the Democratic Party in Congress, particularly among those on the Senate Banking Committee, and the vast majority of the economics profession pretty widely across the ideological and methodological spectrum.  Even many Austrian economists who would prefer that the Fed be shut down have admitted when pushed that they prefer Yellen over Summers.  All that is needed now is for President Obama to appoint Janet L. Yellen to the post, the main rival of Summers.  He may be about to, but why might he be holding back?

According to Ezra Klein, there is "pique" in the White House that so many would not go along with the desire the president to support his openly preferred choice, Summers.  The other reason he gives is particularly weird, that she seems "like a kindly grandmother," see "Five reasons Obama should name Janet Yellen to chair the Federal Reserve". Klein's five reasons are obvious sorts such as that she is the most qualified candidate and this would break the glass ceiling.  But this last odd remark about "kindly grandmother" must be coming from the WH and looks like the last gasp of sexism there.  First she lacked "gravitas" and then we did not want a "female-backed currency" (OK, that was the ed page of the WSJ), but now we get this weird slam on kindly grandmothers?  Frankly, some of the more formidable individuals I have encountered in my life have been kindly, but firm, grandmothers.

So, as a matter of fact, Janet Yellen is not (yet) a grandmother, although she does have white hair and at 67 (I think) old enough to be one.  And she is kindly and nice.  Her (and George Akerlof's) son, economist Robbie Akerlof (now at Warwick, last I heard) has so far failed to followed through on his reproductive responsibilities to sire an offspring, thereby making his kind but firm mother an actually existing grandmother.  In the meantime, maybe this is what the world needs, a kindly but firm (and she is firm) grandmother.  Let for now the world economy be her grandchild.

I shall not diss the remaining possible candidates, both the official one, Donald Kohn, an experienced Fed hand who preceded Janet as Fed Vice Chair, and the others often mention such as the macroeconomically smart Christina Romer, the globally experienced Stanley Fisher, or yet another former Vice Chair, Alan Blinder, all of whom I would have taken over Summers.  But, very simply, when one puts together experience, knowledge, ability to forecast the economy, and that kindly but firm personality, Janet Yellen is simply superior to all these candidates, even if one or the other might have an edge on her on this or that particular desirable characteristic. She beats all of them for the total package, which is also the message from Ezra Klein.

So, Mr. President, what the world economy needs now is this particular firm but kindly grandmother look-alike, Janet Yellen, please!

Barkley Rosser

Morning in America & The Laugher Curve

Paul Krugman summarizes the business cycle aspects of the Reagan years:

So a quick summary of what happened during Reagan’s first term is that the U.S. economy experienced a much worse slump than almost anyone expected, then recovered by 1985 roughly to trend, with unemployment still somewhat elevated. On the whole, it was a bad record, with hundreds of billions of potential output wasted and a lot of gratuitous pain for the unemployed.But that, of course, is not how it played politically. Because output was growing fast and unemployment falling fast in 1984, as the election approached, it was Morning in America! Supply-side economics vindicated, Keynesianism destroyed! And this legend lives on to this day.

It is true that the tug of war between Volcker’s tight monetary policies - which he later turned around after he whipped inflation through a massive and prolonged recession – and Reagan’s fiscal stimulus was a mess. Apologists for the tax cuts, however, focused more on the alleged long-term effects from allegedly raising real GD growth. The only problem is that real GDP growth during the 12 years Republicans controlled the White House was just over 3 percent and this actually was slightly above the CBO’s estimate of potential GDP growth. Rather than leading to some alleged supply-side miracle, the tax cut lowered national savings and thanks to the Volcker monetary policy also led to higher real interest rates and less investment demand. In other words, the economy suffered from the standard out effect that models that abstract from Keynesian business cycles emphasize. No – supply-side economics was not vindicated by this period of really poorly designed macroeconomic policies. And yet the legend of the Laugher Curve continues in some circles.

The "Clinton" miracle of the late 1990s.

For a long time, I've thought that President Clinton was extremely lucky when it came to issues of macroeconomics (inflation and unemployment) in the late 1990s. It wasn't his policies (reducing the government deficit) which led to low unemployment during this period. In fact, reducing the deficit raises unemployment, unless something else happens to counteract that effect. And something else did happen. First, international trade competition and faster productivity growth kept inflation down. Second, the Fed's Alan Greenspan (who really ran the economy back then, to the extent that it can be "run") allowed unemployment rates to go down since he feared inflation less.

But it turns out that the low unemployment rates of the late 1990s were not as lucky for working people as has been advertised. It's true that the official unemployment rate fell from about 7.5 percent in 1992 to about 4.0 percent in 2000 (before rising due to the recession of 2001). But from the point of view of employed workers, the average cost of losing one's job stayed high and roughly constant during the 1990s, at about 27% of average pay. The culprit which caused this high rate is the fact that the unemployed suffered from longer "spells" of joblessness, threatening the employed. That has pretty much the same effect as higher unemployment rates on the cost of job loss. This fact explains why Greenspan saw U.S. workers as "traumatized" (keeping them from demanding higher wages and benefits). Of course, the general decline of unionization rates among private-sector workers also had this traumatic effect.

(On the numbers, see the article by Matthews and Kandilov in the Eastern Economic Journal in Spring 2002.)

-- Jim Devine

Krugman vs. Godley's "Hydraulic" Keynesianism.

Today (Friday the 13 of September, 2013), Paul Krugman's blog (http://krugman.blogs.nytimes.com/2013/09/13/wynne-godley-and-the-hydraulics/) compares the "hydraulic" macroeconomics of the late Wynne Godley to the currently dominant school and finds Godley's view to be lacking.

One key fact that Krugman misses is that "hydraulic Keynesianism" had a completely different focus than the "modern" neoclassical version of Keynesianism that largely replaced it. While hydraulic Keynesian focused on flows of money (with the correction for the effects of inflation being only an afterthought), the neoclassical Keynesians try to see the world totally in terms of "real" variables. Maybe money is crucial in the short run, the neoclassical reasoning goes, but in the long run (which is what's really important) money doesn't matter. Money is only a veil that must be removed to understand what's really happening. To "hydraulic" Keynesians such as Godley, the short run can be extremely crucial, sometimes causing economic collapse. The neoclassical Keynesian focus on the long run (as a result predetermined by the "supply side") totally misses that possibility.

There's also a big difference between hydraulic Keynesianism and the old-school Keynesianism that once dominated academic macroeconomics. In fact, the failures to predict macroeconomic behavior that Krugman points to are not really part of the "hydraulic" aspect of Keynesianism. The prediction that saving would rise (and consumption would fall) relative to total income after World War II was based on an incomplete understanding of the determinants of aggregate consumer spending. Because it was entirely new topic when Keynes wrote The General Theory, it should not be surprising that he got some of the analysis wrong.

This problem was solved by James Duesenberry, who was very much part of old-school Keynesianism. He was not a "hydraulic" thinker. Just as the more sophisticated economists are doing today, he imported elements from psychology into economics in order to understand what was going on. (Duesenberry used math, which should have endeared him to the orthodox economists, but he's largely been forgotten.)

Milton Friedman's innovation on this issue arose from the fact that (as a neoclassical economist) he did not like Duesenberry's rejection of a hard-core individualistic vision of humanity. Instead, he embraced that hard-core theory. This lead him to assume (surrealistically) that people were narrow-minded and isolated maximizers. Somehow, in his view, these "people" were able to plan ahead far into the future despite the blatant uncertainty that will always be associated with future events. (Keynes understood uncertainty's role, but not Friedman.) By the way, both Duesenberry's and Friedman's theories do just as well in terms of predicting changes of aggregate consumer spending over time.

As for the failure in predicting inflation (which became obvious in the 1970s), again the error really wasn't due to a hydraulic focus (an emphasis on flows of money). Instead, it was based on faith in the real-world data held by respected economists such as Paul Samuelson and Robert Solow. In this view, if the data showed that there was a stable trade-off between unemployment and inflation, there must be one. But it wasn't Friedman or Phelps who first pointed out the problems with this perspective. Rather, it was the old-school Keynesian Abba Lerner (who, like Duesenberry, lacked a "hydraulic" bent) who very early on noted that if unemployment stays "too low" and inflation rates stay "too high," inflation will get worse and worse. By the way, Lerner's theory is much more sophisticated than the Friedman/Phelps one, because he never accepted the idea that the "full employment" unemployment rate could be represented by a unique number.

(By the way, economist Nathan Tankus has pointed out that Godley was an early critic of the Phillips Curve.)

If the failure of either old-school or hydraulic Keynesianisms to predict real-world events encourages people to reject these views, we should also reject the neoclassical Keynesianism that expresses itself so clearly in Dynamic Stochastic General Equilibrium theory. That perspective bombed totally when it came to understanding the boom of the early 2000s and the crash of 2008-09.

-- Jim Devine

What Lies Behind The Syria Deal?

I probably should not be posting this, but it seems that I see stuff in this emerging deal between the US, Russia, and Syria that I have not seen put together in one place so far.  Even the usually astute Juan Cole falls short today with http://www.juancole.com/2013/09/congress-embarrassing-themselves .  Most of this post is on the money, but he makes simple errors, such as saying that the G20 happened in Moscow rather than Saint Petersburg and also claiming that somehow Putin sprung this new deal on Obama after Kerry made his "offhand remark" about international control of Syrian chemical weapons.  This does not appear to be what is the situation at all, but it is also worth looking further into what is lying behind each party's behavior, with indeed Juan Cole providing the key for part of this.  It does look like it could be a big win all around, with indeed the post cited above listing many of those gaining, including the US Congress and the European Union, besides the core parties.  I wish to focus on them.

First of all, this is almost certainly not some random odd job that just popped up out of nowhere.  US Press Secretary Jay Carney has now said that this was negotiated "last Friday" in St.Petersburg.  I am astounded that Juan Cole has not caught that, see http://www.viralnewschart.com/ShowLink.aspx?linkld=12823271 , and go to "read more."  OK, so some who want to show Obama and Kerry as just bumbling fools being played by the brilliant Putin are claiming that Carney is just lying.  But there are very good reasons to believe otherwise, quite aside from the fact that all main parties gain from this, as well as all those subsidiary ones that Juan Cole mentions.

What is the main evidence that Carney is not lying?  It is how swiftly both the Russians and the Syrians responded favorably after Kerry made his remark and how quickly the US then responded to their favorable responses. This sort of thing only happens when it is planned ahead of time.  Kerry's remark was not "offhand."  It was planned and the Russians and Syrians were simply waiting for it.  This should be pretty obvious.  But what is in it for them?

Probably the biggest mystery is the Russians.  There are several factors, all of which come back to the fact that even though Congress was likely to vote Obama's request for war powers down, he had made it clear he felt free to act even without their approval.  On top of this is the perception that the chemical weapons are not under even good long term control in Syria and arguably not even under good short term control either.  The long term issue amounts to that even without an attack by the US, which would inevitably aid the rebels at least somewhat, the probability that Assad will lose to the rebels is non-trivial.  In that case, it could well end up that an anti-Russian Sunni radical regime might come to control those weapons, and that such a regime could easily start supplying them to Muslim rebels against Russia in such places as Dagestan, where our Boston bombers came from.  This could also ultimately impact their Winter Olympics, with Sochi not all that far from these troubled zones.  Russia has a real interest in getting these weapons under international control and out of the possible hands of a radical Islamist regime, quite aside from not wanting to see its client, Assad, fall from power, thus endangering their only naval base outside of the old Soviet bloc.

The short run issue is also what affects Syria, although I suspect that most of what is involved in that one is simply Putin strong-arming Assad, who is almost completely dependent on Russia.  It was Juan Cole who reported what I have yet to sse anywhere else in the US media, and he did so twice, and I am surprised he has forgotten his own reporting in this goofy post today.  The problem is that apparently according to some US intel sources, this last chemical attack was far bigger than what was supposed to be the case, with a local commander responsible and the Defense Ministry and presumably Assad as well, very unhappy about it.  This is reportedly based on US intercepting military communications  What is unclear is if this was due simply to a mistake in mixing the chemicals or if this local commander was actually a rogue.  See one of Cole's two posts on this at http://www.juancole.com/2013/08/western-strike-stall.html . 

The real bottom line here is that Assad may have realized that he really does not have control of his own chemical weapons.  Furthermore, they do not really gain him all that much militarily.  Yes, they kill lots of people, but it is not clear that they really result in that much tactical advantage, and the bad fallout in terms of international publicity as well as outright threats of US attack are simply too great.  Again, no matter what, I suspect that he has figured out that it is simply not worth it to use them again, given Obama's serious threat to attack if he does so, and the widespread perception that he might well do so if there is another chemical attack, even if there were a negative vote in Congress.  If this is the case, and he really has nothing to gain from using them, then he might as well get the US and the rest of the world off his back and sign the international treaty and let the UN or somebody just take control of them. After all, the awful behavior of his enemies (eating hearts of people, attacking ancient Christian villages) has many people around the world sympathetic to his side and hoping that he will actually win, or at least survive.

Juan Cole does conclude his most recent post with the reasonable suggestion that assuming this deal goes through, with Obama getting to have the weapons under contorl without an attack or a negative vote in Congress, the next move, to be initiated by the Russians, will be a serious peace negotiation in Syria. The parties there are probably not quite ready for it, but if the current effective stalemate continues, eventually the likely outcome will be some sort of cease fire with a de facto partition on the ground between the current areas of control, which seem increasingly fixed.

Update after Obama TV address:  It would appear that I have oversimplified the situation regarding who has been in charge of the chemical attacks in Syria.  Obama and others are saying that "senior" people planned the attack(s).  There has been a lack of clarity on this.  It has been widely reported that there were multiple attacks earlier on a much smaller scale.  Clearly this program must have had senior support and almost certainly had the approval of Assad.  What remains unclear is just who was in charge of the larger most recent attack and how high that went and was this followed by the reported upset calls from the Defense Ministry.  These may be fine points, but they are also related to how willing the Syrians will be to go along with the new proposal.  It would appear that Russia would like to proceed now, but it remains important how willing the Syrians will be to go along with this, with this issue of just who was in charge at what level and when being an indicator of this.

Barkley Rosser

The Increase in Part-Time Employment: John Lott Versus Sane Individuals

Greg Mankiw has updated his post which originally fell for some spin from John Lott:

So far this year there have been 848,000 new jobs. Of those, 813,000 are part time jobs

This Lott claim that 96% of the new jobs added this year were part time drew a lot of fire in the blogosphere but of course none of it appeared in the comment section of Greg’s blog as there is no comment section. Then again – we didn’t have to endure Mary Rosh praising Lott’s “work”. Partial credit to Greg for eventually putting forth a couple of sane discussions of this issue including something from the Council of Economic Advisors:

New data out today in the Bureau of Labor Statistics Monthly Employment Report show that of the increase in employment since the Affordable Care Act became law, more than 9 out of 10 positions have been full-time.

The notion that less than 10% of new positions since ACA became law have been part time stands in very sharp contrast to the spin put forth by Lott. Greg didn’t mention this headline conclusion but did reproduce the CEA’s second graph (part-time employment as a share of total employment for selected groups) and then suggested:

This shows that part-time work is notably higher than it has been historically for prime-age workers with little education (no more than a high school degree). Whether this is just due to a weak labor market or other more structural changes is an open question.

But let’s read what the folks at the SF Fed had to say about this:

Part-time work spiked during the recent recession and has stayed stubbornly high, raising concerns that elevated part-time employment represents a “new normal” in the labor market. However, recent movements and current levels of part-time work are largely within historical norms, despite increases for selected demographic groups, such as prime-age workers with a high-school degree or less. In that respect, the continued high incidence of part-time work likely reflects a slow labor market recovery and does not portend permanent changes in the proportion of part-time jobs.

In short – never trust anything written by John Lott before doing a little checking with more honest and sane people who actually understand the topic at hand.

The Wall Street Journal Condemns Enforcing the Tax Code Against Multinationals

How did I miss A Global Revenue Grab from the folks at the Wall Street Journal’s editorial page?

Don't be fooled, because this is an attempt to limit corporate global tax competition and take more cash out of the private economy. In the U.S., the Obama Administration has made a five-year fetish of attacking successful American companies that dare to keep overseas profits overseas rather than pay America's 35% corporate rate (plus state taxes) ... This share has nothing to do with actual profits or evading the law, but rather a sense that governments can extract more revenue by exploiting what the OECD calls the "reputational risk" for companies of being labeled a tax evader. The politicians create the reputational risk for companies like Apple and then claim to want to save the same companies from it. Alas for the politicians, the tax data don't support their anecdotes. U.S. corporate tax payments as a percentage of GDP were 2.38% in 2011slightly above their 40-year average of 2.29%. As the nearby chart shows, corporate receipts over the last 30 years fell during recessions but rose again during expansions. The real story is how consistently revenues have stayed between 2% and 2.5% of GDP.

I just read a critique of the OECD’s proposal to limit “Base Erosion and Profit Shifting” from someone at Deloitte who was at least bright enough to know that the Wall Street Journal’s editorial page is “right wing”. But he was not bright enough to recognize pure spin when he saw it. Never mind that the Wall Street Journal is suggesting that Apple is not engaged in aggressive transfer pricing. I’ll leave that to Senator Levin’s capable hands. The chart showing that the ratio of corporate profits to GDP has been basically flat from 1981 to 2011 was classic Wall Street Journal misdirection. Besides the obvious question – why pick 1981 (when we had a White House devoted to letting corporations pay less in taxes rather than 1950 – we should also remember that corporate profits have been rising relative to GDP. So if the ratio of corporate taxes to GDP has been flat, doesn’t it stand to reason that the ratio of corporate taxes to corporate profits has declined? Fortunately, FRED provides an annual time series dating from 1950 to 2011 on this latter ratio. Take a look and judge for yourself!

Operation Desert Fox and Syria

Desert what? 

From article by Walter Pincus in the Washington Post, 9/5/13

"As I wrote Tuesday, the precedent worth recalling is Operation Desert Fox in December 1998, in which the Clinton administration went after Iraqi leader Saddam Hussein's facilities for weapons of mass destruction over four days.

Although the operation almost immediately faded from the American public's mind because it was followed quickly by the House impeachment debate, it did destroy Iraq's WMD infrastructure, as the Bush administration later discovered."

There were also no collateral deaths and no retaliation by anybody, part of the reason it was so quickly forgotten, along with people so concentrated on the The Really Important Issue Of Clinton Lying About Sex (which Operation Desert Fox was supposedly an annoying distraction from).

In fact, it is clear from how it has been described, Pincus is on the money, and what is being planned is essentially a rerun of Operation Desert Fox.  If it happens (not all that likely given a likely no vote in the House of Reps), the chances are very high that the outcome would be about the same: a successful degradation of Assad's capability to deliver chem weapons, with minimal collateral damage and no retaliation by anybody.  Iran is already talking softly. 

Yes, lots of things could go wrong.  The most likely could arise from having gone to Congress and given McCain a tidbit in the form or promising more backing for the rebels.  While there is a possibility of the "moderate" faction of rebels to win, it looks much more likely that if Assad falls radical Sunnis will take over who will make Mohammed Morsi in Egypt look like Martin Luther King, Jr.  It is indeed a very narrow space between degrading Assad's chemical weapons delivery systems sufficiently and tipping the war to the side of the rebels. 

The other complication, rarely mentioned by most people, who mostly go on about ridiculously unlikely scenarios, is that Syria is one of the handful of nations that has never signed the 1925 treaty banning chemical weapons use.  From their perspective, they have done nothing wrong (although they have been formally denying doing it, with the Russians backing them on that), and Juan Cole reported twice that it may have been a local commander either going rogue or just goofing in this last attack, with most reports saying there have been 9 or 10 attacks, but with only small amounts of sarin, not enough to provide awful photos of children who died excruciatingly. 

I cannot leave this without noticing how pathetic a lot of the Dems in Congress have looked on these matters for some time.  There is a tendency to be knee jerk responding to the last major event.  So, Dems voted for Vietnam because of Munich, only to be embarrassed when it was a mess.  Then they voted against the first Gulf war, because of Vietnam, only to be embarrassed when it turned out mostly OK.  Then they voted for invading Iraq in 2003 because they had been embarrassed over voting against the mostly successful first Gulf war.  Now we see most of them about to vote against this small exercise because of being embarrassed over having voted for invading Iraq.  None of them remember the highly successful Operation Desert Fox that this is based on, and which was not voted on.

WaPo Goes Much Further In For Summers

Along with yesterday's article in the NYT on Obama yet again really preferring Summers over Yellen, the Washington Post had its own variation of the same.  However, in contrast to the NYT's, WaPo's version really went whole hog for Summers.  What I am not clear on is if reporter Zachary Goldfarb actually knows how far out he is in pushing forward the pro-Summers line and is doing so to maintain access to White House officials, or if he really does not know what is up.  Neither of the articles mentioned at all the official who is clearly pushing this propaganda campaign for Obama, namely NEC Chair, Gene Sperling, who clashed with Yellen in the White House in the late years of the Clinton adminstration when he held the same position he does now and she was CEA Chair.

So, Goldfarb quotes by name a long string of current and mostly former administration officials, all but one of whom just fall over themselves in praising Summers and gushing about how great he and Obama got along when Summers was NEC Chair.  The praisers include David Axelrod, Rahm Emmanuel, an anonymous "former official," Summers's brother Richard (a psychiatrist and not a former official, but willing to expound on the theme of how Summers likes to pursue all possible angles and ideas supposedly), Pascal Noel, and Michael Barr.  While none of these are economists, they are all falling all over themselves to assure the readers how much Larry cares for the poor and the middle class and so on, despite his tough Wall Street image.

Among former officials, the only one not on board gushing is an economist, Christina Romer, who noted that while he is strong on substance he also needs "managerial skills and personality to win over a large committee," which, she notes "Based on both his tenure at Harvard and his work as NEC chair, it is not clear how strong Larry is on that second one."  Oregon Senator Jeff Merkley (Dem) also expresses doubts about his anti-regulatory history, but all that is brushed aside, and Goldfarb informs us in no uncertain terms that, "But many of his colleagues say the style, however frustrating, usually led to better outcomes."  The article simply piles this sort of thing on more and more.

There are two major things it simply avoids mentioning.  One is anything substantial about Janet Yellen, particularly in comparison directly with Summers, aside from a brief mention at one point that "She faces wide backing and virtually no criticism.  Summers, meanwhile, has drawn his support mainly from current former Obama aides."  And this report is about that latter support, which is quoted at length and without caveats or further mention of Yellen.  I guess that is a report, but it comes across as an astoundingly preachy editorial on the first page.

The other item not mentioned, and also missing from the NYT article, indeed from practially any MSM article on Summers that I have seen, although it has been covered at length by some in the econoblogosphere, especially David Warsh (see www.economicprincipals.com ), is the matter of what really happened at Harvard. When Harvard is mentioned by Goldfarb, he essentially dismisses the problems there for Summers as just being about "his comments on womens' aptitude for math and science." Oh, so we can ignore that because it is just those whiney women like Romer going on again and trying to make Yellen into an affirmative action candidate, which clearly is inappropriate for such an important position. 

The problem is that what really did Summers in at Harvard was his lying to the faculty about his coverup of his helping out his coauthor, Andrei Shleifer, after Harvard had to cough up millions of dollars to settle for Shleifer's scandalous conduct in advising Russia in the 90s.  Needless to say, the real kicker here is not just Summers covering up for helping Shleifer at Harvard, it is that Summers himself  as Treasury Secretary had played a role in getting Shleifer appointed by AID to go to Russia and advise them while he got into hot water over insider trading.  This scandal involves Summers himself much more directly, even though there is no evidence that he personally gained from the insider deals that Shleifer, John Hey, and their wives engaged in.  That this is likely to come up in any Senate confirmation hearing is simply ignored.

Progress?

Josh Marshall has a headline reading, "Progressives Look To Team  Up with Tea Party On  Syria Vote."
If you ask me, if you're looking to team up with the Tea Party on anything, you're no kind of  progressive, but hey,  what do I know?

Another Bogus Argument for a Repatriation Tax Holiday

Forgive me but I just had to endure some nonsense from the tax community – this time being a fluff piece from Bloomberg BNA:

Thomas J. Brennan, a law professor at Northwestern University, found that during the last repatriation tax holiday, in 2005, companies spent most of the repatriated money on cash acquisitions and debt reduction, with lesser amounts on research and development, share repurchases and dividends. That finding contrasts with an earlier study embraced by some lawmakers that estimated as much as 60 cents to 92 cents on each repatriated dollar went to shareholder payouts that were not permissible under the federal tax holiday. The earlier study's conclusion, Brennan wrote, was “completely incorrect.” … If companies could be counted on to invest repatriated money in hiring, training and other job-boosting activities in the United States, rather that paying executives or shareholders, a move to a territorial-type tax system might gain more favor with congressional Democrats.

How many things did things did Bloomberg BNA miss here? First of all – it would have been nice had the fluff piece that identified the study that Brennan suggested was incorrect and why it might have been supposedly incorrect. I suspect it was this NBER publication:

Repatriations did not lead to an increase in domestic investment, employment or R&D -- even for the firms that lobbied for the tax holiday stating these intentions and for firms that appeared to be financially constrained. Instead, a $1 increase in repatriations was associated with an increase of almost $1 in payouts to shareholders. These results suggest that the domestic operations of U.S. multinationals were not financially constrained and that these firms were reasonably well-governed.

Even if the repatriated funds were spent on buying out the equity of other companies (acquisitions) or paying off corporate debt – that does not translate into more investment demand especially in the current state of the U.S. economy. Does Bloomberg BNA not get the basics here? Or do they not understand the issue is whether the repatriation tax holiday will somehow encourage more investment – even though both theory and even Brennan’s results suggest it will not? Of course, I feel compelled now to offer our readers something intelligent on this issue so let me turn it over to Stan Collender who does now how to read the serious research including this finding:

The net effect of repatriating $565 billion from overseas will be to increase the U.S. trade deficit and U.S. unemployment. There is a surplus of desired savings right now, and a corresponding deficiency in aggregate demand. Extra funds coming in to the country only add to this deficiency. I know this is counter-intuitive (wouldn't Americans have more money to spend?), but it is the actual effect of the repatriations.

More Mental Clutter on Climate Change

Certain topics seem to be Sisyphean: you do your best to clarify and then, there it is, the boulder of common sense sitting at the bottom of the hill, demanding to be rolled up once again.  Elementary issues in macropolicy, like the fact that contractionary fiscal policy is contractionary, exemplify this, but so do the basics of climate change.  Here the elements in question are that pricing carbon can go a long way toward avoiding the worst scenarios, that the primary channel is economic substitution, and that good policy pushes out the political limits to action.

Now consider a recent argument that gets all of this wrong.  It comes from Jesse Jenkins of The Energy Collective; I was pointed to it by the usually insightful David Roberts, who in this case misses the boat.  The Cliff Notes version goes like this:

1. Carbon accumulation in the atmosphere is the result of GDP growth and existing technology.

2. We don’t want to cut GDP growth, so the solution is technological innovation, primarily in energy.

3. Carbon pricing itself can’t accomplish this.  The correct price would equal the social cost of carbon (the damage done by emitting an extra ton, monetized), but voters are unwilling to support taxes this high.  This is because such taxes would achieve their purpose only through massive cuts in per capita income (GDP).

4. But modest carbon prices will generate revenue.  This revenue can be channeled by government into R&D.  Just like government-financed research gave us the internet, it can give us the future energy technologies that will put the global economy back within ecological limits.

Almost every detail of this argument is flat-out wrong, and the totality rolls the rock back down the hill and calls it a monument.

Just to give a little more heft to the starting point, read through this excerpt from a letter to the Financial Times by political scientist Roger Pielke Jr., quoted with approval by Jenkins:

Carbon emissions are the product of (a) GDP growth and (b) technologies of energy consumption and production. ... Thus, a “carbon cap” actually means that a government is committing to either a cessation of economic growth or to the systematic advancement of technological innovation in energy systems on a predictable schedule, such that economic growth is not constrained. Because halting economic growth is not an option, in China or anywhere else, and technological innovation does not occur via fiat, there is in practice no such thing as a “carbon cap.”
Where carbon caps have been attempted, clever legislators have used gimmicks such as carbon offsets or set caps unrealistically high so that negative effects on GDP do not result and the unpredictability of energy innovation does not become an issue.
It should thus not come as a surprise that carbon caps have not led to emissions reductions or even limitations anywhere. China will be no different. The sooner that we realize that advances in technology are what will reduce emissions, not arbitrary targets and timetables for reductions, the sooner we can focus our attention on the serious business of energy innovation.

So what’s wrong?

1. Pielke sows confusion with the word “technologies”.  In the standard IPAT decomposition, where Impact equals population times Affluence (GDP per capita) times Technology (impact per unit GDP), technology refers to the technologies in use, due to both how goods are made and what goods we use.  This is the relevant definition for understanding carbon emissions.  It does not mean “everything we currently know about how to produce stuff”, which is how it is sometimes used by economists.  What Pielke is doing is appealing to the logic of the first definition in order to invoke the second.  By a type of verbal illusion, he brings us from a recognition that how we produce stuff is crucial to the claim that everything depends on inventing new ways of doing it.

What he leaves out, of course, is substitution.  Even with existing “technology”, in the sense of everything we currently know, we have quite a bit of scope for producing things differently and changing the mix of what we produce.  We can use fuel-efficient cars rather than guzzlers.  We can teleconference rather than fly people to distant locations for meetings.  We can build wind turbines and the grid needed to support them rather than more coal or oil infrastructure.  There are gobs of opportunities for substitution in a modern economy, and the first purpose of pricing carbon is to make them happen.  This is not speculative.  Countries like the US, which have lower taxes on energy products, have higher energy consumption per unit GDP than countries, like those in continental Europe, that have higher taxes.  There really is a law of demand out there.

2. Innovation responds to prices.  When the price of computer RAM collapsed, software companies started cranking out feature-bloated, RAM-intensive products.  Funny thing about that.  As fossil fuel prices appear to move to higher plateaus, Boeing and Airbus work on more fuel-efficient planes.  No one made them do this; it’s how markets work, for better and worse.  This is not to say that governments can’t speed up the process by subsidizing research that private firms won’t undertake—of course they can.  But we will make a lot more progress a lot faster if carbon is expensive and there are financial incentives to economize on it.

3. The social cost of carbon is a chimera.  There is no way to put a credible price tag on a ton of carbon.  It’s the wrong way to think about what the problem is.  (Insurance is the right way.)  This means you can’t denounce carbon pricing because it fails to achieve some sort of “objectively correct” level.  It’s simply a tool to be used in conjunction with other tools.

4. There are lots of things that can be done by way of regulation to reduce carbon emissions, but most involve inconvenience.  You can force people to change how they build houses or what standards have to be met by appliances, but in practice this means people will have to do things they would not otherwise do.  Sometimes that’s not a problem: people often lack information and will be just as happy doing the regulatory thing as whatever they were doing before.  Quite often it is a problem: you prevent people from doing something they actually prefer doing.  For instance, you can change the parking rules so that people can’t stay more than 15 minutes in a parking space for a large swath of a city.  This will force them to use other modes of transportation but it will piss them off.  Just as there are limits to the acceptability of carbon prices, there are limits to the acceptability of regulations.  You want a mix of measures that pack the most emission reductions within the existing political constraints.   As you back off on one mechanism, like prices, you are more vulnerable to the constraints on the others.

5. And now a word about what determines those constraints.  Yes, the higher the carbon price the less willing people will be to vote for them.  But that constraint can be relaxed by structuring your program to give money back to the citizens in as visible a way as possible.  How much relaxation is not known at this point and may depend on other factors as well, but we need all the relaxation we can get.  That’s why taking carbon revenues and funneling them to businesses to promote R&D is really counterproductive.  (a) Give them back to voters.  (b) Don’t give them to businesses, which will get voters even angrier.

6. In any case, the binding constraint today is not the voter but the CEO.  The business community wants to fob the cost of pricing carbon and substituting other products and methods onto anyone else they can, so what we get are loophole-ridden systems in countries that have carbon pricing and no carbon pricing at all in places like the US.  But that is not about policy design—it’s simply the deep political economic funk we’ve all fallen into.  To do anything else, whether about macroeconomics or the climate, we have to find a way out of post-democracy.

Is Summers As Fed Chair A Done Deal?

CNBC has a report based on an "inside White House source" that Obama has all but decided to appoint Summers as Fed Chair and will do it fairly soon in order to calm the unhappy markets, whose voice demanding an early decision has been transmitted by all the VSPs at WaPo and the NYT, etc.  "Get a decision soon; we don't care who."  See http://www.cnbc.com/id/100988773 . 

So, the question is to what extent this is a trial balloon or an effort to mold the outcome and prepare everybody for the worst.  It is noted that Summers is still "being vetted," and that while Fed insiders at Jackson Hole seem to know he has the edge, some are still raising doubts, the most trenchant being "Has he devised a strategy to be effective within the institution?" (given his lack of experience with the Fed and his notorious arrogance), along with supposedly some lingering concerns about his links to Wall Street, which certainly do not bother the VSPs pounding for his appointment sooner than yesterday.

OK, so we know that Larry and Barry really bonded back there in the foxhole of the early crisis days of the Obama presidency, and Barry just really wants his guy and is annoyed as all get out that all these whiney economists and liberal politicians, feminists, et al are just not jumping on board with full enthusiasm, with presumably this propensity being strongly encouraged by anti-Yellen Gene Sperling.  He is working hard to get us used to what he wants, blankety blank, and we should all just shut up and accept it.

What strikes me as being the really sorry story here is that there are no reports, not even hints of any reports, of him even remotely "vetting" Janet Yellen.  We know he barely knows her, but has he even given her a chance?  How about having her in for a job interview and discussing her view of the world, the Fed, and so on, rather than just listening to the slimey propaganda of Sperling and the rest of the Rubin cohort that surrounds him?  This is what he seriously needs to do before he really makes this decision once and for all.  He looks to be on the verge of making a really big mistake otherwise.

Barkley Rosser