244 Members of Congress Flunked Arithmetic

TPMLivewire reports:

Every House Republican voted Thursday to reject the proposition that the Bush tax cuts added to the deficit. Joined by just a handful of Democrats, the full Republican conference rejected a measure that would have affirmed what nearly all budget experts and economists recognized: President George W. Bush's debt-financed tax cuts blew up the budget in the last decade, leaving the country in a hole that sank into a chasm after the 2008 financial crisis. The final tally was 174-244.

I guess their next vote will declare that the Earth is flat.

A Curious Case of Plagiarism... and of Contradiction

Back in April 2008, the Sandwichman reviewed an IMF Working Paper on "The Effects of Early Retirement on Youth Unemployment." The concluding paragraph began as follows:

BUT the positive side to this dumb paper is the sentence, "Those who make the fallacy claim fail to offer specific evidence of the supposed belief in a fixed amount of work." That's a paraphrase of what the Sandwichman has been saying for 10 years!

Well the Sandwichman was wrong.

How Would Romney Pay for the Repairs in the Safety Net?

This morning on CNN, Mitt Romney said:

“I’m not concerned about the very poor, we have a safety net there,” Romney said. “If it needs repair, I’ll fix it. I’m not concerned about the very rich, they’re doing just fine. I’m concerned about the very heart of America, the 90, 95 percent of Americans who, right now, are struggling, and I’ll continue to take that message across the nation.”

I guess some Democratic hacks could take the very first part of this statement out of context (Romney is not concerned about the very poor) but let’s do as he lectured Soledad O’Brien and finish the sentence. The safety net does need repair and that would involve an increase in government spending. Now if Mr. Romney has decided to agree with President Obama about the very rich doing fine, then have him say we will pay for this increase in government spending by raising taxes on the very rich. But wait – his tax proposal would dramatically reduce Federal revenues by giving the very rich even more tax breaks. So the arithmetic just does not add up unless Mr. Romney is proposing even bigger deficits. Of course, this kind of doubletalk is where Mitt Romney excels.

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It’s amazing, isn’t it, that professional economists could argue about the relationship of identity and equilibrium and fail to come to a quick agreement?  I see that David Glasner and Scott Sumner are still having at each other over at Uneasy Money.  And I am truly baffled by Glasner’s claim “that it is incoherent to state that the income-expenditure model of national income requires savings to equal investment whether or not equilibrium obtains...”

It’s all rather easy: an accounting identity imposes a necessary relationship between a set a variables on the basis of their definition, but it doesn’t say what the value of any particular variable will be.  Behavioral arguments, which may employ the concept of equilibrium (but don’t have to), attempt to explain or predict these values.  A behavioral argument may be right or wrong—people may behave the way you say they do, nor not—but an identity is an identity is an identity.

I disagree strongly with Noah Smith and Paul Krugman, however on the question of whether one can learn anything substantive from identities; clearly the answer is yes.  Rather than make a theoretical argument, I will link to a chapter from my introductory macroeconomics text.  It is all about identity---there is no discussion at all about equilibrium—but I think students would learn a number of useful things about national and global economic patterns from reading it.  See if you agree.

And the next time you accuse someone of not fully comprehending an identity, look in the mirror.

Tokyo Request

I will be visiting Tokyo in the middle of next month. Any contacts or advice would be very much appreciated. Contacting me directly would be best.

Real Interest Rate in the Early 1980’s and the Last Few Years

Brad DeLong constructs a real interest rate series for the past 50 years using the nominal rate on 10-year government bonds minus inflation. Our graph is based on TIPS which limits us to the past few years. Brad notes:

If You Think That the Equilibrium Real Ten-Year Treasury Rate Is 2.5%/Year...as you might conclude from the historical track of the past fifty years: then the current 10-year Treasury rate of 1.87%/year is consistent with market expectations of deflation at an average rate of 0.63%/year over the next decade. If you think that the market's forecast of the equilibrium Treasury real rate over the next decade will be much less than 2.5%/year--as the real TIPS rate of -0.185/year suggests--then it seems likely that it is because the market expects a high unemployment rate for the next decade. Neither possibility seems consistent with market expectations of a Federal Reserve that understands its mission

.

I’m puzzled by the behavior of the real rate during the most recent recession period. At first, this real rate dropped from nearly 2.5% (August 2007) observed before the recession to around 1% (March 2010) as one would have hoped from Federal Reserve policies designed to offset the recession. But by October 2010, the real rate increased to 3%. I realize that this was the period when fiscal policy was trying to revive the weak economy but given the depth of the Great Recession, but most of us thought the fiscal stimulus was too weak to get us even remotely close to full employment.

But let’s also look at the early 1980’s, which was a period when fiscal policy turned stimulative for whatever reason. Some defenders of the Reagan tax cut might have argued we were in a deep recession then as well, while others justified that tax cut on supply-side silliness. Of course, macroeconomic history tells us that the Volcker Federal Reserve was hell bent on combating inflation and decided to offset the Reagan tax cuts with a period of tight monetary policy, which led to much higher real interest rates crowding-out investment. Not exactly the parable that the supply-side crowd likes to tell. But then there has always been a third school of economists who preach Barro-Ricardian equivalence. Their message – as best exemplified by “Do Higher Deficits Produce Higher Interest Rates” by Paul Evans (AER, 1985) – was that households would save all of the tax cuts so that there would be no impact on national savings and hence no effect on interest rates. That prediction was clearly not borne out by the evidence as Brad’s graph clearly shows. The good news is that we finally recovered from the 1982 recession as Federal Reserve policy eventually reversed its draconian contraction and allowed real rates to fall from their peak.

Ratings Agencies Demonstrate Power Over Markets Again (Not)!

So, Fitch has downgraded Spain, Italy, Belgium, Cyprus, and Slovenia. The market response? Yields on Spanish and Italian bonds fall, and the euro rises. Yet more reason to fear the mighty power of the ratings agencies!

Perverse Fiscal Policy

Assuming a picture is worth a thousand words, our graph is offered as an illustration of some wise words from Mark Thoma:

We need a temporary increase in government spending to increase demand and employment through, for example, building infrastructure. That would help to get us out of the deep hole we are in. Instead, the government seems to be trying to make it harder to escape. We do need to address our long-run budget problems once the economy is healthy enough to withstand the tax increases and program cuts that will be required. But the idea of "expansionary" austerity has failed.

Real government purchases fell by almost $30 billion (annualized) last year with $20 billion of this decline shockingly coming from Federal purchases. While it is true that state & local purchases have been declining since late 2007 with the cumulative decline exceeding $90 billion per year, we have also seen a significant decline in Federal purchases over the past year. We should add that Keynesian macroeconomists have always worried about the implications those state & local balanced budget requirements, which force this kind of perverse fiscal reaction to recessions. But as Barkley Rosser noted over at Mark’s blog:

Is it not the case that the main source of this outright decline in G is coming from the state and local levels with their balanced current budget rules, along with the ending of fed stim support for them? Of course, this suggests that the easiest way to offset this would be renewed support by the feds for the states and locals, but obviously this is unlikely to happen in the near future.

Federal revenue sharing should be increased but then the leaders of the Republican Party seem hell bent on balancing even the Federal budget during this Great Recession.

For Once The Military Is Right

Despite the title here I absolutely support civilian control of the military in democratically ruled countries. However, in both the US and Israel we have a weird situation where the military and the intel establishments are not only better informed and more aware of the implications of current serious policy issues than their civilian political superiors, along with their media abettors, but they are right. The issue is the Iranian nuclear program where the disconnect between not only what military intelligence knows (yes, I know, hahahaha, milintel is an oxymoron (decrepitly old joke), hahahaha), and what the public discourse in the media and the political debates and what the official policymakers are saying (including amazingly enough US Nat Sec Advisor Thomas Donilon earlier this evening on Charlie Rose) are totally out disconnected.

The media reports on this recently have become blatant, and I apologize for not providing relevant links. But, last week WaPo and NYTimes reported on how Israeli milintel were saying Iran was not pursuing a nuclear weapons program currently. Then today the NYT was a mass of conflicting stories with the ones from top Israeli governmental leadership (somewhat backed up by NSC director Donilon on Charlie Rose) arguing that Iran is indeed pursuing nukes and when or how will either Israel or the US just bomb the heck out of them blah blah blah to stop it, despite the contrary claims of their respective military intel establishments.

Sorry folks, but the people who will have to do this, either the Israeli or US military, are not all that excited about this (much less convinced by the official reports that go against their offical intel assessments, see US NIE reports). Their leaders know what is not acknowledged by President Obama in his SOTU, or Natenyahu in his public statements, or certainly not by the GOP prez candidates (with the exception of Ron Paul), that in fact Iran is not actively or currently pursuing obtaining nuclear weapons. All the war whooping and hawkishness by the political leaders and their pathetic rivals and related media and much of the public is ignorant and stupid and worthless. But, they cannot speak up publically on this matter. Let us hope that we shall muddle through this without yet another worthless new war.

It’s a Bruegal World

I just returned from seeing “The Mill and the Cross”, the remarkable remake of The Way to Calvary by Pieter Bruegal the Elder.  Some quick reactions:

1. If you were an art history major you will have multiple orgasms.  Guaranteed.

2. Even if you weren’t, if your eyes are open you will be enchanted by images that occupy a gray zone between painting and live-action film.

3. The pace is extremely slow, which works if you allow yourself to be hypnotized.  Don’t go to see it on an empty stomach.

4. The crucifixion thing is overdone, even after allowing for the fact that Bruegel overdoes it too.

5. The scene with the crows eating a dead guy’s eyeballs is really gross.

6. The people in this window on 16th century Flanders are much too clean and healthy.  This is not only a distracting anachronism, it also distances us from the world we see in Bruegal’s paintings.

7. You can see why the Dutch fought so intensely to free themselves of Spanish rule.

8. If the movie doesn’t grab you, you will find it to be a mashup of Masterpiece Theater and Bread and Puppet, except that a rich banker would never be a good guy in a Bread and Puppet production.

9. This film is auteur theory on steroids: Lech Majewski not only directed it, he did camera work, art design and the musical score.  If you don’t like it, you know who to blame.

10. How do people do those slow, gently hopping dances that Bruegal paints so well?  Can we start a new craze?

The Blade’s Response to the State of the Union Address

The transcript of what Indiana Governor Mitch Daniels said can be found here. When the Blade claims Obama’s policies were pro-poverty, what he seems to be saying that in the face of insufficient aggregate demand, the right policy should have been austerity - cutting government spending. Talk about Herbert Hoover economics!

Governor Daniels also expressed concerns about the size of the Federal deficit. Folks give this governor too much credit for the fiscal shape of Indiana, which they assert has been dramatically improved by his policies. Lest we forget, however, that a source of revenues for Indiana was the one time sale of toll rights to the private sector. Sacrificing future toll revenues to collect cash that has a lower present value is not a long-term solution to a government’s fiscal follies.

Of course, we get this rhetoric:

There is a second item on our national must-do list: we must unite to save the safety net. Medicare and Social Security have served us well, and that must continue. But after half and three quarters of a century respectively, it’s not surprising that they need some repairs.

By repairs – does he mean the Paul Ryan plan to effectively eliminate Medicare?

Finally, we get this canard:

Contrary to the President’s constant disparagement of people in business, it’s one of the noblest of human pursuits. The late Steve Jobs - what a fitting name he had - created more of them than all those stimulus dollars the President borrowed and blew.

Rebuttal outsourced to Paul Krugman.

The Radical Right in the US and Europe

Today’s mandatory reading is a news report from the New York Times about a film shown in NYPD training sessions entitled “The Third Jihad”. You should read the whole thing, but here is the CliffNotes version:

1. The feature-length film portrays the entire Muslim world as engaged in a nefarious, secret plot to destroy non-Muslim institutions and achieve global domination.

2. It was shown to about fifteen hundred NYPD officers across all ranks as part of their routine training.

3. It was produced by an organization called the Clarion Fund, which has financial links to gambling tycoon Sheldon Adelson.

4. Adelson is also the principal funder of the super PAC whose support of Newt Gingrich has propelled him to the front of the GOP presidential pack.

Put the pieces together, and what you see is a glimpse of the extreme, xenophobic right, American-style. It is our answer to groups like the National Democratic Party in Germany, Finland’s True Finns, the Austrian Freedom Party, the Danish People’s Party, Hungary’s Jobbik, France's National Front and so on. They share an authoritarian traditionalism in culture, paranoia about immigration (especially from Muslim regions) and a profound hatred of secularism and the left.  The link between xenophobia and authoritarianism is the view, fundamental to fascism, that the “true” members of the nation have a common interest that can only be undermined by the give and take of democratic politics.

The European extremists are forced to organize their own factions, since the political mainstream, including the established conservative parties, see them as echoes of a fascism their societies had actually experienced and would like to see buried forever. This consensus does not exist in the US, and proto-fascist groups can operate freely within the Republic Party. There is a possibility that one of their anointed candidates will be elected president this fall.

Incidentally, this is not about Gringrich personally. Everything in his prior public career and private life tells us he is an opportunist, and he is simply seizing the opportunities that present themselves at the moment. Nor should we assume that his backers are the only financiers of xenophobic authoritarianism; Adelson is simply the one who shows up in this specific instance.

As an American who spends a lot of time in Europe, I am troubled by the laws against racist and fascist propaganda; I worry about the slippery slope that leads to criminalization of unpopular political expression. Maybe I should be worried about the opposite too—the view that all varieties of politics are equally legitimate, that there are no hard lines that respectable political figures cannot cross.

Is the Oil Price Scare From The Strait Of Hormuz Over?

Maybe not, but there is good reason to think that maybe it is over, even though US gasoline prices were still rising over this past weekend. But that is probaby just the pass-through of the earlier spikes in crude prices due to the scare arising from Iran's threat to close the Strait of Hormuz, which it is capable of doing, if the US follows through on its newest economic sanctions, which it appears to be doing. In the longer run higher oil prices would be useful for getting us onto a more sustainable energy path, but in the short run they certainly do not help get the world economy out of its prolonged slump of recent years. I see two signs here.

The first was the report last Wednesday that Israeli Defense Secretary Ehud Barak has announced that Israeli military intelligence has concluded that Iran is not currently in active pursuit of nuclear weapons and that any decision by them to bomb Iran is "far off" in the future. Needless to say, this undercuts some of the more hysterical "bomb Iran" presidential candidates in the US. But, of course, this does not remove the new economic sanctions that Iran was objecting to and which many think that the US and Europe were going along with partly to restrain Israel from such bombing efforts.

The other sign is that over the weekend the Iranian vice president has specifically denied that Iran is planning to block the strait. One can dismiss this, just as many dismiss the anti-nuclear weaons fatwas of Iran's supreme leader, Khamene'i (that is to say, some of those who actually know that he has issued such fatwas, not widespread public knowledge), but it does look as if Iran has backed off for whatever reasons. It now looks extremely unlikely that the Strait of Hormuz will be blocked, even though the US looks to be following through on the new sanctions, which most reports say are already hurting the Iranian economy. Three further thoughts.

One is that David Ignatius claims in WaPo that this was due to Obama putting pressure on Iran through back channels. Maybe, although this smells a bit like the administration giving itself too much credit and leaking this to Ignatius. I suspect that backing off by Israel has played a bigger role.

Another point is that Iran has enough outs to avoid the worst of the economic outcomes. The main method for these sanctions is to attack settlements of oil sales through the Iranian central bank. Yes, several major customers of Iran appear to be scaling back purchases, such as Japan and China. But there are limits to this, particularly if indeed oil prices go up rather than back down (or stay steady). More importantly, Venezuela and possibly other countries are apparently setting up financial arrangements that may allow for these contracts to be completed without being directly blocked by the sanctions. So, Iran may already have seen the worst economically.

And finally, the main evidence for problems is the decline of the Iranian currency. However, such a decline makes it easier for the non-oil sector of Iran's economy to compete with foreigners and even possibly export, Iran usually suffering from the well-known "Dutch disease" endemic to so many nations dependent on exports of a highly priced natural resource. They have a respite from this a bit, although of course imports are more expensive also. Iran is taking a hit economically, but in the end the sanctions will probably backfire politically in Iran, given the strong support even by the political opposition of their civilian nuclear power program.

Hedge Funds for Human Rights

At a time when finance is coming under intense scrutiny, it is heartening to learn about hedge funds' concern about human rights. Greece is wrestling with the idea of asking (forcing) investors to accept 32 cents on the dollar. Hedge funds have been buying up the paper in the expectation that they can force Greece to pay in full.

Now the hedge funds is toying with the idea to sue the country in the European Court of Human Rights on the grounds that Greece had violated bondholder rights, surely a more serious matter than the slaughter of a few dissidents demanding democracy.

At least we now know that capital is seriously concerned about more than maximizing profits.
Thomas, Landon Jr. 2012. "Hedge Funds May Sue Greece if It Tries to Force Losses." New York Times (19 January)http://www.nytimes.com/2012/01/19/business/global/hedge-funds-may-sue-greece-if-it-tries-to-force-loss.html?_r=1&pagewanted=all

Reviewing Econometric Papers

Chris Blattman helpfully links to the syllabus for his course on research design and causal inference.  At the end is a list of questions he thinks (and I agree) would provide a useful checklist for reviewers of econometric papers.  Take a look at it.

Of course, me being me, I have some issues.