Federal Reserve Bank of Atlanta President Dennis Lockhart said the U.S. economic recovery isn’t sustainable enough yet to warrant raising interest rates or shrinking the central bank’s near-record balance sheet.
There’s a “small risk of deflation,” and the rebound from the worst recession since the 1930s faces risks from Europe’s debt crisis, drops in state and local spending, commercial real estate losses and the Gulf of Mexico oil spill, Lockhart said in the text of a speech today in Baton Rouge, Louisiana.
Fed policy makers last week signaled Europe’s growth crisis may harm American growth, saying “financial conditions have become less supportive,” and repeated a pledge to keep interest rates near zero “for an extended period.” The U.S. economy grew at a 2.7 percent annual rate in the first quarter, less than the 3 percent estimate issued last month, according to Commerce Department data released June 25.
“Recent developments make me even more convinced that current policy is appropriate,” Lockhart said in prepared remarks to the Rotary Club of Baton Rouge. “Financial markets and many businesses are more nervous today than a few weeks and months ago, and it’s my view that monetary policymakers should hold to a guarded policy stance and evaluate carefully the risk and reward of a change of policy.”
The remarks are some of the most downbeat on the U.S. economy from a Fed official in recent months. Lockhart doesn’t vote on Federal Open Market Committee decisions this year. Kansas City Fed President Thomas Hoenig has called for an increase in the Fed’s benchmark rate within months and has dissented from four FOMC decisions this year.
Record Low Rate
The Fed has left the overnight interbank lending rate target at a record low of zero to 0.25 percent since December 2008.
“The economy has not yet arrived at a state where healthy and sustainable final demand is underpinning growth,” said Lockhart, 63, a former banker who became the Atlanta Fed’s chief in 2007. “I make this point not to predict a reversal of the progress made but just as a cautionary reminder to avoid counting chickens too early.”
Central bankers are concerned that persistent unemployment may reduce the pace of recovery. The Labor Department will report on July 2 that unemployment rose to 9.8 percent in June from 9.7 percent in May, according to the median forecast of economists in a Bloomberg News survey.
8 Million Jobs
The U.S. lost more than 8 million jobs since the start of the recession in December 2007, the most of any slowdown in the post-World War II era.
While U.S. financial firms have “rather small and manageable direct exposure to the Greek government” and other European sovereign borrowers, there’s still a risk that financial market pressures may be transmitted to the U.S. economy and that a stronger dollar may weaken demand for exports, Lockhart said.
For U.S. state and local governments, budget gaps are likely to widen in 2010 and 2011, with one unspecified estimate of the combined deficit for all states this year at $144 billion, Lockhart said. “This situation is our nation’s very immediate analog of the public finance pressures being felt in Europe,” he said.
Wednesday, June 30, 2010
Fed's Lockhart Says U.S. Economic Recovery Not Yet Sustainable
Why Should We Trust the IMF?
Is advice from the IMF better than advice from a drunk in the street? That is the question that people around the world should be asking as the International Monetary Fund dishes out its prescription for austerity. The IMF programme calls for cutbacks in government support for healthcare, pensions, and a wide range of other public services. It also calls for weakening labour market regulations that provide workers with job security.These recommendations are being given in a context where the world economy is suffering from a massive shortfall of demand. In other words, tens of millions of people are unemployed right now because there is not enough spending to keep them employed. The IMF's programme is almost certain to reduce spending further leading to even larger shortfalls in demand and more unemployment.
But, the IMF says that we should trust them. The question we should all be asking is: "why?"
Where was the IMF when the housing bubble in the US and elsewhere was inflating to ever more dangerous levels? Was it frantically yelling at governments to rein in the bubbles before they burst with disastrous consequences? After all, what could possibly have been more important than warning of the dangers of these bubbles?
It was easy to both recognise the housing bubbles and that their collapse would have devastating consequences for the economy. Economies don't adjust easily to a loss of wealth that in some cases exceeded 50% of GDP.
Real economists know this, but apparently the folks at the IMF did not, or if they did, they didn't think it was worth saying anything. One will look in vain through IMF publications during the build-up of the housing bubble for serious warnings of the potential dangers. While the IMF can scream about the need for austerity today, it couldn't be bothered to say much about the bubbles that got us here.
The IMF's track record gives us reason not only to question the institution's competence but also its motivations. This question comes up most clearly in the case of Argentina. At the end of 2001 Argentina defaulted on its debt, enraging the IMF. Prior to the default, Argentina had been an IMF poster child eagerly embracing the IMF's programme.
The IMF's growth forecasts clearly reflected its change of attitude toward Argentina (pdf). Prior to the default the IMF was consistently overly optimistic about Argentina's growth prospects, projecting much higher growth than Argentina actually experienced. After the default, the IMF was hugely over-pessimistic, projecting much lower growth rates than it subsequently experienced. It is difficult to explain this pattern of errors except by a political motivation.
It is possible to see a similar pattern in the IMF's latest set of policy recommendations to deal with the economic crisis. The impact of most of its proposals will be to reduce the benefits received by ordinary workers. The proposed changes in labour market regulations will likely also weaken workers' bargaining power, leading to cuts in wages. Furthermore, the reduction in demand caused by the turn to austerity will leave millions more out of work, both depriving these workers of income and further weakening the bargaining power of those who still have jobs.
There are alternatives. Central banks like the European Central Bank, the Bank of England, and the Federal Reserve Board could just buy and hold large amounts of government debt. These central banks can both ensure that there are no questions of solvency by providing a ready market for government debt and that there is no build-up of interest burdens. The interest paid on the debt held by the banks is refunded to governments.
Large-scale central bank purchases of government debt will not create inflation in a context of massive unemployment and excess capacity. This is not a point we have to debate. Japan's central bank has bought an amount of government debt roughly equal to its GDP, yet it remains far more concerned about deflation than inflation. While we could hope to do better on the stimulus front than Japan, inflation is simply not a problem it faces now or even on the distant horizon.
It is especially painful to see these calls from austerity coming from the IMF. This organisation is distinguished not only by its dismal track record in pushing economic policies that don't work; it also is known for the exorbitant benefits that it gives its economists. Under the IMF's pension programme, many staffers can retire in their early 50s with six-figure pensions. Imagine the folks who completely missed the housing bubble or who got it totally wrong on Argentina lounging around the tropics at age 51 on their $100,000 a year IMF pension. When it comes to economic advice, I think I'd rather listen to that honest street drunk.
Tuesday, June 29, 2010
Chinese pay rises encourage move to cheaper provinces
Foxconn's shock announcement this month that it would double base pay for some of its workers may not hurt consumers but it is likely to lead to a fresh round of labour relocation within China.
"We frequently have double-digit percentage swings in the price of D-Ram [chips] or [LCD] panels, and those are the ones that matter," says Kevin Chang, ac Citigroup analyst. "The impact from the recent labour cost changes is going to be minimal [on consumers]."
That is because Chinese labour accounts for just over 3 per cent of Foxconn's total cost of goods sold, and for an even lower percentage of the final retail price of products such as Apple's iPhone.
But inside China, the labour woes that have shaken the country's main export manufacturing hub are pushing crucial changes on its economic map, and Foxconn is at the forefront of those adjustments.
"The labour cost increases will be dealt with by increasing productivity, passing on to customers and moving production to inland China," says Manish Nigam, head of Asian technology research at Credit Suisse. "And the relocation within China will be the most important force."
The move away from the coastal locations of the Pearl and Yangtze river deltas, still China's main manufacturing hubs, to other locations is not new.
Some Taiwanese contract manufacturers started diversifying their locations on the mainland as early as a decade ago, and many now have factories in scattered provinces such as Jiangsu, Jiangsi, Sichuan, Shandong and Liaoning.
That can make a big difference. In Jiangsu, wages are 86 per cent of the level in Shanghai, according to a research report from Credit Suisse. In Shandong and Shanxi provinces, where Foxconn already has big manufacturing facilities, the wage levels are 82 and 76 per cent, respectively. In Chongqing, the metropolis in central China on the upper reaches of the Yangzi River, wages are 61 per cent of Shanghai levels.
Chongqing is the new frontier for the electronics industry. HP, which announced as early as 2008 that it was building a new manufacturing site there, is expected to start production next year. All its major manufacturing partners have followed.
Austerity measures trigger doubts on recovery
Growing doubts about the strength of the global recovery provided the dominant theme in financial markets this week as a burst of euphoria over China’s decision to allow more flexibility for the renminbi proved short-lived.
Analysts reported mounting concerns that fiscal austerity measures being adopted in Europe could trigger a return to recession for some countries and weigh on the recovery elsewhere. The Federal Reserve hinted at its concerns about the potential impact on the US of Europe’s fiscal woes, as it maintained its pledge to keep interest rates “exceptionally low” for an “extended period”.
The more downbeat mood in the Fed’s assessment of current conditions chimed with evidence of the dire state of the US housing market and a further downward amendment to first-quarter US gross domestic product growth.
“The downward revision from 3.2 per cent in the advanced report to 3 per cent in first revision and now just 2.7 per cent shows that as the Obama/Bernanke stimulus wears off, so does the upward momentum in the economy,” said Steven Ricchiuto, chief economist at Mizuho Securities USA.
“With the banking and consumer sector still struggling with weak balance sheets, exogenous events like the European sovereign debt crisis are more likely to have lasting negative effects on the recovery.”
Hayek and Methodological Individualism
One of the earliest iterations of this debate occurred during the so-called Methodenstreit between members of the Austrian School in Economics and the German Historical School. Most theorists of the Austrian School, however, like Carl Menger and Ludwig von Mises, were pure atomists. It was only Friedrich von Hayek who explicitly identified himself with the Weberian doctrine of methodological individualism, and defended it through reference to the demands of interpretive social science. The key text is his paper, “Scientism and the Study of Man,” serialized in Economica (1942-44), and later published as the first part of The Counter-Revolution of Science (1955).
In Hayek's view, the desire on the part of social scientists to emulate the physical sciences creates an exaggerated fear of teleological or “purposive” concepts. This leads many economists to eschew any reference to intentional states and to focus purely upon statistical correlations between economic variables. The problem with this focus is that it leaves the economic phenomena unintelligible. Take, for example, the movement of prices. One might notice a constant correlation between the date of the first frost and fluctuations in the price of wheat. But we do not really understand the phenomenon until it has been explained in terms of the rational actions of economic agents: an early frost reduces yields, leading to less intense price competition among suppliers, more among consumers, etc. Thus Hayek insists that, in effect, all macroeconomic analysis is incomplete in the absence of “micro” foundations.
It is important to note, however, that while Hayek has a model of rational action as the centerpiece of his view, his is most emphatically not a form of rationalism. On the contrary, he puts particular emphasis upon the way that various economic phenomena can emerge as the unintended consequences of rational action. Even though the outcomes that people achieve may bear no resemblance to the ones that they intended, it is still important to know what they thought they were doing when they chose to pursue to course of action that they chose – not least because it is important to know why they persist in pursuing that course of action, despite the fact that it is not producing the intended consequences.
Of course, part of Hayek's motivation for endorsing methodological individualism and demanding that social-scientific explanations specify a mechanism at the action-theoretic level is that he wants to emphasize the limitations of the individual's actor's perspective. It's fine to talk about macroeconomic variables like “the inflation rate,” but it is important to remember that individual actors (generally speaking) do not respond directly to such indicators. All that they can see are changes in the immediate prices that they must pay for production inputs or consumption goods, and this is what they respond to. The large-scale consequences of the choices they make in response to these changes are largely unintended, and so any regularity in these consequences constitutes a spontaneous order. This is a crucial element of Hayek's information-based argument for capitalism: economic actors do not have access to the same information as economic theorists, thus it is only when we see the operations of the economy through their eyes that we can begin to see the advantages of a decentralized system of coordination like the market.
To illustrate the importance of the individual's perspective, Hayek gives the example of the process that leads to the development of a path in the woods. One person works his way through, choosing the route that offers the least local resistance. His passage reduces, ever so slightly, the resistance offered along that route to the next person who walks though, who is therefore, in making the same set of decisions, likely to follow the same route. This increases the chances that the next person will do so, and so on. Thus the net of effect of all these people passing through is that they “make a path,” even though no one has the intention of doing so, and no one even plans out its trajectory. It is a product of spontaneous order: “Human movements through the district come to conform to a definite pattern which, although the result of deliberate decisions of many people, has yet not been consciously designed by anyone” (Hayek 1942, 289).
The problem with ignoring the agent's perspective, in Hayek's view, is that it can easily lead us to overestimate our powers of rational planning and control, and thus to fall into “rationalism.” By contrast, the central virtue of methodological individualism is that it helps us to see the limitations of our own reason (Hayek 1944, 33). Formulating theories that refer directly to the “interest rate,” or “inflationary pressures,” or “the unemployment rate” can mislead us into thinking that we can manipulate these variables, and thus intervene successfully in the economy. We forget that these concepts are abstractions, used not to guide individual action, but rather to describe the net effect of millions of individual decisions. The key characteristic of methodological individualism is that it “systematically starts from the concepts which guide individuals in their actions and not from the results of their theorizing about their actions” (1942, 286). It therefore encourages, in Hayek's view, greater modesty with respect to social planning.
Math Question: jobs jobs job...
Rally 'Round the "True Constitution"
Indeed, while "birther" conspiracy theorists dominate the airwaves with tales of a mystical Kenyan baby smuggled into Hawaii just days after his birth, these "tenther" constitutionalists offer a theory that is no less radical but infinitely more dangerous.Tentherism, in a nutshell, proclaims that New Deal-era reformers led an unlawful coup against the "True Constitution," exploiting Depression-born desperation to expand the federal government's powers beyond recognition. Under the tenther constitution, Barack Obama's health-care reform is forbidden, as is Medicare, Medicaid, and Social Security. The federal minimum wage is a crime against state sovereignty; the federal ban on workplace discrimination and whites-only lunch counters is an unlawful encroachment on local businesses.
Tenthers divine all this from the brief language of the 10th Amendment, which provides that "the powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people." In layman's terms, this simply means that the Constitution contains an itemized list of federal powers -- such as the power to regulate interstate commerce or establish post offices or make war on foreign nations -- and anything not contained in that list is beyond Congress' authority.
The tenther constitution, however, reads each of these powers very narrowly -- too narrowly, it turns out, to permit much of the progress of the last century. As the nation emerges from the worst economic downturn in three generations, the tenthers would strip away the very reforms and economic regulations that beat back the Great Depression, and they would hamstring any attempt to enact new progressive legislation.
Such retreat to fringe constitutional theories is one of the right's favorite tactics during times of historic upheaval. The right-wing South justified both secession and the Civil War on the theory that the Constitution is nothing more than a pact between sovereigns that each state is free to leave at will. In the immediate wake of Brown v. Board of Education, 19 senators and 77 representatives endorsed a "Southern Manifesto," proclaiming -- in words echoed by modern-day tenthers -- that Brown "encroach[es] on the rights reserved to the States" because the "Constitution does not mention education." President Franklin Delano Roosevelt spent much of his first term combating a tenther majority on the Supreme Court, which routinely struck down substantial portions of the New Deal.
But Roosevelt's black-robed adversaries are unlike modern-day tenthers in two respects. Although the Supreme Court was dominated by tenthers for much of the early part of this century, Roosevelt had a powerful populist movement on his side. He won his landside re-election victory in 1936 in no small part by campaigning against the tenthers on the Court, and he used his second Inaugural Address to chide these justices, warning them that "the Constitution of 1787 did not make our democracy impotent." With a powerful and popular president lined up against them, the Court's tenther coalition broke, and America's economic policy has rested almost exclusively in elected officials' hands ever since.
Today, however, the tenthers tap into the same populist outrage that inspired a generation of working-class religious conservatives to enthusiastically vote against their own interests. Fox News star Glenn Beck exhorts his audience to "be a constitutional watchdog for America" by lining up against health-care reform, cap-and-trade legislation, and the stimulus package. Gov. Rick Perry of Texas, who enthusiastically backed a tenther "state sovereignty resolution," told a right-wing radio host that he is "willing and ready for the fight if this administration continues to try to force their very expansive government philosophy down our collective throats." Tenther-inspired claims that federal spending violates the Constitution are so common at "tea party" protests that it is impossible to tell where the tenthers end and the tea baggers begin.
In other words, it is all but certain that tenthers will play a significant role in selecting the GOP's presidential nominee in 2012. And if that nominee wins, the tenthers could even come to dominate the administration in the same way that the religious right set its hooks into George W. Bush.
Additionally, while the Depression-era justices provided much of the movement's intellectual framework, today's tenthers are extreme even by 1930s standards. The Constitution gives Congress the power "to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States," thus empowering the federal government to levy taxes and leverage these revenues to benefit the American people. Tenthers, however, insist that these words don't actually mean what they say, claiming that spending on things like health care, education, and Social Security is simply not allowed.
Their basis for ignoring the plain language of the Constitution is a statement by James Madison that federal spending is only really permitted when it advances one of Congress' other enumerated powers, such as by building a post office or funding a war. Since the words "health care" do not appear in the Constitution, there can't be any federal power to pay for health care, and the uninsured can eat cake.
Although tenthers are correct that Madison did make such a statement, his views hardly reflect the founding generation's consensus. Alexander Hamilton, the nation's first Treasury secretary and a co-author of Madison's Federalist Papers, emphatically rejected Madison's claim that the words "provide for the … general welfare of the United States" have any kind of secret meaning. Moreover, it is not even clear that Madison still believed that the Constitution requires a decoder ring when he was elected to the White House. Justice Joseph Story, whom President Madison appointed to the Supreme Court, was a Hamiltonian.
If anything, the tenthers' invocation of Madison reflects the danger inherent in any appeal to the founding generation. Early American politics were at least as contentious as our own, and the framers debated the Constitution's meaning with just as much zeal and uncertainty as we bring to such arguments today. Indeed, the framers' many conflicting statements offer such a rich menu of viewpoints that it is possible to find a quotation to support nearly any political agenda.
More important, there is something fundamentally authoritarian about the tenther constitution. Social Security, Medicare, and health-care reform are all wildly popular, yet the tenther constitution would shackle our democracy and forbid Congress from enacting the same policies that the American people elected them to advance. After years of raging against mythical judges who "legislate from the bench," tenther conservatives now demand a constitution that will not let anyone legislate at all.
States’ Budget Woes Only A ‘Modest’ Drag, San Francisco Fed Reports Says -
Financial problems at the state level are unlikely to send the U.S. economy back into recession, a report from the Federal Reserve Bank of San Francisco said Monday.
“State fiscal crises aren’t likely to go away soon and will probably get worse before they get better,” bank economists Jeremy Gerst and Daniel Wilson wrote in the release.
“Painful budgetary choices lie ahead for many states, though the drag on the national economy should be modest,” they wrote.
State and local government finance issues have been on the minds of economists and policy makers for a while now. Unlike the federal government, states are rather limited in their ability to make up for falling tax receipts, given that most are legally required to run balanced budgets. That often forces local leaders to cut back on spending and investment programs just at the time many economists believe they need to keep the stimulative power of those activities ongoing.
The federal government has helped state and local governments deal with this situation by borrowing massive amounts of money and supporting programs that would have otherwise been cut. But the impact of federal stimulus is winding down, and even seemingly politically safe moves like keeping extending unemployment insurance are sputtering out.
So why are the San Francisco Fed forecasters hopeful state and local troubles will not be the undoing of the recovery? For one thing, they assert economic activity on a national level is the ultimate determinant of what happens in the states, so the continued gains in activity should eventually aid governments below the federal level.
There’s also the matter of size. The economists note projected 2010 state budget gaps account for about 1% of GDP, adding “the combined state budget gaps from 2009 through 2012, as calculated by the Center on Budget and Policy Priorities, total less than the estimated cost of the 2009 federal stimulus package.”
Two-Year Treasury Yield Declines to Record Low 0.6% on Demand for Safety
Treasuries advanced, pushing two- year yields to a record low and that on the 10-year security below 3 percent for the first time since April 2009, as a decline in stocks boosted demand for the safest assets.
Government securities headed for their best quarter since the 2008 financial crisis as European governments’ struggles to rein in debt increased demand for the relative safety of U.S. securities. Pacific Investment Management Co., which runs the world’s biggest bond fund, said in a report on its website that inflation will stay low for the rest of 2010.
“There’s risk aversion, and nervousness about the euro- land debt crisis isn’t going away,” said Jesper Fischer- Nielsen, a senior fixed-income strategist in Copenhagen at Danske Bank A/S. Investors have also pushed “any speculation about the Federal Reserve tightening back to a more distant future,” supporting demand for government debt, he said.
The yield on the two-year note fell two basis points to 0.61 percent as of 7:39 a.m. in London, according to data compiled by Bloomberg. The 0.625 percent security due June 2012 rose 1/32, or 31 cents per $1,000 face amount, to 100 1/32.
The yield dropped as low as 0.5935 percent. The prior record was 0.6044 percent set Dec. 17, 2008, after the Fed cut its target for overnight bank lending to a range of zero to 0.25 percent. It has held the rate there since.
Ten-year yields dropped four basis points to 2.99 percent, after touching 2.97 percent, the least since April 29, 2009.
`Deep-Cover' Russian Spies Worked in U.S., FBI Says
Ten alleged members of a “long- term, deep-cover” Russian spy ring whose ultimate goal was to infiltrate U.S. policy-making circles have been arrested, the Justice Department said.
The arrests in the New York area and in Boston and Arlington, Virginia, were the result of an investigation by U.S. authorities into the ring, which began operating in the 1990s, according to two criminal complaints unsealed yesterday.
The alleged ring included agents posing as American and Canadian citizens, some of them living in the U.S. for more than 20 years, with the goal of becoming “Americanized” and passing intelligence back to the Russian Federation, according to the complaints.
The conspiracy involved at least three unnamed Russian government officials, including an official associated with the Russian Mission to the United Nations, the complaints said.
The government charged 11 individuals, including the 10 arrested June 27, with conspiring to act as illegal agents of the Russian Federation within the U.S., according to a Justice Department statement yesterday. One defendant hasn’t yet been arrested. Nine of the defendants are charged with conspiracy to commit money laundering.
Byrd's Death, Republican Fee Concerns Complicate Finance Bill
The death yesterday of West Virginia Democratic Senator Robert Byrd, and Wisconsin Democrat Russell Feingold’s refusal to back the final package, underscored the need for some Republican support to obtain 60 votes necessary to proceed to final Senate action on the financial-regulatory bill approved June 25 by a House-Senate committee.
Byrd’s absence and possible opposition from Brown, who voted for an earlier Senate version of the legislation, means Democratic leaders may come up short if they try to bring the measure to the floor before July 4, as they had planned.
Senate Judiciary Committee Chairman Patrick Leahy, a Vermont Democrat, told Bloomberg Television yesterday that consideration of the bill may be postponed until West Virginia’s Democratic Governor Joe Manchin appoints a successor to Byrd, possibly not until after the funeral.
Possible Delay
“The hope was that the Senate would vote this week, and now you have lost a vote,” Leahy said. “I am not sure what will happen. It is possible they put this off until after a replacement has been appointed by the governor.”
Leahy said he expects the bill “will eventually pass.”
In Ireland, a Picture of the Cost of Austerity
As Europe’s major economies focus on belt-tightening, they are following the path of Ireland. But the once thriving nation is struggling, with no sign of a rapid turnaround in sight.
Nearly two years ago, an economic collapse forced Ireland to cut public spending and raise taxes, the type of austerity measures that financial markets are now pressing on most advanced industrial nations.
“When our public finance situation blew wide open, the dominant consideration was ensuring that there was international investor confidence in Ireland so we could continue to borrow,” said Alan Barrett, chief economist at the Economic and Social Research Institute of Ireland. “A lot of the argument was, ‘Let’s get this over with quickly.’ ”
Rather than being rewarded for its actions, though, Ireland is being penalized. Its downturn has certainly been sharper than if the government had spent more to keep people working. Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession.
Joblessness in this country of 4.5 million is above 13 percent, and the ranks of the long-term unemployed — those out of work for a year or more — have more than doubled, to 5.3 percent.
Now, the Irish are being warned of more pain to come.
“The facts are that there is no easy way to cut deficits,” Prime Minister Brian Cowen said in an interview. “Those who claim there’s an easier way or a soft option — that’s not the real world.”
Despite its strenuous efforts, Ireland has been thrust into the same ignominious category as Portugal, Italy, Greece and Spain. It now pays a hefty three percentage points more than Germany on its benchmark bonds, in part because investors fear that the austerity program, by retarding growth and so far failing to reduce borrowing, will make it harder for Dublin to pay its bills rather than easier.
Other European nations, including Britain and Germany, are following Ireland’s lead, arguing that the only way to restore growth is to convince investors and their own people that government borrowing will shrink.
The Group of 20 leaders set that in writing this weekend, vowing to make deficit reduction the top priority despite warnings from President Obama that too much austerity could choke a global recovery and warnings from a few economists about the possibility of a much sharper 1930s style downturn.
“Europe is in a tough bind,” said Kenneth S. Rogoff, a former chief economist at the International Monetary Fund and now a Harvard professor. “If you want to escape default, the Irish path is the only way to go. But the Ireland experience points to the profound challenges that the current strategy implies.”
Deficit reduction is not the enemy of jobs
When the economy gets back up to speed, the key to debt reduction in the US will once again be paying for federal spending in real-time, and dealing with rising health costs. That is why our recent health care reforms target unsustainable health costs, and old “PAYGO” rules that require Congress to pay for new entitlement spending or tax cuts in normal times have been reinstated.Yet policymakers should know that a dollar spent by the government today adds less to the deficit than a dollar spent when the economy is at full strength. In normal times, deficit spending is like adding water to a glass that is already full. Public spending just displaces private. Even if deficit spending did add to the glass, the Fed would avoid the spill by jacking up interest rates. We’d be creating more debt for no good reason.
But when you have so many people out of work – so much extra capacity – the outcome is different. As economist Brad DeLong recently noted, at times like this “there is no crowding out of private investment; on the contrary, there is likely to be crowding in”. We saw just this in our 2009 Recovery Act, which is using matching grants and tax credits to encourage private investors to come off the sidelines and finance the expansion of new industries – and new jobs – most often associated with clean energy. The existence of all this excess capacity keeps interest rates and inflation low, so monetary policy is not compelled to mop up any overflow.
Such short-term, temporary spending does not add to medium- or long-term debt burdens. Spending that gets into the system, acting to offset a collapse in private demand, and then scaling back as the private sector comes back online, has only a minor impact on longer-term debt.
At $787bn, the Recovery Act is far larger than any of the new targeted stimulus jobs programmes the president is now proposing. Even a programme of this magnitude adds less than a half a per cent to the deficit-to-GDP-ratio by 2012, and nothing to the growth in the debt-to-GDP ratio for the rest of the decade.
These economic relationships are not unknown, so why is it proving so hard to pass legislation related to temporary jobs measures? One reason may be that members of Congress believe that, since the worst is over, now is the time to hand the growth baton back to the private sector. This is the same mistake made in the late 1930s, when it threw the country back into depression.
Compared to the size and scope of the Recovery Act, our new proposals reduce the magnitude of spending programmes needed to keep up economic momentum. But with millions desperately needing to get back to work, it is too soon to give up, especially given the favourable debt trade-offs that are unique to this moment.
It would be wrong to overstate this friendship between job growth and deficit reduction: this is not an argument for a free lunch. But as President Barack Obama recently pointed out in a letter to our Congressional leadership, today’s conditions mean the real cost of helping to preserve important jobs is now as much as 40 per cent below the budgetary cost.
Equally important, Mr Obama used the letter to list steps that will lead us back to fiscal health once the economy recovers. These include the reduction of temporary programmes, spending freezes and reductions, a fee on big banks and, most importantly for the long run, implementing health reform.
Thankfully, we do not have too many moments when unused capacity creates a friendship between growth and deficits. But if we fail to recognise this one, we risk unnecessarily condemning millions of American families to pain that could, should and must be avoided.
Monday, June 28, 2010
Hayek on Democratic Socialism
Road to Serfdom, p. viii
A public apology
Sunday, June 27, 2010
Boston Tea Party --- "the first instance of Anti-Free Trade protectionism"
It is an understatement to say that the late 1700’s were a turbulent time in American History. The colonists were fed up with being considered second class citizens and more and more of them were eager to rid themselves of the ‘tyrannical yoke’. The British Crown, in the meantime, saw them as restless rabble-rousers who needed to be clamped down upon.
While all of this is true, and the ‘tyrannical yoke’ was undoubtedly referred to often, it is unlikely any colonist at the time saw it exactly that way. The Colonies felt they had just won the French and Indian war, and were happy to have come out the victors and return to their lives. Back in Europe, however, it was not only called the Seven Years’ war, but the British felt very successful in having kicked the French and Spanish out of North America and thought the American colonies should therefore help pay for the stationed troops.
King George III (who may or may not have been slightly insane) decided to do so by means of the Stamp Act in 1765. This declared that every piece of official printed paper (from newspapers, to magazines, to many documents) in the colonies had to have a royal “Tax stamp” on it, which obviously cost money. While the British saw this as just, the Americans balked at the idea, already foreseeing the end of journalism due to the extra costs.
Then, two years later, came the Townshend Acts, another series of taxes and revenue raising acts. Named after the then Chancellor of the Exchequer (the British version of the Treasury Secretary) there were at least 5 of these acts. The New York Assembly refused to comply with one of them, after which the New York Restraining Act was added on.
The British then created the American Customs Board with the sole purpose of enforcing these Townshend Acts. The board was located in Boston, and its members were so unpopular it wasn’t long before they requested a military guard. Things between local colonists and the military guard got out of hand one day. The spark wasn’t so much idealism as it was due to one of the British Captains not having paid a local wigmaker his fee. Of course, this opportunity was seized upon by many colonists who joined in the shouting and jeering. This chain of events ultimately culminated with the Boston Massacre.
The British Crown decided to repeal all of the Townshend Acts except for the Tea Act. It was argued that at least one Act should remain as a show of British sovereignty. The result was that American colonists decided to boycott tea from the British East India Company. Many of the local tea merchants at this time, such as John Hancock, were also smugglers. Boycotts such as this allowed people like him to smuggle tea from Holland without paying taxes.
Due in part to these smugglers, the British Crown finally decided, in 1773, to do away with any tax on tea and the British East India Company was able to sell tea again to the colonies at a competitive price. This would obviously be seen as a victory for the colonists: all of the Townshend Acts had been repealed and the Americans had succeeded in their boycott. The British had caved in!
Unfortunately, the reality was that the tea coming in from the East India Company was much cheaper than the smugglers’ tea. People started buying the cheaper tea, and the local merchants were underpriced in the process.This removal of the Tea Tax did not benefit the local merchants, so they decided to protest. They threatened the British consignees (those receiving the British tea) through vandalism, and they organized protests when the British East India Company ships started coming into the harbor. After some weeks of a standoff, the owners of the ships agreed to sail back to Great Britain, but the mayor of Boston did not let them. So on December 16, 1773, Bostonians dressed as Narragansett Indians boarded the ships and threw around 45 tons of tea into the harbor.
Interestingly, getting rid of the cheaper East India Company tea would raise the price of tea for the average American. The fact that this was all done in opposition to a tax removal (and the subsequent loss to local merchants) means that the Boston Tea Party was not in opposition to “Taxation without Representation”, but was actually the United States’ first instance of Anti-Free Trade protectionism.
The decline of intellectual honesty and the Republican Party
NEGOTIATING WITH THOSE WHO OPPOSE THEIR OWN PRINCIPLES....
This week, a couple of key Senate Republicans said they would never agree to any compromise on energy policy if it included a cap-and-trade provision. If a proposal puts a cap on carbon emissions, and applies that cap to anyone or anything, anywhere, even a little, Republicans said they will kill the legislation and not allow the Senate to vote on it.
It led Mark Kleiman to raise a good point, and I hope he won't mind if I quote it at length.
Why, I'm so old that I remember when market-simulating pollution-control regulations -- polluter charges or cap-and-trade -- were the official conservative alternative to command-and-control regulation. I was sympathetic to that critique, and frustrated about the environmental movement's unwillingness to see reason.
But now that the enviros have embraced a GHG tax or its cap-and-trade equivalent as the way to deal with global warming, conservative support is nowhere in sight. They're all too afraid of Grover Norquist.
Remember this the next time a conservative explains how we ought to voucherize public education. The minute that happens, the conservatives will come back and decide that we need to means-test the vouchers. That done, they'll attack the remaining program as "welfare."
This is not a group of people it's possible to do business with.
This is important. Cap-and-trade -- any version of it -- has been deemed wholly unacceptable by Republicans this year. But given the intense opposition to the idea, it's easy to forget that Republicans used to consider cap-and-trade a reasonable, market-based mechanism that was far preferable to command-and-control directives that the right found offensive.
And I'm not talking about the distant past -- the official position of the McCain/Palin Republican presidential ticket, not even two years ago, was to support cap-and-trade. Not just in theory, either. The official campaign website in 2008 told Americans that John McCain and Sarah Palin "will establish ... a cap-and-trade system that would reduce greenhouse gas emissions." McCain/Palin's official position added, "A cap-and-trade system harnesses human ingenuity in the pursuit of alternatives to carbon-based fuels."
Even George W. Bush awkwardly endorsed cap-and-trade before leaving office.
Democratic policymakers could, today, endorse the policy put forward by the Republican ticket from 2008, and GOP senators would filibuster it. Republicans said they wanted cap-and-trade, but now refuse to take "yes" for an answer.
The goal posts are always on the move, which in turn makes substantive policymaking with Republican lawmakers practically impossible.
Indeed, after Kleiman posted his piece this week, plenty of others noticed how common the phenomenon is. Matt Yglesias noted:
Another major example I can think of is the Earned Income Tax Credit, once touted as the conservative alternative to welfare and/or restoring the real value of the minimum wage, but now supported almost exclusively by liberals while conservatives castigate the poor for not paying taxes. Section 8 housing vouchers, put forward as an alternative to public housing and then repeatedly cut by GOP congresses is another one. Of course this kind of consideration doesn't invalidate any given idea -- I think auctioned, tradable emissions permits actually are the best way to regulate most sources of pollution and that housing vouchers are superior to old-school public housing. But this kind of continual pulling away of the football by the conservative movement makes it quite difficult for us to reach stable consensus around decent policies.
Ezra Klein noted that Republicans used to support industry bailouts, but now consider them creeping socialism. Jon Chait noted that the Republicans "fervently embraced the logic of Keynesian stimulus in 2001," but now fundamentally reject the same idea.
In perhaps my favorite example, the concept of an individual mandate as part of health care reform was, in fact, a Republican idea. Now, the GOP considers it the single most offensive part of the Democratic policy.
The point isn't to point out Republican inconsistencies; that's fairly routine. The point is to demonstrate that Republicans are so fundamentally unserious about solving public policy challenges, that they'll shamelessly move the goalposts at a moment's notice. The party supports cap-and-trade, EITC, industry bailouts, housing vouchers, and mandatory health insurance -- right up until there's a Democratic president. Then, Republicans are no longer willing to even consider Republican ideas.
When the David Broders of the world lecture the dysfunctional Congress on the importance of policymakers working together in good faith, this dynamic tends to be overlooked entirely. Credible people who are serious about solving problems can formulate consensus solutions. But they'll invariably fail because Republicans have no qualms about fighting against their own proposals.
Cap and Trade $3,100 fiction
Leading Republicans are claiming that President Obama’s proposal to curb greenhouse gas emissions would cost households as much as $3,100 per year. The Republican National Committee calls it a "massive national energy tax." But the $3,100 figure is a misrepresentation of both Obama’s proposal and the study from which the number is derived.
Republicans say they base their figure on a study from the Massachusetts Institute of Technology. But one of the authors says that the GOP’s use of the study is "simplistic and misleading" and that it ignores key provisions designed to cushion the impact on consumers. The author puts the true added cost of a cap-and-trade system at closer to $800 a year.
Obama himself once said energy costs would "skyrocket" under his plan, but the GOP’s partisan claim of a $3,100 per household cost increase is far higher than figures produced by other studies. The Environmental Protection Agency estimates the average cost per household to be between $98 and $140 per year, based on the Democratic cap-and-trade bill working its way through the House. Even the conservative, pro-Republican Heritage Foundation figures the average family would see its energy bill increase by $1,500 a year, less than half what the GOP claims. A Congressional Budget Office expert recently estimated the cost per household at an average of $1,600 a year, but that figure doesn’t account for energy rebates Obama has proposed giving to consumers. If the government did use revenue from cap and trade "to pay an equal lump-sum rebate to every household," the CBO expert said, "lower-income households could be better off."
Friday, June 25, 2010
Stand up for our kids this November!
Thursday, June 24, 2010
Thanks to all who could make it out last night!
Wednesday, June 23, 2010
A Stronger Yuan Could Increase Commodity Metal Demand
China’s yuan reform suggests firmer prices for base metals , which have suffered price depreciation from expected weaker demand and excess inventory. Aluminum may recover some of the 20 percent price loss in the past three months due to production cuts, and gains are also expected in copper, while prices for nickel and zinc should trade sideways in the coming week.
China's move of making the Yuan more flexible will help the market react positively as hopes of an economic recovery have re-emerged. Therefore, a strong investor sentiment and higher risk appetite would support base metal prices this week. Last week, base metal prices experienced losses as factory activity growth plunged, jobless claims increased and consumer prices in May registered their worst fall in almost one and a half years. Additionally, fresh selling by traders also dragged down the prices. This week, metal prices would also be affected by the scheduled economic data releases. Existing home sales in May are foreseen to increase to 6.15 million from 5.77 million earlier, while new-home sales are seen declining to 410,000 from 504,000. Furthermore, U.S. initial jobless claims are seen falling by almost 12,000 in the upcoming week.
Estimate of June Decennial Census impact on payroll employment: minus 243,000
The Census Bureau released the weekly payroll data for the week ending June 12th this morning (ht Bob_in_MA). If we subtract the number of temporary 2010 Census workers in the week containing the 12th of the month, from the same week for the previous month - this provides a close estimate for the impact of the Census hiring on payroll employment. The Census Bureau releases the actual number with the employment report.Click on graph for larger image in new window. This graph shows the number of Census workers paid each week. The red labels are the weeks of the BLS payroll survey.The Census payroll decreased from 573,779 for the week ending May 15th to 330,737 for the week ending June 12th. So my estimate for the impact of the Census on June payroll employment is minus 243 thousand (this will be close). The employment report will be released on July 2nd, and the headline number for June - including Census numbers - will almost certainly be negative. But a key number will be the hiring ex-Census (so we will add back the Census workers this month).
Reception supporting Jim Nichols for State Senate
| Date: | Wednesday, June 23, 2010 |
| Time: | 5:30pm - 7:00pm |
| Location: | Manuels Tavern Main Event Room |
| Street: | 602 N Highland Ave |
| City/Town: | Atlanta, GA |
Reception supporting Jim Nichols for State Senate
| Date: | Wednesday, June 23, 2010 |
| Time: | 5:30pm - 7:00pm |
| Location: | Manuels Tavern Main Event Room |
| Street: | 602 N Highland Ave |
| City/Town: | Atlanta, GA |
Tuesday, June 22, 2010
Alan Greenspan v. Paul Krugman
The key point is that while the advocates of austerity pose as hardheaded realists, doing what has to be done, they can’t and won’t justify their stance with actual numbers — because the numbers do not, in fact, support their position. Nor can they claim that markets are demanding austerity. On the contrary, the German government remains able to borrow at rock-bottom interest rates.
So the real motivations for their obsession with austerity lie somewhere else.
In America, many self-described deficit hawks are hypocrites, pure and simple: They’re eager to slash benefits for those in need, but their concerns about red ink vanish when it comes to tax breaks for the wealthy. Thus, Senator Ben Nelson, who sanctimoniously declared that we can’t afford $77 billion in aid to the unemployed, was instrumental in passing the first Bush tax cut, which cost a cool $1.3 trillion.
German deficit hawkery seems more sincere. But it still has nothing to do with fiscal realism. Instead, it’s about moralizing and posturing. Germans tend to think of running deficits as being morally wrong, while balancing budgets is considered virtuous, never mind the circumstances or economic logic. “The last few hours were a singular show of strength,” declared Angela Merkel, the German chancellor, after a special cabinet meeting agreed on the austerity plan. And showing strength — or what is perceived as strength — is what it’s all about.
There will, of course, be a price for this posturing. Only part of that price will fall on Germany: German austerity will worsen the crisis in the euro area, making it that much harder for Spain and other troubled economies to recover. Europe’s troubles are also leading to a weak euro, which perversely helps German manufacturing, but also exports the consequences of German austerity to the rest of the world, including the United States.
But German politicians seem determined to prove their strength by imposing suffering — and politicians around the world are following their lead.
How bad will it be? Will it really be 1937 all over again? I don’t know. What I do know is that economic policy around the world has taken a major wrong turn, and that the odds of a prolonged slump are rising by the day.
An urgency to rein in budget deficits seems to be gaining some traction among American lawmakers. If so, it is none too soon. Perceptions of a large U.S. borrowing capacity are misleading.
Despite the surge in federal debt to the public during the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.
How much borrowing leeway at current interest rates remains for U.S. Treasury financing is highly uncertain.
We cannot grow out of these fiscal pressures. The modest-sized post-baby-boom labor force, if history is any guide, will not be able to consistently increase output per hour by more than 3% annually. The product of a slowly growing labor force and limited productivity growth will not provide the real resources necessary to meet existing commitments.
Only politically toxic cuts or rationing of medical care, a marked rise in the eligible age for health and retirement benefits, or significant inflation, can close the deficit. I rule out large tax increases that would sap economic growth (and the tax base) and accordingly achieve little added revenues.
It is little comfort that the dollar is still the least worst of the major fiat currencies. But the inexorable rise in the price of gold indicates a large number of investors are seeking a safe haven beyond fiat currencies.
The United States, and most of the rest of the developed world, is in need of a tectonic shift in fiscal policy. Incremental change will not be adequate.
I do not believe that our lawmakers or others are aware of the degree of impairment of our fiscal brakes. If we contained the amount of issuance of Treasury securities, pressures on private capital markets would be eased.
Fortunately, the very severity of the pending crisis and growing analogies to Greece set the stage for a serious response. That response needs to recognize that the range of error of long-term U.S. budget forecasts (especially of Medicare) is, in historic perspective, exceptionally wide. Our economy cannot afford a major mistake in underestimating the corrosive momentum of this fiscal crisis. Our policy focus must therefore err significantly on the side of restraint
I believe Greenspan is flat wrong - just as he was in 2001 when he Greenspan spoke of "an on-budget surplus of almost $500 billion ... in fiscal year 2010". Greenspan offered a projection of "an implicit on-budget surplus under baseline assumptions well past 2030 despite the budgetary pressures from the aging of the baby-boom generation, especially on the major health programs." I argued Greenspan was wrong then, and I believe he is wrong now.I believe the focus right now needs to be on jobs, jobs and jobs.
If the mortgage meltdown taught us anything, it was how little anybody knew about the interplay between housing prices, bad mortgages, securitization, credit-default swaps and off-balance-sheet financing vehicles. Not even the most prescient critics of the housing bubble like Robert Shiller or Dean Baker had any idea of how subprime mortgages would ripple through the global economy.
Today, we're still in utterly uncharted territory, and we're doing things we never imagined before. So far, the results have been better than we dared hope. But let's not fool ourselves about how smart we are.
We need insurance. We need to plan for the possibility of getting our next move wrong. I agree with Calculated Risk that Greenspan is flat wrong about the need to slam the brakes on spending right now. But we need to recognize that there's a non-trival risk of a bond-market rebellion.
On this point, look up Bruce Bartlett's very smart recent warnings on two points. First, the U.S. is much vulnerable than most people think to a ratings downgrade on Treasuries, a move that would probably cause a long-term spike in interest rates Second, that right-wing Republicans and Tea Partiers could in their ignorance trigger an actual default by refusing to approve an increase in the government's legal debt ceiling.
What would an insurance plan look like? At a minimum, it would include a credible plan for reducing long-term deficits. It would require targets for government spending and revenues. If I were king, the plan would allow for another round of stimulus spending but call for real belt-tightening around 2015. It would include agreements to limit future entitlements, limit our military ambition, rein in health care costs and increase tax revenues. And it would include back-up options, triggers to shift policy in case the economy performs better or worse than expected.
Again, there are too many things that are unpredictable or unknowable. Surprises are inevitable on the upside and the downside. Instead of pretending we know it all, wouldn't it be better to plan based on a range of risks?
Andrews actually goes further in his own scaremongering than even Greenspan does:Look up Bruce Bartlett’s very smart recent warnings on two points. First, the U.S. is much vulnerable than most people think to a ratings downgrade on Treasuries, a move that would probably cause a long-term spike in interest rates Second, that right-wing Republicans and Tea Partiers could in their ignorance trigger an actual default by refusing to approve an increase in the government’s legal debt ceiling.
A ratings downgrade on the US simply isn’t going to happen: the ratings agencies need the US to be triple-A more than the US needs to be triple-A. And they have very good reason to keep the US where it is, for reasons explained by Greenspan:
The U.S. government can create dollars at will to meet any obligation, and it will doubtless continue to do so. U.S. Treasurys are thus free of credit risk.
The logic here is the foundation for everything the ratings agencies do: their business is based upon the idea that Treasuries are risk-free, and that all other debt instruments can be placed at some point on a one-dimensional spectrum, where they’re riskier the further they are from Treasuries. In reality, of course, debt dynamics in general, and Treasuries in particular, are much more complicated than that. But the ratings agencies will be the last to admit it: it’s their job to oversimplify and to breed complacency, which is the one part of their job that they’re very good at.
As for the possibility of a technical default caused by a 1994-style refusal to raise the debt ceiling, I’m skeptical: Treasury has all manner of rabbits in various hats that it can pull out to keep paying coupon payments through a legislative crisis, even (especially) if much of the federal government has been shut down. Besides, any technical default would be a bit like the technical default by Fannie and Freddie: no one really minded very much, because they knew that they would end up getting paid in full.
So yes, Andrews is right that it’s a great idea to start putting together a long-term plan for dealing with the deficit, which is very much in unsustainable territory. I’m quite sure that Krugman would agree with him on that front. But my feeling is that the best way to put together such a plan is to start coming up with new revenue sources, such as a carbon tax / cap-and-trade system, or a financial-transactions tax. The more income streams that Treasury has, the less likely we are to see any kind of market panic.
At Capital Gains and Games, Edmund Andrews wants to write:
- Alan Greenspan is flat-out wrong in his demand for immediate fiscal contraction.
- Alan Greenspan cannot find even a shred of evidence to support his claims.
- In fact, we need not less but more fiscal stimulus--Andrews does write: "If I were king, the plan would allow for another round of stimulus spending but call for real belt-tightening around 2015..."
- And then, sometime between 2015 and 2020, we need to focus on starting the process of gradually raising taxes and capping spending in order to deal with America's federal health program spending-driven large long-run fiscal imbalance.
This is a smart thing to write. This is what I believe. This is what Paul Krugman believes.
But it turns out, it is not what Ed Andrews writes.
What he writes is, instead:
Alan Greenspan v. Paul Krugman: Paul Krugman and Alan Greenspan came out with dueling op-eds Friday about budget deficits gone wild. Krugman: we're slitting our wrists by trying to slash our deficits now. Greenspan: cut spending now, right now, and don't worry your pretty little head about a double-dip recession. Neither was convincing... the fiscal debate has become so polarized that combatants on both sides are glossing over what they don't know...
And so my reaction is "Huh?!"
Why does Andrews say Krugman was not convincing? Krugman was completely convincing--Andrews agrees with him.
Indeed, compare Andrews's assessment of Greenspan:
Greenspan's one piece of empirical evidence about a looming panic over deficits is incredibly thin. He can't cite any flight from Treasuries.... He can't point to inflation.... And he sure can't cite evidence of an overheated economy. So he cites a really obscure derivative indicator called the "swap spread"... that tells you... investors expect interest rates to climb.... Well, duh.... Pricing that assumption into swap spreads hardly makes them a sign of panic over government spending. Greenspan is fear-mongering.... Greenspan is flat wrong about the need to slam the brakes on spending right now...
To Krugman's--significantly more polite--assessment of arguments similar to Greenspan's made by Germans in Berlin:
What’s the economic logic behind the government’s moves? The answer, as far as I can tell, is that there isn’t any. Press German officials to explain why they need to impose austerity on a depressed economy, and you get rationales that don’t add up. Point this out, and they come up with different rationales, which also don’t add up. Arguing with German deficit hawks feels more than a bit like arguing with U.S. Iraq hawks back in 2002: They know what they want to do, and every time you refute one argument, they just come up with another...
Same thing. Except where Andrews says "flat wrong" Krugman says "don't add up."
But Andrews writes, of Krugman's version of Andrews's own argument:
Krugman isn't convincing either.... [H]e can't believe that those fusty German deficit hawks are so frightened of a market rebellion that they're cutting spending and raising taxes.... German fiscal hawks aren't crazy. The markets can panic.... No one knows where the tipping point between acceptance stops and panic kicks in...
Why is Andrews's argument that Greenspan is off-base no longer right but "not convincing" when Krugman makes it? Andrews tries to explain:
We need to plan for the possibility of getting our next move wrong.... [W]e need to recognize that there's a non-trival risk of a bond-market rebellion.... [T]he U.S. is much vulnerable than most people think to a ratings downgrade... a move that would probably cause a long-term spike in interest rates...
But this recognition isn't a substantive difference with Krugman, who has written:
[W]hat about the possibility of a [bond market] squeeze, in which rising rates for whatever reason produce a vicious circle of collapsing balance sheets among the carry traders, higher rates, and so on? Well, we’ve seen enough of that sort of thing not to dismiss the possibility. But if it does happen, it’s a financial system problem — not a deficit problem. It would basically be saying not that the government is borrowing too much, but that the people conveying funds from savers, who want short-term assets, to the government, which borrows long, are undercapitalized. And the remedy should be financial, not fiscal.... Whatever you do, don’t undermine recovery by calling off jobs creation...
And so I say "huh?!" once again.
Perhaps Andrews has a difference with Krugman on policy? Andrews does go on:
What would an insurance plan look like?... a credible plan for reducing long-term deficits... agreements to limit future entitlements, limit our military ambition, rein in health care costs and increase tax revenues... back-up options, triggers to shift policy in case the economy performs better or worse than expected...
To which I cannot help but remember Paul Krugman:
Even a full economic recovery wouldn’t balance the budget.... So once the economic crisis is past, the U.S. government will have to increase its revenue and control its costs. And in the long run there’s no way to make the budget math work unless something is done about health care costs...
And say, once again, "huh?!" I really don't see a substantive difference between Andrews and Krugman.
So what is going on here?
I think what is going on here is that Edmund Andrews acquired bad habits working for the New York Times that he has not yet managed to shed.
Andrews thinks that he is not a serious person if he writes:
- Alan Greenspan is flat-out wrong in his demand for immediate fiscal contraction.
- Paul Krugman is quite right in his urging more fiscal expansion.
- And then, sometime between 2015 and 2020, we need to focus on raising taxes and capping spending in order to deal with the federal health program spending-driven long-run fiscal imbalance.
That wouldn't be neutral, that wouldn't be balanced, that wouldn't be something a serious person would say, that would be ideological.
So, Andrews thinks, if he is going to agree with Krugman on everything substantive--which he is--he must first kick Krugman in the teeth. And he must never say that he is, on the substance, agreeing with Krugman.
That wouldn't be balanced.
Now perhaps this is a sound rhetorical strategy on Andrews's part. Perhaps it gets him a reputation as a Serious Person who Does Not Agree with Hippies and Who Can Be Trusted.
I think not. I think that this type of piece tends to get two types of readers:
The ones who skim the beginning--and who take away the lesson "Andrews says that neither Greenspan nor Krugman was convincing" and then things got too complicated to remember. Andrews has served this fraction of his readership badly: they leave thinking that the equities are balanced between Greenspan and Krugman, which they are definitely not.
The ones who read to the end--and who say: wait a minute: Andrews agrees with Krugman that (i) we need more expansionary fiscal policy now and (ii) we need to tackle our long-run health spending-driven budget problems. They then ask themselves: why did he confuse us and make us work harder than we had to to get to his bottom line? They leave somewhat annoyed, feeling as if they have been the victims of a game of hide-the-ball.
The Undeserving Unemployed
Maybe they don’t deserve assistance. Or maybe they don’t deserve unemployment. Attitudes toward the approximately 10 percent of our labor force that is actively seeking work and not finding it have become a defining feature of our political landscape.
Fierce and intensely partisan disagreements over the extension of unemployment benefits are blowing up on Capitol Hill.
Long-term unemployment, a jobless period of six months or longer, has reached a historic high. In March 2010 more than 44 percent of the unemployed fell into this category.
Whose fault is this? Some argue that wages in the United States are too high. If everybody would just agree to work for less – or if employers were gutsy enough to cut wages – we could solve the problem. Just let the forces of supply and demand do their job!
Unfortunately, as John Maynard Keynes pointed out, both unemployment and falling wages lower consumer demand and can lead to even greater unemployment.
A more popular view (especially among Republican members of Congress and on the opinion pages of The Wall Street Journal) lays the blame squarely on government itself. Extended unemployment benefits and other means-tested programs can undermine incentives to work.Evidence suggests that individuals do prolong their job search when they receive unemployment benefits, partly because they are looking for the best possible job. But the magnitude of this effect is likely to be small.
A recent study by Rob Valletta and Katherine Kuang, economists at the Federal Reserve Bank of San Francisco, compared lengths of unemployment among those eligible for unemployment insurance with those who were not eligible. Their statistical analysis suggests that extended benefits accounted for only four-tenths of 1 percentage point of the nearly 6 percentage point increase in the national unemployment rate over the last few years.
Do numbers like these influence the Congressional debate? They should, but they seem to pack less punch than more primal underlying emotions. How do people with jobs feel about those who are trying to find one, but can’t?
Some studies, such as those showing that long-term unemployment causes emotional anguish as well as economic stress, may elicit sympathy.
On the other hand, it’s not hard to find articles emphasizing that the long-term unemployed are lucky to have so much free time, or suggesting that they’re better off than they were in previous eras because they are more likely to have a working spouse.
In other words, maybe the unemployed and those who are most worried about them should just stop whining.
The moral and emotional tenor of the debate over extending unemployment benefits is consistent with psychological research showing that we all like to believe that people generally get what they deserve. We tend to have a high opinion of individuals who receive fortuitous rewards, and a low opinion of individuals who are victims of bad luck.
Melvin Lerner, the psychologist best known for his book, “The Belief in a Just World,” considered this belief a delusional means of avoiding moral discomfort.
The economists Roland Bénebou and Jean Tirole argue that however delusional the belief in a just world may be, it can be economically advantageous. Individuals who believe they will inevitably be rewarded for their effort and initiative are likely to exercise more discipline and self-control than those who don’t.
Professors Bénebou and Tirole observe that the belief that individuals always get what they deserve is stronger in the United States than in European countries with more redistributive public programs. Indeed, they argue that this belief helps explain why our policies are different (though the causality can run both ways).
They also argue that our policies reward merit more effectively – even if they are harder on the poor (and, presumably, the unemployed). But Professors Bénebou and Tirole don’t offer much support for this lofty claim. Nor do they consider the possibility that meritocracy might be undermined by trends toward increased income inequality and long-term unemployment.
Belief in a just world is not a self-fulfilling prophecy. While it may bolster individual effort, it can also undermine collaborative efforts to make reality conform a little more closely to our ideals of justice.