Soaring Nominal Wages?

CNN/Money ran a story that makes me what to scream:

Over the last generation, pay for some professions has risen much faster than the overall rate of inflation.

Since they do note consumer prices have increased from 1983 to 2012 (by a factor of 2.31), how hard it would have been for them to express these increases in real terms? I guess it is no surprise that the median wage for doctors have risen over the last 30 years – nominally by 276% but that represents a real increase of only 63%. OK, I have no pity for these impoverished doctors. But when CNN/Money tells us that some professions have seen wages rise by 170% - that’s also in nominal terms and represents only a 17% real increase. I’m glad that hotel clerks and firefighters haven’t suffered real wage erosion like some professions, but stories that tout the allegedly enormous increase in nominal salaries are just stupid.

The Cooch May Win In VA

As of Friday, the Emerson poll shows Cuccinelli only 2 points behind McAuliffe.  I fear my piece on short term memory may be too real.  A week ago, MacAuliffe would have massively beaten Cuccinelli.  Now the Cooch may win.  He is running ads hard on the failed rollout of the Obamacare exchanges, which has totally dominated the news all week. No more government shutdown by Republican Tea Partiers in the public mind, now it is Obama incompetence, and the Cooch is running it hard.  That ACA will probably get straightened out eventually does not matter.  What matters is the perception right now, and that is not good for the Dems.

I also fear that all those  polls showing Mac so far ahead may induce complacency, while the Cooch's supporters are fired up and have momentum.  This is going to be very close in the end.

Oh, and of course this trend means that in the AG race Obenshain is probably well in the lead now, although I have seen no polls in the last few days on that one.  Heck, Jackson might even pull through, although that still seems unlikely.

Who Is A RINO?

The quick answer is that the real RINOs (Republicans In Name Only) are those accusing others of being RINOs, with those doing so doing so very loudly and repeatedly, much the way they make most of their half-baked to outright wrong arguments.  But I want to get into this a bit more based on sitting where I am sitting in Harrisonburg, VA, the home of the only VA GOP statewide candidate with a chance of winning this year, Mark Obenshain, their candidate for Attorney-General, 3 points behind Dem Mark Herring in the latest WaPo poll, within the error of margin, and as I argued earlier with a good chance to win with such a margin a week from today, given the higher energy of the teabag faction, although he is has greater acceptability to moderate Republicans and independents that gives him the chance to win, even though he is essentially as conservative as Governor candidate Cuccinelli.

So, besides that detail, why is where I am sitting so important in understanding this?  Because the older around here of those who shout about RINOs were themselves previously Democrats, over 40 years ago when the Byrd Machine was Democratic, the political machine that led the massive resistance to racial school integration in the 1950s in Virginia.  And what has that to do with Harrisonburg?  The local newspaper, the very conservative Daily News-Record, is owned by the Byrd family, with the dean of the family, former Senator Harry F. Byrd, Jr. recently dying at age 98.  It turns out that he was the personal overseer of the massive resistance campaign for his father, who then ran the machine.  On his death, the local paper spent pages and pages listing his achievements, and he had some genuine ones and was a notable example of the Old School Virginia Gentleman who had many virtues.  But a love of racial equality was not among them, and many noted how the local paper barely mentioned this awkward piece of his past.

As it was, the point got further hammered in when I was at a recent forum about the election, which was attended by both the city GOP chairman (who lives across the street from me) and the local Tea Party Chair, whom I had not previously met. After expressing various wacko views and her full support of truly wacko GOP LG candidate, E.W. Jackson, she bragged about how she used to be a Democrat.  When did she switch?  Oh, around 1970, about the same time the whole Byrd machine switched to the GOP.  This pointedly reminded me that these people are only skin deep Republicans.

So, who are the real Republicans?  As a former Republican I am painfully aware of making the opposite switch and for roughly the same reason but in reverse.  What fundamentally attracted the Byrd machine Dems to the GOP was the national Dems coming out for national civil rights laws, with the GOP after Goldwater opposing them.  I was a pro-civil rights Republican.

As it is this history also  plays out in my local area, the Shenandoah Valley.  It was a part of Virginia historically with little slavery and many groups such as pacifist Mennonites who opposed slavery.  If Stonewall Jackson's army had not been sitting here in 1863, much of the valley, including probably the part Harrisonburg is in, might well have voted to secede from Virginia and become part of West Virginia. Personally I am glad that did not happen, but the fact of the matter is that there were many Republicans here, "Mountain Valley Republicans," who opposed slavery and supported Abraham Lincoln.  These were the real Republicans, and during the long rule of racist Democrats such as those in the Byrd machine, it was this part of the state where the Republican Party hung on and would occasionally manage to elect people to the state legislature.  These real Mountain Valley Republicans were moderate to liberal or progressive in their outlook, generally speaking, and anti-racist.

Unsurprisingly, since the Byrd machine switch, there has been a long campaign and effort by the right wing of the VA GOP to purge and eliminate the remnants of this faction of the party, including especially in their old home base out here in the Shenandoah Valley.  Ironically, one of the leaders of that movement over a long period was Mark Obenshain's late father, Richard Obenshain, who served as state Chairman, but died in a plane crash after having defeated moderate GOP former Senator John Warner for the nomination for that seat in a convention, Warner being a prime example of the Mountain Valley type, even though he was from Northern Virginia, and who was appointed to replace Obenshain after his death as the GOP Senate candidate.  Now, Mark Obenshain looks moderate by comparison to his running mates, but he is no Mountain Valley Republican.

Indeed, the breed is nearly extinct.  There are very few in the House of Delegates, and there may be just one left in the State Senate, although even a few years ago there were several.  But they have been Tea Party primaried intensively, often with this battle cry that they are "RINOs" echoing in their ears.  And the battle is on against the one left.  He is Sen. Emmet W. Hanger, Jr., who represents the district just southwest of here in the valley, Augusta County, with Mark Obenshain my district's senator.  Hanger has been frequently primaried in the past and has so far managed to hang on, the last of the Mountain Valley real Republicans in the evenly-divided-on-party-lines VA State Senate.

Why is the battle now fiercer than ever, to the point of receiving attention in the national media and blogs?  He is heading a panel that must pass on whether or not Virginia will extend Medicaid coverage as part of the Affordable Care Act.  He has reportedly been open to doing so, showing his progressive Mountain Valley roots, and instigating outrage among the teabaggers and others.  As reported nationally, outside money is flowing in from various right wing sources, and he has been hounded by hired demonstrators in his own district over this issue.  They want blood, and in particular, the blood of Emmet Hanger.  I hope that he not only makes the best decision for Virginia on the Medicaid expansion issue, but that he is able to hang in there as the last of the real Mountain Valley Republicans against this onslaught by this mob of hypocritical phonies.

Barkley Rosser

Still Confused About Inflation after All These Years

Woe to the economics profession, or at least the more responsible parts of it, which for decades has tried to explain the income-expenditure identity to any journalists willing to listen.  Every transaction has a buying side and a selling side; one person’s spending is another person’s income, and the sum of all the spending is the sum of all the income.  This needs to be adjusted for transactions that spill over national (and therefore accounting) borders, but otherwise it’s just an identity.

The immediate implication for inflation is that it makes no sense to wonder whether incomes will keep up with inflation.  Here are two ways to think about it, which of course are different versions of the same way.  First, the sum of spending is equally the sum of income.  If nominal spending rises by x% because of inflation, then nominal income does too.  Second, inflation is the average increase in prices, and wages are prices.  Naturally inflation can be accompanied by income redistribution, with some people coming out ahead and others behind, but there is no a priori reason why any particular group should benefit, or even why there should be any correlation between which group benefits in one period and which in another.

Journalists are supposed to know this by now.

But then we see pieces like today’s today’s New York Times/Economix post by Binyamin Appelbaum, and it’s right back to square one, or maybe one-and-a-half.  Granted, there is a paragraph of enlightenment:

To be clear, inflation by definition increases total income. Someone ends up holding the new money. The question is about distribution: Are workers able to secure the raises necessary to keep pace with inflation, or does the extra money simply pad profits?

Other than this, though, it’s all confusion.  Appelbaum keeps referring to wages as “income” and wonders whether income will keep up with prices.  He also throws out comments like

If the Fed drives up inflation, prices would rise first. Even if wages follow, the very people who most need help would feel the short-term pain most acutely. It would feel something like a temporary national sales tax.

Earth to Appelbaum: wages are prices.

Of course, the relationship between price inflation and nominal wage increases is a purely empirical matter, so let’s consult with uncle FRED:

The blue line is the quarterly year-on-year percentage change in the consumer price index (CPI); the red line is the corresponding year-on-year change in nominal hourly compensation.  As you can see, they move largely in tandem.  A few specifics:

• At first, the Volcker disinflation of 1979-82 had little effect on nominal wages; after a couple of years both plunged together, with the decline in prices somewhat outpacing the fall in wages.

• There was an extended period in the latter 1990s during which real wages (wage growth minus inflation) rose.  This was due to the low unemployment of the Clinton boom; inflation during this period was unchanged.

• Other than this, the relationship is mostly a wash.

If the public, as Appelbaum quotes Shiller as saying, is misinformed about the relationship between inflation and wages, it’s the responsibility of the press to set them straight.  You don’t do that by musing on whether incomes can keep up with prices or, as he does toward the end, whether global labor market conditions will cause inflation to “punish” workers.

The big distributional effect from unanticipated changes in inflation has been and always will be between net lenders and net creditors, and it is useful to explore who these people are and how big the impacts on them are likely to be.  It is also true that even anticipated inflation can affect financial flows if contracts are fixed in nominal terms over long enough time periods, as in some defined benefit pensions.  But wages?  There is neither a theoretical nor an empirical reason to think much of anything.

Now here is the real problem beneath the problem.  Net creditors, which means those sitting on a pile of financial assets whose value depends on real interest rates, suffer a one-off loss every time expected inflation goes up.  If the Fed decides to boost its target, that loss will be substantial, like a one-time tax of all credit market holdings of 1-2 percent.  If the runup in prices exceeds the target, which of course it could, the loss is that much greater.  We are talking about a very large sum of money, and it is perfectly rational for the high net worth crowd to try to avoid it.  One practical strategy is to pay or otherwise reward pundits, reporters and even economists who sew confusion.  Spread the rumor that prices are one thing and wages are another.  Repeat the mantra that “inflation is the cruelest tax of all”.  Fill economics textbooks with endless pages about whether households fail to see that nominal wage increases are offset by consumption prices but nothing about whether they understand that consumption prices are offset by nominal wage increases.  (You know: inflation is bad because I have to pay more, but my wage went up because my employer knows how valuable I truly am.)

We live in a sea of deliberate misinformation about the effects of inflation.  Journalism should be the rock that stands up against the waves, not the waves beating down on the rock.

Greg Mankiw and Lisa Myers on the Tale About People Losing Their Health Insurance

Greg Mankiw lectures the advisors for President Obama on the latest controversy surrounding the Affordable Care Act:

As someone who has previously worked for a President, I am fascinated by how the White House staff let the President so consistently and so publicly make a false statement. Presidential speeches undergo a painstakingly thorough review process.

I’ll skip the obvious retort about how the President that Greg worked for told the American people a lot of lies and simply note that Greg’s source was Lisa Myers. Rather than getting into the specifics, let me turn this one over to Josh Marshall:

It's been a long time since I've seen someone bend over quite so far backwards to mislead people about what's contained in a story. But it is Lisa Myers. So I guess we shouldn't be surprised? We were just discussing this amongst our ed staff: it's true that the White House did oversell how little change there would be in the individual insurance market. But saying that millions of people are getting 'cancellation notices' or 'losing their coverage' is deeply misleading.

The Economist on the Inflation Tax

Greg Mankiw has a problem with one aspect of something in this discussion:

Investors who bought Treasury bonds in 1946, when yields were around current levels, did not suffer a formal default. But over the following 35 years they lost money in real terms at a rate of 2% a year. The cumulative real loss was 91%. By that standard, Greek creditors, who recently suffered a 50% loss via default, were lucky.

Greg’s comment is simply this:

Answer: The second number is inconsistent with the first. Note that .98^35=.49, so we get only a 51 percent cumulative loss. In fact, the price level from 1946 to 1981 rose by a factor of about 5, so holding currency with a zero nominal return led to a real loss of only about 80 percent.

Interest rates on Treasury bonds reflect the expected inflation rate at the time a person purchases the bond plus the real interest rate at the time. Treasury bonds in 1946 were generally around 2.5% so if actual inflation over the period that the person held the bond exceeded expected inflation, then ex post real rates would be lower that the real rate expected when the person purchased the bond. But eventually the bond matures and the person is free to renegotiate based on market conditions and the expected inflation rate when purchases new bonds. So was The Economist referring to 10-year Treasuries or 30-year Treasuries? Simply put – it is not inflation but unexpected inflation that leads to the type of losses described in this discussion. To fair, the discussion later admits:

The answer to that conundrum may be that default happens suddenly, whereas inflation and depreciation are slower, giving investors more time to adjust by demanding higher interest rates to compensate for their losses. This is particularly true in the case of short-term debt, such as Treasury bills; inflation is unlikely to do serious damage to a portfolio in the course of a few months.

Alas, the discussion goes off track in my view with:

But by buying bonds in the name of “quantitative easing”, central banks are influencing interest rates of all maturities these days. By holding down bond yields, the authorities are employing a policy some have dubbed “financial repression”, in which real returns on government debt are reduced. The idea is to make investors buy riskier assets, such as equities and corporate bonds. In effect, the bond vigilantes have been neutered.

Doesn’t financial repression suggest that interest rates are low because the Federal Reserve has suppressed market forces creating a difference between the market demand for government debt and its supply? One would think the real story is the incredibly weak state of the overall economy has been the driving factor in keeping real interest rates so low.

Accelerating Inflation?

Today (October 27, 2013), the New York Times has an excellent page 1 story by Binyamin Applebaum indicating that more and more economists favor the encouragement of inflation as a way to fight the persistent stagnation that the U.S. economy has been suffering from since the Big Financial Flop of 2008 and the resulting Great Recession.  As Paul Krugman notes in his blog, this policy is what he's been advocating for awhile. This pro-inflation company includes even Kenneth Rogoff, the Chicken Little of government debt.

One argument against this view is that of economists who "warn that the Fed could lose control of price as the economy recovers." The idea is that inflation will accelerate (speed up) in a way that gets us back to the conditions that the U.S. last saw during the 1970s.The problem with this "Back to the 1970s" perspective is a key fact that was left out of the news story.

What's left out is the fact that the official (U3) unemployment rate is currently at 7.2%, which is significantly higher than almost all estimates of the inflation-barrier unemployment rate, also known as the NAIRU. (The initials stand for the Non-Accelerating Inflation Rate of Unemployment. This rate is known to ignorami as the "natural" rate of unemployment.) Worse, the ratio of paid employment to the potentially working population has stayed distressingly low since the Great Recession (even when corrected for the population's changing age profile). It's true that the official unemployment rate has edged downward, but this is largely an illusion: as unemployed people stop looking for jobs (discouraged by the bad job situation), the statisticians count them as having dropped out of the labor force and therefore as no longer unemployed. If all of those workers who left the labor force were counted as "unemployed," the unemployment rate would be much higher. Heidi Shierholz of the Economic Policy Institute has shown this by looking at real-world data.

Anyway, the point is that the NAIRU concept cuts both ways. In happier times, conservative economists could point to this minimum and use it to argue against people who want full employment. They'd say that "we can't go there because there be monsters," where of course the monsters are worsening inflation rates. If the Fed encourages inflation, people will begin to expect inflation and will act to protect the real purchasing power of their incomes (or to buy now, before prices go up). This means that inflation becomes built into the economy's normal behavior. If the unemployment rate stays below the NAIRU, the inflation gets worse and worse.

But nowadays, the U.S. economy has unemployment significantly above this threshold. In the current situation, the inflation rate should be falling and it is doing that, as Appelbaum's graph shows. Except for the usual barriers against cutting wages and prices (some of which were mentioned in the article), it could easily become negative, so that we would see deflation (as actually seen in Japan). People would expect falling prices, which would then lead to behavior that causes prices to fall further. In this case, we would see a vicious cycle that encourages depression.

That is, the "Back to the 1970s" scenario might have applied in 2006, when the job situation was significantly better, but it cannot apply now. Any inflationary surge that the Federal Reserve and the federal government engineer would be canceling out the current deflationary tendency. It wouldn't actually cause rising inflation.

Putting it a different way, those who are always shouting "inflation!"  are assuming that the economy is operating at the NAIRU, or what used to be called the "inflation barrier" or full employment.

The 64 thousand ruble question -- also not addressed by Appelbaum -- is how the Fed and the federal government are ever going to cause an inflationary surge. The Fed's stimulus as mostly created a lot of excess reserves in the banks' coffers rather than stimulating the economy and the inflation rate. The federal government has been going in the opposite direction, joining most of the state and local governments to encourage deflation.  -- Jim Devine

A Fuzzchart on Federal Spending Courtesy of John Taylor

Mark Thoma used to crack me up when he would refer to those Jerry Bowyer National Review graphs as Fuzz Charts since Bowyer usually tried to deceive his readers. Now if you miss those good old days – John Taylor has kindly decided to take over when Jerry left off with his latest:

A starting point is to lay out in simple big picture terms what the House and Senate budget resolutions passed earlier this year look like. The chart below tries to do this. It was put together from those resolutions passed last March. It provides the year-by-year totals (not ten years sums) needed to compare the two budgets. This kind of chart is more useful for comparing budgets than the ten-year multi-trillion dollar totals which few people can understand. The chart shows the recent history of federal outlays along with the path of outlays as a percentage of GDP under the Senate proposal and under the House proposal. There is a big difference in these two paths. Spending gradually comes down to pre-crisis levels as a share of GDP under the House plan and remains high under the Senate plan. I have been arguing since 2009 that undoing the recent spending binge is a reasonable goal, and prefer the House version on that count.

My problem with his chart is its historical starting point is 2000 when Federal spending as a share of GDP was only 18.5%. Note the Ryan plan would bring us back to this level whereas the Senate plan would leave this share closer to 22%. A naïve reader might think the historical norm was the 18.5% observed in 2000, but my graph takes us back to 1961. And it turns out that Federal spending as a share of GDP was not always as low it was at the end of the Clinton years. The peace dividend years are over and future health care spending isn’t going to what it was in 2000 – but John Taylor wants us to think there is something magical and normal about the Ryan budget.

Harrisonburger Predicts Victory in VA AG Race by Harrisonburger Republican

I am the Harrisonburger making the prediction that fellow Harrisonburger, Mark Obenshain, whom I have known for decades, will be elected Attorney General of Virginia in the nationally watched election coming up in VA shortly.  OTOH, I expect that the Dems, McAuliffe and Northam, will win the races for Governer and Lieutenant Governor, although neither of those is a sure thing, particularly the second.

Of course, the most important race is that for Governor, and if the current polls showing Terry McAuliffe ahead of Ken ("the Cooch") Cuccinelli prove to be correct in the end, this will be the first time since 1973 when Republican Mills Godwin (a former Byrd Machine Dem) was elected Governor while someone from the same party sat in the White House, Republican Richard Nixon.  The state has had a rebellious contrary streak since to always go for someone of the opposite party to the person in the WH.  But, moderate Republicans are angry at how Cuccinelli grabbed the nomination in a stacked conventino rather than having a primary over Lt. Gov. Bolling, GOP business leaders in NoVa have been unhappy at the Cooch's opposition to the transportation plan put forward by GOP Gov. McDonnell (whose scandal problems have not helped and in which the Cooch is also somewhat involved), although now the Cooch says that he will not undo the plan, on top of which there are the impacts of the government shutdown, massively unpopular across the board here in VA, which the Cooch has said he might have voted for, on top of which Libertarian candidate Robert Sarvis is scoring 10% in the polls reportedly drawing more from otherwise likely GOP voters than from likely Dem voters.  The two have their final debate tonight, but unless one of them makes some massively idiotic statement, I doubt it will affect things much.

However, I suspect the outcome will be much closer than most polls show.  I see three reasons: 1) Cuccinelli has intense support from his base, which will turn out, and WaPo today reported that in the final stretch he is leaning to the base, not playing ads in NoVA and trying to get it out; 2)  Some of those Sarvis voters will probably "go home" to whomever they initially supported on "don't waste your vote" argument, with that probably adding a few points for the Cooch, and 3)  Two weeks is the limit of short-term memory, and while now only one week after the end of the shutdown many are very angry and motivated against Cuccinelli, by election day a lot of those softer supporters, minorities and younger voters will have gotten past that immediate annoyance and may lose their anger and motivation.  The Cooch can still pull this off, particularly if McAuliffe stumbles and says something stupid.

BTW, my own personal opposition to him has many grounds, but probably at the top of the list is the lawsuit he brought against the University of Virginia as AG demanding all the emails and other records of climatologist, Michael Mann, from when he was at UVa.  Mann has been at Penn State for some time, so this was a dredge through ancient history to try to find some nonexistent smoking gun disproving global warming, which did get rejected by the courts.  But, quite aside from the specifics of the global warming issue, this assault on academic freedom is simply beyond the pale for me.

The Lieutenant Governor race is more important than one might think because the state Senate is evenly split between the parties.  Who is LG determines who controls the Senate, and currently that is relatively moderate but still GOP Bill Bolling.  If Northam beats Jackson, as polls suggest, the Dems will gain control.  I note that Jackson is further to the right to the point of complete insanity, claiming that modern libearlism is worse for African-Americans than was slavery or the KKK.  I note that he is an African-American minister and got the nomination out of 7 candiates at the convention that was heavily dominated by Tea Partiers impressed by whomever could be farther and crazily to the right than the others.  That proved to be Jackson, who is so far out that the other two GOP candidates have clearly avoided being seen with him.  But, the lack of a Libertarian distraction and as a spinoff if turnout strongly favors the right wing base, Jackson couild win, and very likely will if Cuccinelli does.  This is not out of the question.

Which brings us to my fellow resident of Harrisonburg, the GOP AG candidate.  Mark has long been asociated wtih the conservative wing of the VA GOP, with his late father having been one of the main leaders of that wing in the past.  His cred with the Tea Partiers is solid, and there is little distance between his and Cuccinelli's views.  Indeed they are personally close, having shared a desk apparently in the state Senate, where Mark is still our local Senator, while the Cooch was there prior to getting elected AG four years ago.  Nevertheless, Mark looks like the rational moderate compared to the other two and also does not have a Libertarian distracter.  The polls show his Dem opponent Herring slightly in the lead, but that race is clearly much closer than the other two.  I suspect in the end the enthusiasm factor of the TP base, plus some more moderate types willing to vote for him as he has assiduously avoided saying obviously crazy things, will put him over the top. 

Nevertheless, he really is a social and otherwise conservative along Cooch lines, and when he was on the Board of Visitors that oversees James Madison University (JMU) where I teach economics, he made his biggest splash making the student health center not be able to hand out contraceptives.  If  elected, he will not be undoing the moves that Cuccinelli made to close down abortion clinics and other such policies.

Barkley Rosser

Update:  One more serious problem with Cuccinelli is that unlike the previous 6 VA AGs who ran for higher office over several decades, he has not resigned his position prior to running.  As it comes down, there are major legal issues arising over this election, most noticeably the purge of 57,000 voters from the lists, supposedly illegal, although it is increasingly clear that a substantial minority of them are properly and legally registered, although there is no way to adjudicate all this prior to the election, and, guess who?, is responsible ultimately for overseeing this?  Well, Ken Cuccinelli, candidate for Governor and sitting Attorney General.  This scum must not become Governor.  Period.

The Greenspan FED and the Housing Bubble – Two Critiques

Steve Pearlstein and John Taylor are both blaming certain aspects of Federal Reserve policy during the latter years of the Greenspan era but their critiques are quite different. Taylor references something by Alexandra Wolfe:

He said he is baffled by all the blame that has been piled on him. Since the recession, critics have said the increased money supply and low interest rates during his tenure at the Fed from 1987 to 2006 led to bubble investments. Mr. Greenspan first heard that theory, he says, in 2007, when John Taylor, a professor of economics at Stanford University who has advised Republicans, made the connection between easy money and the housing bubble. "It had absolutely nothing to do with the housing bubble," he says. "That's ridiculous."

While Taylor continues to argue for his thesis that the FED kept interest rates too low for too long, I sort of agree with Greenspan. Doesn’t John Taylor recall that the employment to population ratio remained at or below 62.5% until the spring of 2005? In fact, it did not reach 63% until 2006. I’m sure he remembers the dismal state of the labor market back then as the economic advisors for President Bush (of which he was one) was excusing serial doses of fiscal stimulus (two tax cuts, a large increase in defense spending, and an unpaid for new prescription drug benefit) on arguments that a depressed economy needed aggregate demand stimulus. And many economists note – monetary stimulus may be preferred to fiscal stimulus if that means lower interest rates and increased business investment. In fact, the FED started raising interest rates in 2004 in part because of the extent of Bush’s fiscal stimulus. Not exactly a pro-growth policy mix. But you say there was a housing bubble, which later burst leading to our current mess. Pearlstein’s critique is more on point:

His latest book, oddly named “The Map and the Territory,” is meant to be an account of his intellectual journey to discover why, as the nation’s top bank regulator and its most famous economic prognosticator, he failed to see it all coming. Why had the markets, which for centuries had been so adept at self-correction, failed this time? Why had bank executives, with every incentive to protect their fortunes and reputations, knowingly gambled it all away? What we find, however, is that Greenspan’s journey of discovery brings him right back to where he began — to an unshakable faith in free markets, an antipathy toward market regulation, and a conviction that progressive taxes and social spending are to blame for slow growth, stagnant wages and exploding deficits. Those who have followed his career know that it was Greenspan who gave the green light to bank consolidation, Greenspan who pushed financial deregulation, Greenspan who advocated new global rules that would have reduced bank capital reserves and Greenspan who blocked efforts to crack down on abusive subprime lending. But if you are looking for him to accept any responsibility for the crisis that ensued, you will be sorely disappointed.

But I guess an economic advisor to Romney-Ryan isn’t going to criticize deregulation given it is the position of many leading Republicans that we should not re-regulate. This matters more than a historical exercise of where the Greenspan FED failed as these issues will face the Yellen FED. Taylor is already arguing that the FED should get back to his magical rule as soon as possible. Count me as hoping the Yellen ignores Taylor’s advice on monetary policy as she seeks to have our policymakers reverse some of the Greenspan deregulations.

Reform Translated Means Dooh Nibor Economics

With debt default temporarily averted and the Federal government back open for a few months, we are already hearing certain members of both parties talking about “reform”. But tax “reform” typically refers to having the middle class lose a few tax deductions so that we can cut tax rates on the rich even more – and any Republican version of this would mean even less tax revenues. But don’t fret boys and girls as they will reduce spending via entitlement “reform”, which means again that the middle class and the poor would have even less income so the rich can pay less in taxes. What did Paul Krugman call this?

That agenda is to impose Dooh Nibor economics -- Robin Hood in reverse. The end result of current policies will be a large-scale transfer of income from the middle class to the very affluent, in which about 80 percent of the population will lose and the bulk of the gains will go to people with incomes of more than $200,000 per year.

So why don’t the center right Democrats who want to assist the Republicans in this agenda just drop the word reform and speak clearly? Is it because if they did speak in plain English, the public would turn against them? One small glimmer of hope is that the repeal of the medical device excise tax – which would be a giveaway to the medical device fat cats – was not part of yesterday’s deal in part because the dreaded Tea Partiers actually turned against this repeal. A small bit of light finally appears?

Please, Mr. President, Just Bite The Bullet And Declare The Debt Ceiling Unconstitutional!

Which it is, btw, the 14th Amendment and all that, although some fools think that Treasury can prioritize and just pay interest on the debt while not paying all sorts of other legally mandated bills.  As it is, it is against the law not to pay legally mandated bills, although those who want to blow past the debt ceiling say that all that would be involved would be delaying paying the bills.  But the effect would be very bad for the US and world economy, as leaders from all over the world are telling us about as loudly as they can, not that those who are pushing for a default are paying the slightest shred of attention to them.

Quite aside from the fact that the debt ceiling is unconstitutional, even if, Mr. President, you are reported to accept the argument of Laurence Tribe that it is constitutional, you yourself have analyzed how given the current polarization, it just sets you and your successors up for repeated blackmail.  You already caved in 2011 and are now trying to put the genie back into the bottle.  It looks like it is not going, with Vix soaring and Congress just apparently unable to cut any sort of deal.  Maybe, just maybe, Boehner will simply pass some six weeks extension at the last minute, but that simply puts the day of reckoning off six weeks.  It is time to end this once and for all, even though you will probably be impeached by the loonies in the House. Rest assured that you will not be convicted by the Senate, and the world and history will be grateful, even if SCOTUS later stupidly disagrees with the judgment and reinstates the damned thing.  Hopefully they will not, and the US and world economies and future presidents will be freed from this noxious law that never should have been passed and is the only one of its kind ever passed in any nation on the planet.

Let us recognize that in fact we really do not know what will happen if there is a default.  It may well be the case that those saying consequences will not be all that bad may prove to be right.  Interest rates will go up in the US with a slowdown in US growth, but adjustments will be made and the world will not come to an end.  OTOH, there is a really serious downside tail risk here, one that those who are more closely connected with the financial markets seem to take very seriously. One of the worst possible scenarios would be a complete freezeup of the repo bond market.  The reason would be that what gets traded there are essentially short term Treasury securities, whose interest rates are currently soaring.  This is the main market the Fed uses for its open market operations, and it is arguably at the very foundation of the entire global financial system.  Causing it to freeze up completely by defaulting on the main security being traded in it might well lead to the Fed to being totally crippled in dealing with this crisis and essentially freezing up nearly every financial market in the world in a scenario that not only would make 2008 look like a picnic on Sesame Street, but could rival even 1931 as well.  Yes, this is a less than 50% probability outcome, but, Mr. President, do you really want to risk this?  Please act to forestall such an utterly disastrous possibility.

Barkley Rosser

Fair and Balnced in Sweden

One guy gets a Nobel for  showing that asset markets are  efficient. Another gets  one for showing  that they are nothing of the sort! Go figure.

Greg Mankiw’s Misguided Example of the Lack of Political Comity

Greg Mankiw pens an admirable call for both parties to work together. Alas his example strikes me as one that completely ignores the history of the health care debate:

the vote on President Obama’s 2010 health care reform was entirely one-sided, so it is no surprise that the law is still the source of much rancor

As long as this op-ed was, could Mankiw have noted that Obama decided not to go for the progressive’s preferred approach – universal health care? Obama instead put forth a plan that John Gruber designed, which was the same plan that Governor Romney adopted in Massachuetts. In other words, he reached out to the other side and adopted what used to be the Republican alternative to universal health care. He also was willing to work with Republicans but these same Republicans acted just like the Eagles and the Rattlers in his summer camp parable. While calls for comity are admirable, we need to start the process with at least a shred of honesty.

Paul Ryan Echoes Niall Ferguson

Paul Ryan to the rescue in terms of the government shut down?! I’ll leave it to others to make the political point – he is throwing the anti-Obamacare Tea Party agenda under the bus in favor of the good old fashion Romney more tax cuts for the rich. After all, the first two paragraphs of his latest rant is wasted on blaming the President for not negotiating. But should we not have seen this coming given the latest nonsense from Niall Ferguson? Consider Ryan’s dire warning:

The Federal Reserve won't keep interest rates low forever. The demographic crunch will only get worse. So once interest rates rise, borrowing costs will spike. If we miss this moment, the debt will spiral out of control.

OK – Ryan did not get into the numbers over whether interest expenses are 8% of GDP or 8% of tax revenues. But Ryan and Ferguson are on the same page as to how to lower future deficits:

the discretionary spending levels in the Budget Control Act are a major concern. And the truth is, there's a better way to cut spending. We could provide relief from the discretionary spending levels in the Budget Control Act in exchange for structural reforms to entitlement programs. These reforms are vital. Over the next 10 years, the Congressional Budget Office predicts discretionary spending—that is, everything except entitlement programs and debt payments—will grow by $202 billion, or roughly 17%. Meanwhile, mandatory spending—which mostly consists of funding for Medicare, Medicaid and Social Security—will grow by $1.6 trillion, or roughly 79%. The 2011 Budget Control Act largely ignored entitlement spending. But that is the nation's biggest challenge.

Gee whiz – Social Security cuts and scaling back Federal spending on health care, which was the fiscal part of the Romney-Ryan 2012 campaign. How well did that campaign work out? And why do we need to cut entitlements? Ryan repeats his desire for even lower tax rates than we got by making the Bush tax cuts permanent. Finally, Ryan like Ferguson must have missed what the latest from the CBO said why their forecast of the future debt path deteriorated:

Federal revenues under the extended baseline are now expected to be substantially lower in coming decades than CBO projected in 2012 (see the top panel of Figure A-2). By 2023, revenues are projected to be 2.8 percent of GDP lower than projected in the 2012 analysis: 18.5 percent of GDP rather than 21.3 percent ... Noninterest spending under the extended baseline is now expected to be lower in coming decades than CBO projected in 2012 (see the middle panel of Figure A-2). Specifically, noninterest spending in 2038 is projected to be 1.4 percent of GDP lower than in the 2012 analysis.

Even though Romney-Ryan lost the election in 2012, they have won in terms of getting spending cuts to pay for making the Bush tax cuts permanent. But they want even more spending and tax cuts and are mad that President Obama is not capitulating again.