As both of my regular readers (Hi Mom!) might have noticed , I tend to come down on a particular side of most policy debates. In part, that has to do with the way I see the world-- I'm instinctively skeptical of government intervention in the economy, but I'm not viscerally opposed to it, and I tend to think that selective, smart government intervention can play a role in improving social outcomes. But I like to think that I'm pretty open-minded: I like to read things from people who I'm likely to disagree with, just so that I can feel like I have a good sense of what the debate is, and can justify why I come down on a particular side. A lot of times, those bloggers make interesting, innovative arguments, and I learn from them (Bentley's Scott Sumner and George Mason's Tyler Cowen are two of my favorites in that category). Other times, the blogs, despite the author's academic credentials, are either thin on substance (Harvard's Greg Mankiw is the primary example; he mostly posts links, and when he does make arguments, they're... curious and frequently at odds with his academic research) or spend their time playing politics (Stanford's John Taylor is guilty of this one more than anyone else; he makes claims that are directly at odds with his own statements from a few years back, for what seems to be no better reason than that his political party has shifted to the right and his research bolsters Democratic positions).
But the most curious case is the University of Chicago's John Cochrane. Cochrane spends so much time twisting himself in circles to get to particular outcomes that he ends up making arguments that are either blatant contradictions or have logical implications that are entirely absurd. Which leads to bizarre posts like this one. The best thing you can say for Cochrane is that he doesn't close his eyes, plug his ears, and yell that up is down-- the austerity experiment in Greece is a proven failure, as austerity (predictably) reduces output, which depresses tax receipts, which means that hiking taxes and cutting spending isn't just bad for growth-- it's also bad for the budget. Cochrane acknowledges all this. But then he dismisses the notion, advanced in Brad DeLong and Larry Summers's recent paper, that, when the economy is in a liquidity trap (as the US presently is), expansionary fiscal policy can actually pay for itself (by stimulating growth enough to actually improve the fiscal situation. He then goes on to talk about structural reform, but that's neither here nor there.
What Cochrane's position implies is that, while we know austerity doesn't help the budget problems in Europe, it seems he thinks stimulus doesn't either. But we know that changes in fiscal policy have to have some effect on the budget picture; the deficit isn't going to stay at a constant level regardless of what changes government makes to taxes or spending (that's a pretty self-evident argument). The implication, then, is that, in purely budgetary terms, government spending, both in Greece and everywhere else in the world, is OPTIMAL. In other words, he's either making the patently absurd claim that it doesn't matter what kinds of taxing and spending decisions government makes, or the even more patently absurd claim that every government in the world has gotten its taxing and spending decision exactly right, and no changes can be made to improve that outcome.
And it's posts like these that convince me that I have the opinions I do for a reason...
Showing posts with label Economics. Show all posts
Showing posts with label Economics. Show all posts
Sunday, March 25, 2012
Friday, February 3, 2012
Larry Summers Explains Policymaking
Last night I went to see Larry Summers give a talk at the 92nd Street Y. Summers is an incredibly gifted person and economist-- he won a Clark Medal (more prestigious than the Nobel in the profession, I think), served as Chief Economist at the World Bank, Treasury Secretary under Clinton, NEC head under Obama, president of Harvard... the resume goes on, but the point is, the guy's incredibly accomplished.
Most of what he said last night was substantively identical to the things economists of similar stature have said on the major issues. Summers is, on the details, to the right of Paul Krugman, but his interpretation of the issues was more or less the same-- the evidence that we have inadequate demand in the economy is overwhelming, there's no better time to repair infrastructure than when construction unemployment is at 20% and the government borrows at a negative interest rate for 10 years, the idea of expansionary austerity is oxymoronic (and, in Summers's terms, "you can drop the prefix"), the gold standard is the "creationism of economics", etc. None of that is surprising. He also mentioned the famous scene from the Facebook movie where he dismissed the Winklevoss twins, who claimed that Mark Zuckerberg "stole their property" while he was creating Facebook ("None of the lines in that movie were actually said. But if you're asking about the tone, that's exactly what happened."). I would say he stopped short of calling the Winklevoss twins arrogant assholes, but he didn't stop short at all.
But what really struck me was an offhand remark he had about the economic policymaking of the Republican Party. Summers, while he's certainly a Democrat, is far from a leftist, and also far from an ideologue. Among economists, if Paul Krugman is on the center-left (which, in the profession, he is), then Summers is very much in the very middle. People forget that he served in Reagan's Treasury Department when he was a younger (but still already tenured at Harvard) economist. Summers suggested that today's Republican Party has canned solutions that it appropriates to "solve" any problem, and this is something that rings a bell because it's, well, true. He talked specifically about capital gains taxes ("No matter what the problem, their solution is to cut the capital gains rate. If the economy is slow, cut cap gains taxes for demand-side reasons. If the economy is fine, we can improve it even more by cutting cap gains taxes for supply-side reasons."). But I think it's a tic that's present in every aspect of the party's public platform, and extends far beyond economics. If there's a problem in an industry, the solution must be to deregulate it. If something's wrong, government is the problem. If there's a solution, the solution is less government and a tax cut.
It's a tic that allows them to ignore evidence and fit the problem to the solution. That attitude has come starkly into focus in the aftermath of the financial crisis. The crisis was an obvious failure-- it's been almost 3.5 years since Lehman Brothers collapsed, and unemployment is still well over 8%. Those who looked at the data saw that the crisis was a very obvious market failure-- regulations in place were insufficient, and regulators charged with overseeing the markets were asleep at the wheel, or were ideologically opposed to any market regulation (Alan Greenspan being the prime example). Nevertheless, in a case of either mass cognitive dissonance or outright dishonesty, there's been a massive effort to recast the market failure as a result of too much government and too much regulation rather than too little. Fannie and Freddie must have been the problem, they assert, ignoring the fact that mortgages backed by Fannie and Freddie substantially outperformed private label mortgages. Barring that, the Community Reinvestment Act must have been at fault (ignoring the absurdity of blaming a housing bubble that began inflating in the early 2000s on a statute passed a quarter century earlier that didn't cover the vast majority of institutions churning out messy mortgages). Point out those problems, and you'll hear a diatribe about how awful government is. That's not to say that Fannie and Freddie were blameless, upstanding institutions-- their very existence in the form they took was a disaster, and they certainly will need to be re-examined and refocused in a significant way going forward. But there's nothing inconsistent about acknowledging both that Fannie and Freddie were poorly constructed institutions prone to crony politics and poor incentives, and acknowledging the simple truth that their existence was neither necessary nor sufficient for the financial crisis.
That's not to say that more government is unabashedly good, or that it's the solution to every problem, or even most problems. Rather, government is one of many tools for solving various problems. There are cases where it's useful for government to play a direct role-- in putting together a military, building roads, and providing education and law enforcement. There are cases where government can play a valuable supporting role-- in making markets more efficient by demanding disclosure of financial information for public companies, ensuring transparency in financial markets, and protecting parties from being taken advantage of by those with more information, and pricing externalities such as pollution and gridlock on roads through targeted minor interventions. There are also cases where government has certainly overreached-- deregulating the airlines in the 1970s has contributed to cheaper air travel by a factor of about 3; New Deal financial regulation likely went too far in a number of key areas; and the welfare system had become ineffective and lacked focus by the 1990s.
The point, I think, is that finding solutions requires an honest assessment of problems. That can mean action by government, it can mean government taking a different approach than it had been taking, or it could mean acknowledging that government involvement is counterproductive. For a time, government was likely too involved in the economy and needed to step back. Over the last thirty years, the trend has gone too far the other way-- the knee-jerk reaction is that government must be the problem and less government must be the solution. I think today's problem is the belief, without regard to evidence, that every problem must involve too much government, and every solution must involve deregulation and less government.
Most of what he said last night was substantively identical to the things economists of similar stature have said on the major issues. Summers is, on the details, to the right of Paul Krugman, but his interpretation of the issues was more or less the same-- the evidence that we have inadequate demand in the economy is overwhelming, there's no better time to repair infrastructure than when construction unemployment is at 20% and the government borrows at a negative interest rate for 10 years, the idea of expansionary austerity is oxymoronic (and, in Summers's terms, "you can drop the prefix"), the gold standard is the "creationism of economics", etc. None of that is surprising. He also mentioned the famous scene from the Facebook movie where he dismissed the Winklevoss twins, who claimed that Mark Zuckerberg "stole their property" while he was creating Facebook ("None of the lines in that movie were actually said. But if you're asking about the tone, that's exactly what happened."). I would say he stopped short of calling the Winklevoss twins arrogant assholes, but he didn't stop short at all.
But what really struck me was an offhand remark he had about the economic policymaking of the Republican Party. Summers, while he's certainly a Democrat, is far from a leftist, and also far from an ideologue. Among economists, if Paul Krugman is on the center-left (which, in the profession, he is), then Summers is very much in the very middle. People forget that he served in Reagan's Treasury Department when he was a younger (but still already tenured at Harvard) economist. Summers suggested that today's Republican Party has canned solutions that it appropriates to "solve" any problem, and this is something that rings a bell because it's, well, true. He talked specifically about capital gains taxes ("No matter what the problem, their solution is to cut the capital gains rate. If the economy is slow, cut cap gains taxes for demand-side reasons. If the economy is fine, we can improve it even more by cutting cap gains taxes for supply-side reasons."). But I think it's a tic that's present in every aspect of the party's public platform, and extends far beyond economics. If there's a problem in an industry, the solution must be to deregulate it. If something's wrong, government is the problem. If there's a solution, the solution is less government and a tax cut.
It's a tic that allows them to ignore evidence and fit the problem to the solution. That attitude has come starkly into focus in the aftermath of the financial crisis. The crisis was an obvious failure-- it's been almost 3.5 years since Lehman Brothers collapsed, and unemployment is still well over 8%. Those who looked at the data saw that the crisis was a very obvious market failure-- regulations in place were insufficient, and regulators charged with overseeing the markets were asleep at the wheel, or were ideologically opposed to any market regulation (Alan Greenspan being the prime example). Nevertheless, in a case of either mass cognitive dissonance or outright dishonesty, there's been a massive effort to recast the market failure as a result of too much government and too much regulation rather than too little. Fannie and Freddie must have been the problem, they assert, ignoring the fact that mortgages backed by Fannie and Freddie substantially outperformed private label mortgages. Barring that, the Community Reinvestment Act must have been at fault (ignoring the absurdity of blaming a housing bubble that began inflating in the early 2000s on a statute passed a quarter century earlier that didn't cover the vast majority of institutions churning out messy mortgages). Point out those problems, and you'll hear a diatribe about how awful government is. That's not to say that Fannie and Freddie were blameless, upstanding institutions-- their very existence in the form they took was a disaster, and they certainly will need to be re-examined and refocused in a significant way going forward. But there's nothing inconsistent about acknowledging both that Fannie and Freddie were poorly constructed institutions prone to crony politics and poor incentives, and acknowledging the simple truth that their existence was neither necessary nor sufficient for the financial crisis.
That's not to say that more government is unabashedly good, or that it's the solution to every problem, or even most problems. Rather, government is one of many tools for solving various problems. There are cases where it's useful for government to play a direct role-- in putting together a military, building roads, and providing education and law enforcement. There are cases where government can play a valuable supporting role-- in making markets more efficient by demanding disclosure of financial information for public companies, ensuring transparency in financial markets, and protecting parties from being taken advantage of by those with more information, and pricing externalities such as pollution and gridlock on roads through targeted minor interventions. There are also cases where government has certainly overreached-- deregulating the airlines in the 1970s has contributed to cheaper air travel by a factor of about 3; New Deal financial regulation likely went too far in a number of key areas; and the welfare system had become ineffective and lacked focus by the 1990s.
The point, I think, is that finding solutions requires an honest assessment of problems. That can mean action by government, it can mean government taking a different approach than it had been taking, or it could mean acknowledging that government involvement is counterproductive. For a time, government was likely too involved in the economy and needed to step back. Over the last thirty years, the trend has gone too far the other way-- the knee-jerk reaction is that government must be the problem and less government must be the solution. I think today's problem is the belief, without regard to evidence, that every problem must involve too much government, and every solution must involve deregulation and less government.
That's kinda an off the cuff reaction, but it's what I took from Summers's talk, and I think it's become pretty true.
Wednesday, November 23, 2011
Bringing your fire extinguisher to Noah's Flood
In a development that I definitely didn't expect, Germany had a disastrous debt auction today, driving its borrowing costs up over 2% for its 10-year notes. I think this reflects, above all else, an extreme vote of no confidence in the European Central Bank by the market. My mode of thinking about the European crisis had been of the ECB as an extremely deficit hawkish appendage of the Bundesbank. That is, it set monetary policy based exclusively on developments in Europe's biggest economy, Germany. I saw the crisis driven, in large part, by the ECB's stubborn refusal to accept marginally higher inflation in Germany in order to ease the burdens of deflation in the peripheral countries. In the case of an asymmetrical shock, like the one that struck when Greece went bust and Spain and Ireland's property bubbles burst, those countries needed wages and prices to fall relative to the rest of Europe's in order to restore export competitiveness and allow them to essentially export their way out of trouble. But, absent higher inflation in the core countries like Germany, this would mean lower nominal wages and prices in the periphery, which in turn would make those countries' real debt burdens higher (not to mention bring on a massive deflationary recession that would cause huge suffering).
In this model, I expected spreads between German and peripheral sovereign debt to widen until those countries were forced out of the Euro. The widening spreads make sense because, in the case of a Euro collapse, the new drachma and new peso would be revalued at substantially less than the deutschemark. However, that development in turn means that Germany's borrowing costs shouldn't rise, since investors would see their bonds appreciate rather than depreciate if they were revalued in deutschemarks, provided Germany doesn't default.
I think what the failed auction reflects, though, is one of two things. The first is the possibility that Germany might opt to take on the liabilities of the peripheral countries, which would put substantial fiscal pressure on the Germans. However, I think that's unlikely-- with a cooperative central bank, a one-time addition of debt could be alleviated with steady growth, provided it wasn't choked off by the central bank. Which is, I think where the heart of the problem lies. The ECB is hawkish to the extreme on inflation; if it sees a possibility of inflation, it raises rates. Which is a huge problem when economic growth Euro-wide is stagnant and there's mass unemployment. I think the fear is even contraction in Germany wouldn't lead the ECB to raise rates, out of its misguided inflationary fears. Then, in a collapse, their further misguided fear of inflation would keep them from acting. This still doesn't explain the German borrowing problem-- even in a Euro collapse, their debts would get paid off-- but I think it may just be markets' fear of anything having to do with the Euro that's driving them away from German bunds.
To use a metaphor I really like, the ECB is the fireman who shows up to Noah's flood with his fire extinguisher and gets swept away. To use Paul Krugman's (probably superior) characterization, the ECB is determined to cast itself as the highly credible defender of the value of a currency that no longer exists.
In this model, I expected spreads between German and peripheral sovereign debt to widen until those countries were forced out of the Euro. The widening spreads make sense because, in the case of a Euro collapse, the new drachma and new peso would be revalued at substantially less than the deutschemark. However, that development in turn means that Germany's borrowing costs shouldn't rise, since investors would see their bonds appreciate rather than depreciate if they were revalued in deutschemarks, provided Germany doesn't default.
I think what the failed auction reflects, though, is one of two things. The first is the possibility that Germany might opt to take on the liabilities of the peripheral countries, which would put substantial fiscal pressure on the Germans. However, I think that's unlikely-- with a cooperative central bank, a one-time addition of debt could be alleviated with steady growth, provided it wasn't choked off by the central bank. Which is, I think where the heart of the problem lies. The ECB is hawkish to the extreme on inflation; if it sees a possibility of inflation, it raises rates. Which is a huge problem when economic growth Euro-wide is stagnant and there's mass unemployment. I think the fear is even contraction in Germany wouldn't lead the ECB to raise rates, out of its misguided inflationary fears. Then, in a collapse, their further misguided fear of inflation would keep them from acting. This still doesn't explain the German borrowing problem-- even in a Euro collapse, their debts would get paid off-- but I think it may just be markets' fear of anything having to do with the Euro that's driving them away from German bunds.
To use a metaphor I really like, the ECB is the fireman who shows up to Noah's flood with his fire extinguisher and gets swept away. To use Paul Krugman's (probably superior) characterization, the ECB is determined to cast itself as the highly credible defender of the value of a currency that no longer exists.
Sunday, November 20, 2011
On Inequality
Larry Summers has a very good piece in the Financial Times about inequality which is worth taking a look at. What it shows is that the Occupy Wall Street folks, if nothing else, started what will hopefully become a valuable discussion about the harm that comes from inequality. On the whole, my feelings about OWS are mixed. On the one hand, the more specific they get, the less coherent anything they say becomes. The people down there range from those who think giving Manhattan back to Native Americans is a great idea, to those who oppose wearing fur, to those who think we'd be better off with no financial system. Needless to say, when it comes to solutions to problems, or crafting a coherent message, they come up just a little bit short. Not to mention some of the protesters' aversion to showers and their love of conspiracy theories turns me off. On the other hand, broadly speaking, they've touched on a vitally important problem in America, and started a discussion that will hopefully lead to some tangible positive change. The reality is that we do have some serious problems-- for the last 30 years, the lives of the average American haven't improved-- wages have stagnated, resulting in an explosion in the level of debt, and, while Wall Street titans have pocketed fortunes while bringing the financial system (and the national economy) to its knees, average people have been left behind.
They've succeeded in sparking a counter-movement whose members have succeeded only in inadvertently underscoring the broader point of the OWS people. Typically, the counter-protestors have countered in two ways: 1) The "dirty hippies" need to go get a job, and 2) Something along the lines of, "Look at me! My life stinks, but I'm not complaining, so you shouldn't either." Any amount of thought on these responses just underscores two points. First, we've had unemployment averaging around 9% for 3 years now. Getting a job is tough, and not because twice as many people suddenly became really really lazy, or all the jobs found really good hiding places in the woods. Something's wrong, and it's not government suddenly getting in the way and regulating everything. Second, the people underscoring how bad things are for them, or how hard they had to work to earn modest success just begs a simple question-- do we really want to live in a society where finding a job, any job, is a triumph, and where a whole lot of previously middle class people have to fight day by day to meet their most basic needs?
Opponents of this view argue that it doesn't matter if we have inequality, so long as the possibility to get rich is available to anyone. Even if that were true (it isn't: studies show "socialist" Europe has more class mobility than the US), do we really want a society where 1% (or, more accurately in the US, 0.1%) of people get fantastically wealthy while the rest struggle? I think some people have the perplexing idea that what made the US great was the fact that any child could dream of growing up to be wealthy, regardless of their class. Which, when you think about it, is a really silly proposition. Sure, Andrew Carnegie grew up a poor immigrant and got rich, and Bill Clinton went from poverty to the presidency. But Saddam Hussein was born into a family of shepherds and got fantastically rich. Joseph Stalin was the son of a cobbler who couldn't afford to pay his tuition when he was in seminary. But we don't dream of being like Ba'athist Iraq or Soviet Russia. Upward mobility is possible in any society. What made the US special was that, for awhile, you could be pretty sure that if you finished school and worked hard, you'd be able to find a decent job. You would be able to afford a home, a car and a television, and you could put your kids through college and retire comfortably to Florida in your sixties. Plenty would shoot for the stars and most would miss, but, where missing in Soviet Russia, anywhere outside of Moscow and St. Petersburg, meant poverty, in the US, if you fell, instead of crashing to Earth, you could land comfortably on a cloud. Over the last thirty years, that America has been slipping away.
Summers forcefully argues that, as a society, we need to start doing better. And I agree wholeheartedly. I don't claim to know exactly how to solve our problems, but I do know that "Cut taxes--> Shrink Government --> Magic!" formula is a proven failure. And we have to start looking for a formula that can work.
They've succeeded in sparking a counter-movement whose members have succeeded only in inadvertently underscoring the broader point of the OWS people. Typically, the counter-protestors have countered in two ways: 1) The "dirty hippies" need to go get a job, and 2) Something along the lines of, "Look at me! My life stinks, but I'm not complaining, so you shouldn't either." Any amount of thought on these responses just underscores two points. First, we've had unemployment averaging around 9% for 3 years now. Getting a job is tough, and not because twice as many people suddenly became really really lazy, or all the jobs found really good hiding places in the woods. Something's wrong, and it's not government suddenly getting in the way and regulating everything. Second, the people underscoring how bad things are for them, or how hard they had to work to earn modest success just begs a simple question-- do we really want to live in a society where finding a job, any job, is a triumph, and where a whole lot of previously middle class people have to fight day by day to meet their most basic needs?
Opponents of this view argue that it doesn't matter if we have inequality, so long as the possibility to get rich is available to anyone. Even if that were true (it isn't: studies show "socialist" Europe has more class mobility than the US), do we really want a society where 1% (or, more accurately in the US, 0.1%) of people get fantastically wealthy while the rest struggle? I think some people have the perplexing idea that what made the US great was the fact that any child could dream of growing up to be wealthy, regardless of their class. Which, when you think about it, is a really silly proposition. Sure, Andrew Carnegie grew up a poor immigrant and got rich, and Bill Clinton went from poverty to the presidency. But Saddam Hussein was born into a family of shepherds and got fantastically rich. Joseph Stalin was the son of a cobbler who couldn't afford to pay his tuition when he was in seminary. But we don't dream of being like Ba'athist Iraq or Soviet Russia. Upward mobility is possible in any society. What made the US special was that, for awhile, you could be pretty sure that if you finished school and worked hard, you'd be able to find a decent job. You would be able to afford a home, a car and a television, and you could put your kids through college and retire comfortably to Florida in your sixties. Plenty would shoot for the stars and most would miss, but, where missing in Soviet Russia, anywhere outside of Moscow and St. Petersburg, meant poverty, in the US, if you fell, instead of crashing to Earth, you could land comfortably on a cloud. Over the last thirty years, that America has been slipping away.
Summers forcefully argues that, as a society, we need to start doing better. And I agree wholeheartedly. I don't claim to know exactly how to solve our problems, but I do know that "Cut taxes--> Shrink Government --> Magic!" formula is a proven failure. And we have to start looking for a formula that can work.
Sunday, November 6, 2011
How much longer for the Euro?
Looks like Greece's prime minister has to resign in order for them to accept the latest package. I still don't think it's going to make a difference. Sure, it includes some debt write-downs (definitely a good thing), but it also includes a bunch of immediate austerity (short-term, definitely not a good thing). For me, the key would be a commitment on the ECB's part to support the Euro-periphery's funding needs until their economies recover (an indefinite bond-buying program, for example). But, while Mario Draghi is infinitely more competent than Jean-Claude Trichet, he still doesn't seem to be willing to give the peripheral countries the kind of commitment they need to get them through the crisis.
While it's kind of hard to see the Europeans letting the Euro go, they are also committed to not doing enough to keep the Euro-zone together. Eventually, this will come to a head-- Greeks will get tired of counterproductive austerity, and the Euro will reach a point of crisis. Either the ECB will have to provide open-ended financing and delay austerity until the economy can recover, or Greece will have to shut down its banking sector, default on its debts, and exit the Euro-zone. That will inevitably cause massive bank runs-- assets on Greek banks' books are Euro-denominated, while the drachma would inevitably be worth substantially less than the Euro. Depending on the global financial system's exposure to Greek (and other peripheral European) debt, it could also have knock-on effects whose scale could range anywhere from seriously disruptive to catastrophic.
I tend to think that a Greek default would cause a cascading effect, at the least to Spain, Italy, and Portugal, but potentially even further. In that case, I think we'd be facing a global Lehman moment. Lehman's disorderly collapse in 2008 shook global financial markets so much that the Congress was immediately scared into passing TARP and bailing out the rest of the big American banks, while the Fed flooded the US financial system with trillions of dollars of emergency liquidity to prevent an imminent failure. A failure of any one of Greece, Spain, Italy or Portugal, never mind all four, would be a few orders of magnitude worse. And the US alone probably wouldn't be equipped to rescue them. I think at that point we'd need a concentrated global effort to avert global economic collapse, with not just Germany and France, but also China and the US pitching in funds to stabilize the global financial system. Now, the ECB could choke off that kind of disaster by taking aggressive steps to create higher inflation in the Euro-zone and buy up peripheral Euro-zone debt, but it's looking more and more like the ECB is a useless institution, which in turn could well mean that the global economy would have to be on the verge of collapse before it was induced to act.
While it's kind of hard to see the Europeans letting the Euro go, they are also committed to not doing enough to keep the Euro-zone together. Eventually, this will come to a head-- Greeks will get tired of counterproductive austerity, and the Euro will reach a point of crisis. Either the ECB will have to provide open-ended financing and delay austerity until the economy can recover, or Greece will have to shut down its banking sector, default on its debts, and exit the Euro-zone. That will inevitably cause massive bank runs-- assets on Greek banks' books are Euro-denominated, while the drachma would inevitably be worth substantially less than the Euro. Depending on the global financial system's exposure to Greek (and other peripheral European) debt, it could also have knock-on effects whose scale could range anywhere from seriously disruptive to catastrophic.
I tend to think that a Greek default would cause a cascading effect, at the least to Spain, Italy, and Portugal, but potentially even further. In that case, I think we'd be facing a global Lehman moment. Lehman's disorderly collapse in 2008 shook global financial markets so much that the Congress was immediately scared into passing TARP and bailing out the rest of the big American banks, while the Fed flooded the US financial system with trillions of dollars of emergency liquidity to prevent an imminent failure. A failure of any one of Greece, Spain, Italy or Portugal, never mind all four, would be a few orders of magnitude worse. And the US alone probably wouldn't be equipped to rescue them. I think at that point we'd need a concentrated global effort to avert global economic collapse, with not just Germany and France, but also China and the US pitching in funds to stabilize the global financial system. Now, the ECB could choke off that kind of disaster by taking aggressive steps to create higher inflation in the Euro-zone and buy up peripheral Euro-zone debt, but it's looking more and more like the ECB is a useless institution, which in turn could well mean that the global economy would have to be on the verge of collapse before it was induced to act.
Monday, October 17, 2011
The case for voting Republican
Sometimes, I remember that next year's an election year. Which means the Republicans are going to run a candidate to rival Obama. Now, with unemployment above 9%, the only issue that really matters is the economy. Since the general public doesn't understand the first thing about economic policymaking, chances are if the economy is still in the tanker next Fall, a Republican could win. The Republican debate on the economy was, as I figured it would be, a complete sham. They stood on stage and tried to outdo each other by saying dumber and dumber things. And some of them actually believed it. Which is why there's no way in hell I'd ever vote for Herman Cain, whose bank teller economic adviser managed to create a tax plan that reduces revenue AND raises taxes for the poor and the middle class, while cutting them massively for buyout barons and hedge fund managers. So he's out. Rick Perry has a "super secret" plan he won't disclose, but he's campaigning on the "competitively lower wages against yourself" platform, which shows he doesn't understand accounting identities, so he's out too. Jon Huntsman is running as white Obama, so the chances of him getting nominated are zero. Rick Santorum is a fool and Michele Bachmann's nuts. So that leaves Mitt Romney.
Right now, Romney's the front-runner, and, if things go according to plan, will probably be the nominee. And if he is, I'd be tempted to vote for him. Here's why. While he's been playing an idiot on TV for the last two months to appeal to his base, Romney's no fool. His economic team is headed by Greg Mankiw, who, while definitely a Republican, is a very good economist. And Mankiw and Romney realize that wrecking the economy isn't good for Romney's re-election prospects. So the results... will likely be economic policies that look an awful lot like Obama's, only more aggressive. The rhetoric about lynching Bernanke will go out the window. And lip service will be paid to "repealing regulations" so that, in the end, if the economy does recover, Romney can claim that it was the vague platitudes that are the cause. But in reality, while promising less aggressive policies, he'll likely be able to deliver more. Why? Because, while Republicans in Congress have spent the last 3 years decrying everything Obama's proposed as the death knell of capitalism, they won't want to see a Romney presidency fail. So the apocalyptic rhetoric will die down, and we'll get better policy, simply because of the political party of the person in the White House.
Now, my main reservation about voting for Romney is that it would reward Republicans for their bad behavior. Frankly, the last few years have been completely disgusting in that regard. Obama hasn't been able to get even extremely competent appointees past Congress... three years into his term (Richard Shelby's claim that Nobel laureate Peter Diamond was "unqualified" for the Fed board was an embarrassment). Any effort to relieve the economic problems has been stonewalled. And the Republicans risked allowing the nation to default just to wring concessions out of Obama. I can definitively say nothing like that would happen with President Romney in power. In essence, we'd likely get more aggressive policies than we got under Obama (though not as aggressive as might be ideal) because Republicans won't line up to oppose a Romney presidency the way they did to Obama.
But the real issue with casting that vote is that it essentially sends the signal to the Republican Party that they can stonewall everything for political gain, and it will benefit them politically in the end. So I'm really not inclined to cast my vote that way just for that reason. But I think it's very likely that we'll be better off under a President Romney just for that reason, and it is something I've thought about.
Goldman joins the 99%
All of the big Wall Street banks keep economists on their payroll to forecast trends and assist their traders in establishing positions. Goldman Sachs happens to have one of the best in the industry in Jan Hatzius. Now, Hatzius is calling on the Fed to set an explicit nominal GDP target which, combined with more quantitative easing, would bolster economic growth. Hatzius's baseline scenario (no action on the Fed's part) has unemployment at over 7% at the end of 2015 (a truly scary proposition), he forecasts that a nominal GDP target combined with more QE could get unemployment under 7% before 2013 rolls around.
A rising tide (in terms of GDP) certainly lifts all ships-- a thriving economy wouldn't just be beneficial to Goldman; it would also be welcome relief for the millions of unemployed who have suffered through this crisis. And the biggest roadblock to Fed action right now is... Republican politicians. While Democratic (Krugman, Stiglitz, Roubini) and Republican (Mankiw, Rogoff) economists alike have called on the Fed to be more aggressive, Republican presidential candidates have all decided that Ben Bernanke should be replaced as Fed chairman... because he's done too much to help support the economy. Which is kind of an absurd position, given that, without his support, we would be looking at catastrophic unemployment worse than we had during the Great Depression.
But the real message to take out of this is that, when it comes to fixing the economy, Wall Street and Main Street are on the same page-- both would benefit from aggressive action by both the Fed and the government to tackle the unemployment problem. But it's politicians that are blocking the road path to fixing that problem.
A rising tide (in terms of GDP) certainly lifts all ships-- a thriving economy wouldn't just be beneficial to Goldman; it would also be welcome relief for the millions of unemployed who have suffered through this crisis. And the biggest roadblock to Fed action right now is... Republican politicians. While Democratic (Krugman, Stiglitz, Roubini) and Republican (Mankiw, Rogoff) economists alike have called on the Fed to be more aggressive, Republican presidential candidates have all decided that Ben Bernanke should be replaced as Fed chairman... because he's done too much to help support the economy. Which is kind of an absurd position, given that, without his support, we would be looking at catastrophic unemployment worse than we had during the Great Depression.
But the real message to take out of this is that, when it comes to fixing the economy, Wall Street and Main Street are on the same page-- both would benefit from aggressive action by both the Fed and the government to tackle the unemployment problem. But it's politicians that are blocking the road path to fixing that problem.
Friday, October 14, 2011
Republicans on the economy
When it comes to job creation, the Obama Administration has a pretty poor record-- that's no secret. It pitched an initial stimulus that was much too small, came back for a second round of stimulus that was also much too small, and really hasn't done anything about the debt overhang in housing that's continuing to drag economic growth. But, unfortunately, politics being what it is, the question isn't whether the Obama Administration is doing well-- it's whether the Republicans have a better alternative. And, after reading the transcript of the primary debate, the clear answer is that, at least from what they say, the answer is very clearly "no." So first, I'll go through some general thoughts, and then some specifics about what's wrong with each candidate.
What the Republicans don't seem to understand, across the board, is simple accounting identities. To be fair, Britain's Prime Minister, David Cameron, doesn't understand them either. It's very clear that a major drag on growth in the US is that consumers built up unsustainable debt burdens by borrowing against their houses. The big banks did the same thing. And, with tax revenues depressed, government has been running deficits (rightly, but ignore my commentary for a second). So, in essence, consumers and businesses have both been savings to pay down their debts. Government spending hasn't done nearly enough to fill that hole. But the Republican candidates, to a man, seem to think that government should be cutting spending, and that those spending cuts will somehow spur job creation. To understand how wrong that is, all you need to understand is simple arithmetic. The first truism is that debt is a zero-sum game: there's no such thing as "too much debt in the system"-- individuals can be overindebted, businesses can be overindebted, and governments can be overindebted. But every dollar of debt is offset by a dollar of lending-- you can't run up debt unless you find someone else to lend to you. Demand (and the size of the economy and job growth by extension), however, is not a zero-sum game. If, as the Republican candidates insist, government should be reducing the deficit (and paying down debt), and consumers should be paying down debt (which they obviously should be), and businesses should be paying down debt (which certainly happened over the last few years), then there's no place for demand to come from. To pay down debt, you need income. And to earn income, someone has to demand your labor (meaning spend money). And that means that someone has to be borrowing. Now, consumers are already overindebted, so consumer borrowing is a terrible idea. And it's hard to induce businesses to spend when demand is weak without creating expected inflation (go find a Republican presidential candidate to advocate higher inflation), so the only remaining candidate is the government. By putting people to work, they can pay down their debts, which allows them to spend more in the future once they have paid off their debts. This economic growth eventually bolsters government finances and allows the government to draw down its spending and pay down its debts. Unfortunately, none of the Republican candidates seem to understand this accounting identity. So instead we've got a bunch of candidates who insist that everyone needs to save more simultaneously and get out of debt at the same time. Which is a nice recipe for disaster.
Now, even though all of the candidates are a mess, the specifics are pretty bad too. To start with, we've got the Hermanator hawking his "9-9-9" tax plan, which sounds an awful lot like Domino's 5-5-5 pizza deal from back in the day. When the moderator pointed out that 9-9-9 wouldn't raise enough revenue to run the government, the Hermanator said everyone was using the wrong baseline. But, since he hasn't pointed out that baseline, I guess we're supposed to take him at his word. Good luck with that. It also doesn't help that the "expert" who came up with this idea isn't an economist at all-- it's a Wells Fargo wealth manager with an accounting degree. And not a high-level wealth manager, but the guy you go to if you want to plan your retirement. Which is a respectable profession and all, but most definitely doesn't qualify you to advise a presidential candidate on federal tax policy. It's the equivalent of a Starcraft junkie coming up with military strategy.
Then you've got Rick Perry. Somehow, he's gonna create 1.2 million jobs in the energy industry by "making America energy independent." But no one knows what the plan is, and no one's suggested they can make anything of it, so there's no there there. Then you've got Michelle Bachmann, who whined about Barney Frank a lot, but didn't offer anything in the way of ideas. Ron Paul gave a ramped-down version o his usual schpiel about the Fed-- just as silly and nonsensical as always. Jon Huntsman didn't offer much specific, but, reading between the lines, I think he's running as Obama with an R next to his name-- not stupid enough to actively harm the economy like most of the rest of the field, but not aggressive enough to make an active difference.
The last candidate worth mentioning is Romney. On issues, he brought up the usual Republican platitudes about regulation and not raising taxes, but I seriously doubt he'll actually end up following through. More likely, you can learn a lot about what he thinks by looking at his advisers, Glenn Hubbard and Greg Mankiw. Hubbard is the dean of Columbia Business School, so he's not a dumb guy. His policy views are pretty wrongheaded, but he certainly understands business. Mankiw is a Harvard economist who chaired George W. Bush's Council of Economic Advisers for awhile. On policy grounds, he's a somewhat tax-obsessed New Keynesian. In other words, he thinks tax rates matter more than most New Keynesians do, but in terms of the models he's using, he's starting from the same place as Paul Krugman and Joe Stiglitz. And he's recently advocated a higher inflation target to stimulate growth. This is a good idea not just to stimulate consumption, but also because it reduces the real value of debt, which in turn is kind of a good thing when we have a private debt problem. But, again, Mankiw is an academic and Romney is a Republican politician-- throwing out that platform will get him burned at the stake. But I do have far more confidence in Romney than in any of the other Republican contenders solely because he has real advisers who aren't inept.
The one thing that all the Republican contenders seemed to agree on was the need to get rid of Ben Bernanke. Ignore for a second the fact that Bernanke is probably the single biggest reason we didn't have a second Great Depression-- he's also a Republican who was appointed by George W. Bush, and a pupil of Milton Friedman's. The public lynching of Bernanke shows just how far the Republican Party's gone off the rails in the last 3 years. And that's scary.
What the Republicans don't seem to understand, across the board, is simple accounting identities. To be fair, Britain's Prime Minister, David Cameron, doesn't understand them either. It's very clear that a major drag on growth in the US is that consumers built up unsustainable debt burdens by borrowing against their houses. The big banks did the same thing. And, with tax revenues depressed, government has been running deficits (rightly, but ignore my commentary for a second). So, in essence, consumers and businesses have both been savings to pay down their debts. Government spending hasn't done nearly enough to fill that hole. But the Republican candidates, to a man, seem to think that government should be cutting spending, and that those spending cuts will somehow spur job creation. To understand how wrong that is, all you need to understand is simple arithmetic. The first truism is that debt is a zero-sum game: there's no such thing as "too much debt in the system"-- individuals can be overindebted, businesses can be overindebted, and governments can be overindebted. But every dollar of debt is offset by a dollar of lending-- you can't run up debt unless you find someone else to lend to you. Demand (and the size of the economy and job growth by extension), however, is not a zero-sum game. If, as the Republican candidates insist, government should be reducing the deficit (and paying down debt), and consumers should be paying down debt (which they obviously should be), and businesses should be paying down debt (which certainly happened over the last few years), then there's no place for demand to come from. To pay down debt, you need income. And to earn income, someone has to demand your labor (meaning spend money). And that means that someone has to be borrowing. Now, consumers are already overindebted, so consumer borrowing is a terrible idea. And it's hard to induce businesses to spend when demand is weak without creating expected inflation (go find a Republican presidential candidate to advocate higher inflation), so the only remaining candidate is the government. By putting people to work, they can pay down their debts, which allows them to spend more in the future once they have paid off their debts. This economic growth eventually bolsters government finances and allows the government to draw down its spending and pay down its debts. Unfortunately, none of the Republican candidates seem to understand this accounting identity. So instead we've got a bunch of candidates who insist that everyone needs to save more simultaneously and get out of debt at the same time. Which is a nice recipe for disaster.
Now, even though all of the candidates are a mess, the specifics are pretty bad too. To start with, we've got the Hermanator hawking his "9-9-9" tax plan, which sounds an awful lot like Domino's 5-5-5 pizza deal from back in the day. When the moderator pointed out that 9-9-9 wouldn't raise enough revenue to run the government, the Hermanator said everyone was using the wrong baseline. But, since he hasn't pointed out that baseline, I guess we're supposed to take him at his word. Good luck with that. It also doesn't help that the "expert" who came up with this idea isn't an economist at all-- it's a Wells Fargo wealth manager with an accounting degree. And not a high-level wealth manager, but the guy you go to if you want to plan your retirement. Which is a respectable profession and all, but most definitely doesn't qualify you to advise a presidential candidate on federal tax policy. It's the equivalent of a Starcraft junkie coming up with military strategy.
Then you've got Rick Perry. Somehow, he's gonna create 1.2 million jobs in the energy industry by "making America energy independent." But no one knows what the plan is, and no one's suggested they can make anything of it, so there's no there there. Then you've got Michelle Bachmann, who whined about Barney Frank a lot, but didn't offer anything in the way of ideas. Ron Paul gave a ramped-down version o his usual schpiel about the Fed-- just as silly and nonsensical as always. Jon Huntsman didn't offer much specific, but, reading between the lines, I think he's running as Obama with an R next to his name-- not stupid enough to actively harm the economy like most of the rest of the field, but not aggressive enough to make an active difference.
The last candidate worth mentioning is Romney. On issues, he brought up the usual Republican platitudes about regulation and not raising taxes, but I seriously doubt he'll actually end up following through. More likely, you can learn a lot about what he thinks by looking at his advisers, Glenn Hubbard and Greg Mankiw. Hubbard is the dean of Columbia Business School, so he's not a dumb guy. His policy views are pretty wrongheaded, but he certainly understands business. Mankiw is a Harvard economist who chaired George W. Bush's Council of Economic Advisers for awhile. On policy grounds, he's a somewhat tax-obsessed New Keynesian. In other words, he thinks tax rates matter more than most New Keynesians do, but in terms of the models he's using, he's starting from the same place as Paul Krugman and Joe Stiglitz. And he's recently advocated a higher inflation target to stimulate growth. This is a good idea not just to stimulate consumption, but also because it reduces the real value of debt, which in turn is kind of a good thing when we have a private debt problem. But, again, Mankiw is an academic and Romney is a Republican politician-- throwing out that platform will get him burned at the stake. But I do have far more confidence in Romney than in any of the other Republican contenders solely because he has real advisers who aren't inept.
The one thing that all the Republican contenders seemed to agree on was the need to get rid of Ben Bernanke. Ignore for a second the fact that Bernanke is probably the single biggest reason we didn't have a second Great Depression-- he's also a Republican who was appointed by George W. Bush, and a pupil of Milton Friedman's. The public lynching of Bernanke shows just how far the Republican Party's gone off the rails in the last 3 years. And that's scary.
Thursday, October 13, 2011
Wall Street Is Struggling: Should we care?
Bloomberg had an article a couple of days ago talking about the struggles on Wall Street. Essentially, the article points out that Wall Street banks aren't actually doing as well as the Occupy Wall Street people seem to think. And that's certainly true-- Goldman is set to announce its second quarterly loss since going public in 1999 this month, and Morgan Stanley, Citigroup, and especially Bank of America aren't doing so hot either, especially compared to the heights they reached in 2007. All of them have laid off employees, and pay is down. What struck me in particular was this passage from the end of the article:
The implication seems to be that the trader is demoralized because he's working hard and his pay is down. But his discontent shows just how far off the rails our financial system was in the boom years leading up to 2007, when these kinds of pay packages were common. Short of a brilliant entrepreneur starting his own company, no 27-year-old employee creates a half-million worth of value in a year. Pay packages on Wall Street were certainly huge, but they were huge for a reason: banks could make directional bets with their capital, and use extreme leverage to magnify their returns. The result was huge profits... but also huge risks that were borne not just by the banks, but by the entire economy. Think of it this way. If a 27-year-old trader makes a huge trading profit, he takes a significant chunk of the upside. If he loses that much, his bonus may be cut, but he'll still get a salary. And if the trade is complex enough that it doesn't go sour for 5 years, well, he'll pocket big gains, then leave his firm holding the bag. But with financial firms as big as they were, it wasn't really the firms holding the bag-- it was taxpayers. Because banks do provide valuable services to businesses that can't be replaced on a whim. But it's not those activities that were earning traders monster bonuses in the good years.
What we've seen over the last couple of years is a realization that the outsize pay in the banking sector didn't in any way reflect social value-- banks certainly play a valuable role in helping companies streamline operations, go public, merge, make acquisitions, go public, and hedge their risks and exposures. Heck, Goldman Sachs has done an aggressive ad campaign over the last few years emphasizing its role in financing public projects. And those services are truly valuable. But what they don't mention is that those services made up something like 10% of their profits during the boom years (I may be remembering the exact number wrong, but it was certainly at most 25%). But in boom times, it was proprietary trading and investments that were driving monster profits, as well as securitization fees from their disastrous mortgage operations. The Dodd-Frank bill cut back on a lot of those extremely profitable but not particularly socially useful activities... and a lot of monster paychecks went by the wayside (though finance still pays a LOT more than just about any other industry). So what we're seeing, I think, is these 27 year olds who think they're entitled to monster paychecks because they "work hard", who don't realize that those monster paychecks came about in large part because of a system that was rife with moral hazard (government picking up the tab for losses while banks took all the gains). If reduced paychecks in finance meant companies had a harder time raising capital, or made going public more difficult, it would be a cause for concern. But there's no evidence of that: I hope that what we're seeing instead is a useful readjustment of Wall Street's proper role in helping businesses raise capital.
Good thing... if it leads to more financial stability. These people are colorblind to the fact that their risk-taking in "good times" helped wreck the economy. But it also says that the solution isn't more railing on Wall Street-- Wall Street's been reined in to some extent already. The solutions need to be macro in scope.
Bankers aren’t optimistic about those gains. Options Group’s Karp said he met last month over tea at the Gramercy Park Hotel in New York with a trader who made $500,000 last year at one of the six largest U.S. banks.
The trader, a 27-year-old Ivy League graduate, complained that he has worked harder this year and will be paid less. The headhunter told him to stay put and collect his bonus.
“This is very demoralizing to people,” Karp said. “Especially young guys who have gone to college and wanted to come onto the Street, having dreams of becoming millionaires.”
The implication seems to be that the trader is demoralized because he's working hard and his pay is down. But his discontent shows just how far off the rails our financial system was in the boom years leading up to 2007, when these kinds of pay packages were common. Short of a brilliant entrepreneur starting his own company, no 27-year-old employee creates a half-million worth of value in a year. Pay packages on Wall Street were certainly huge, but they were huge for a reason: banks could make directional bets with their capital, and use extreme leverage to magnify their returns. The result was huge profits... but also huge risks that were borne not just by the banks, but by the entire economy. Think of it this way. If a 27-year-old trader makes a huge trading profit, he takes a significant chunk of the upside. If he loses that much, his bonus may be cut, but he'll still get a salary. And if the trade is complex enough that it doesn't go sour for 5 years, well, he'll pocket big gains, then leave his firm holding the bag. But with financial firms as big as they were, it wasn't really the firms holding the bag-- it was taxpayers. Because banks do provide valuable services to businesses that can't be replaced on a whim. But it's not those activities that were earning traders monster bonuses in the good years.
What we've seen over the last couple of years is a realization that the outsize pay in the banking sector didn't in any way reflect social value-- banks certainly play a valuable role in helping companies streamline operations, go public, merge, make acquisitions, go public, and hedge their risks and exposures. Heck, Goldman Sachs has done an aggressive ad campaign over the last few years emphasizing its role in financing public projects. And those services are truly valuable. But what they don't mention is that those services made up something like 10% of their profits during the boom years (I may be remembering the exact number wrong, but it was certainly at most 25%). But in boom times, it was proprietary trading and investments that were driving monster profits, as well as securitization fees from their disastrous mortgage operations. The Dodd-Frank bill cut back on a lot of those extremely profitable but not particularly socially useful activities... and a lot of monster paychecks went by the wayside (though finance still pays a LOT more than just about any other industry). So what we're seeing, I think, is these 27 year olds who think they're entitled to monster paychecks because they "work hard", who don't realize that those monster paychecks came about in large part because of a system that was rife with moral hazard (government picking up the tab for losses while banks took all the gains). If reduced paychecks in finance meant companies had a harder time raising capital, or made going public more difficult, it would be a cause for concern. But there's no evidence of that: I hope that what we're seeing instead is a useful readjustment of Wall Street's proper role in helping businesses raise capital.
Good thing... if it leads to more financial stability. These people are colorblind to the fact that their risk-taking in "good times" helped wreck the economy. But it also says that the solution isn't more railing on Wall Street-- Wall Street's been reined in to some extent already. The solutions need to be macro in scope.
Wednesday, October 12, 2011
"We are the 53%" is really really stupid
So, in response to the Occupy Wall Street folks, Erick Erickson from RedState.com decided to start a competing "movement" called "We are the 53%." The idea behind the tag is that 53% of Americans pay income taxes and 47% don't, and the 47% should work harder and stop complaining. This is without a doubt one of the dumbest ideas of all time. To start with, the statistic it's based on is a common right-wing talking point that's also laughably misleading. Yes, a lot of people don't pay federal income taxes. Why? Well, first, a lot of those lucky duckies are poor. The idea seems to be that if you're lucky enough to be poor, you won't have to pay taxes! That's like being jealous of your neighbor whose friends chipped in to buy him a wheelchair after his legs were blown off. It's easy to join the 47%, Erick-- just stop working. Then go out and tell all those poor folks all about how awesome it is to be poor in America. Of course, the Heritage Foundation released a nice little survey recently pointing out that, if you're poor in America, odds are pretty good that you've got a refrigerator and a microwave. Great. Maybe Heritage can start a movement. Tag: "Being poor in America: Way better than being poor in Somalia." The second reason the tag is stupid (and probably the more relevant one) is that the implication is that 47% of the country doesn't pay taxes on their income. That's baloney. The federal income tax is a specific tax on income across the board. But for most Americans, federal income tax isn't the biggest tax they pay-- instead, it's the payroll tax. Which... is also levied on income. So they cherry-pick a tax and decide that, because a lot of people are too poor to pay it, they must be freeloading. Clever (except not).
Then there's the second reason that "movement" is stupid-- it's the implication that if only people wanted to get jobs, they could get them. It's a rehash of the absurd idea the Real Business Cycle folks like to float-- that downturns happen because people suddenly decide that they value leisure time more than working. Their explanation for the Great Depression boils down to a quarter of the population dropping everything and deciding that they all simultaneously wanted to go on a long vacation. And also stand in bread lines. Yes, the idea is as dumb as it sounds. So, implicit in the "53%ers" demands is the idea that the reason a lot of people are out of work is they're not working hard enough to find jobs that are out there. Which is a patently ridiculous idea-- if taken to its logical conclusion, it suggests that, in the last 3 years, twice as many people have become lazy and stopped looking for jobs that are out there. The reality, of course, is that jobs aren't hiding in the woods waiting to be found-- if businesses are selling a lot of their product, they'll expand and hire workers. And they won't keep those jobs secret from the unemployed so that they'll have to finish a scavenger hunt to get hired.
But the problem is that those businesses ARE seeing weak sales. And the result is 9% unemployment and frustrated people protesting all over the country (whether they're protesting at the right places is a different question).
Two reasons: 1) Misleading statistic, 2) Economy is cyclical-- implication is that 10% of the population suddenly became super lazy in 2008.
Then there's the second reason that "movement" is stupid-- it's the implication that if only people wanted to get jobs, they could get them. It's a rehash of the absurd idea the Real Business Cycle folks like to float-- that downturns happen because people suddenly decide that they value leisure time more than working. Their explanation for the Great Depression boils down to a quarter of the population dropping everything and deciding that they all simultaneously wanted to go on a long vacation. And also stand in bread lines. Yes, the idea is as dumb as it sounds. So, implicit in the "53%ers" demands is the idea that the reason a lot of people are out of work is they're not working hard enough to find jobs that are out there. Which is a patently ridiculous idea-- if taken to its logical conclusion, it suggests that, in the last 3 years, twice as many people have become lazy and stopped looking for jobs that are out there. The reality, of course, is that jobs aren't hiding in the woods waiting to be found-- if businesses are selling a lot of their product, they'll expand and hire workers. And they won't keep those jobs secret from the unemployed so that they'll have to finish a scavenger hunt to get hired.
But the problem is that those businesses ARE seeing weak sales. And the result is 9% unemployment and frustrated people protesting all over the country (whether they're protesting at the right places is a different question).
Two reasons: 1) Misleading statistic, 2) Economy is cyclical-- implication is that 10% of the population suddenly became super lazy in 2008.
Monday, October 10, 2011
Don't Listen to Ron Paul: Part 129
Paul Krugman has a good blog post explaining in three paragraphs why the Austrians' obsession with banning banking is inane. I don't have much to add, but it's worth reading, if nothing else to understand why listening to Ron Paul is a good way to make yourself dumber.
Occupy Wall Street and its Discontents
Paul Krugman has a defense of the Occupy Wall Street people in his Times column. As usual, it's well-written and persuasive, but I don't think it gets at the whole of the issue. Krugman's central argument is that the movement is essentially right to vilify Wall Street and the wealthy, and that it's those positions that are dangerous and extreme rather than, as the Right would tell you, Occupy Wall Street's.
Now, I think Krugman's main mistake is that he projects onto Occupy Wall Street what he wants to see in it: essentially an army of center-left folks who believe that we need government to tame the excesses of the market and regulate industries that are habitually destabilizing when left to their own devices. And while Krugman's position is cogent, powerful, and essentially correct, I think much of Occupy Wall Street has a different agenda. There are segments that are essentially protesting for the sake of protesting (and flying a Marxist flag to feel important). Those folks can be dismissed out of hand. There's another chunk that is taking up traditional far-left positions that are either entirely economically indefensible (like rejecting free trade), or more nuanced than those people like to think they are (like minimum wage hikes).
But the segment that I think Krugman is correct in sympathizing with, and which is the portion with whom I am most sympathetic, are those who are protesting out of an unspecified frustration with the American economy. They know something is wrong. They know that the economy is in a hole, and ordinary people are struggling while Congresspeople are sitting around and worrying about government solvency at a time when investors are lending to the US government at incredibly low rates and 9% of the workforce is out of work. And they know that super-wealthy people are doing exceptionally well and paying very little in taxes to top it off while ordinary people struggle. But those people don't know exactly what to do about it, while people like Krugman do.
But where I think the movement goes off the rails (and Krugman with it) is in the tenor of the protests. To put it in simple terms, to me, this doesn't look like a "what about us" protest-- it looks like a "let's cut the rich down to size" protest. And the two are very different. Yes, rich people broadly and Wall Street in particular are doing better than the average American. The question, then, is what we can do about it. Cutting CEO pay isn't going to put millions of people back to work. Nor will abolishing Wall Street help the country move forward-- more likely it'll hurt.
The real changes have to come at the policy level, in ways that make the "99%" better off rather than the "1%" worse off (though there's at least some inevitable sacrifice that "1%" will have to make to get that result). Simply put, the economy's problem is massive private debt overhang that is keeping consumers from spending and stifling demand. Wall Street people are smart enough to support such provisions. Goldman, Morgan Stanley, Citigroup, and every other big bank have economists on staff who forecast the economic impact of government stimulus. And those economists, across the board, acknowledge that stimulus will improve the economy. So what's blocking policies that will resolve those issues? My feeling is it's two things. First, this is still a country whose people are widely suspicious of government. Tea Party folks might not like Wall Street any more than the "Occupy Wall Street" folks, but talk to them about stimulus, and they'll wave their pitchforks in the air and mutiny. They've convinced themselves that if government just gets out of the way, business will magically start hiring (for some reason neither they nor their leaders can articulate in any minimally coherent way) and the economy will start booming. These people might not like Wall Street, but they and their leaders refuse to acknowledge that the solution is more rather than less government investment. Second, and this point is more directly related to Wall Street, is the fact that relief for debtors (which is probably the single most significant step government could take to speed up the recovery) would force banks to take write-downs, which in turn would cut into their revenues and damage their balance sheets. And, at a time when Citigroup and Bank of America are especially vulnerable, forced write-downs may not be wise policy. And, at the end of the day, with much of the country still opposed to debt relief for ordinary people (remember, the Tea Party started with Rick Santelli's nonsensical rant about bailing out "losers"; and those "losers" weren't the illiquid banks-- they were homeowners who were underwater on their mortgages), there's no political will to override the creditors' position on that issue.
One solution might be targeted stimulus directed at household balance sheets-- in essence, paying off mortgages for those who are underwater, or combining forced write-downs on the principal of underwater mortgages with subsidies for the banks holding those mortgages. Would this be another bailout? Sure. But economics isn't a morality play. While debtors were certainly irresponsible for taking out loans they couldn't afford, creditors were equally irresponsible for making loans to creditors without doing their due diligence. And such a solution would provide equal relief for both guilty parties. Would this reward the "guilty" (dumb borrowers and lenders) at the expense of the "innocent" (those who borrowed and lent prudently)? Sure again. But it's not like it's only those who are underwater on their mortgages who are struggling. The overhang of debt is having a huge effect on aggregate demand, which in turn affects even the prudent. So a factory worker who is laid off because her company's sales dropped 30% because households started saving to pay down debts instead of spending may have done everything right, but that's no relief to her. And debt relief for underwater homeowners and banks, by shoring up household balance sheets and freeing up funds to spend, would indirectly help her as well.
But I think such nuanced solutions aren't what OWS is fundamentally about-- I kind of get the sense it's more about dragging down "the rich" and "Wall Street" than it is about promoting policies that will actually improve the lives of ordinary people. And I think that's my biggest problem with the nature of the protests.
Now, I think Krugman's main mistake is that he projects onto Occupy Wall Street what he wants to see in it: essentially an army of center-left folks who believe that we need government to tame the excesses of the market and regulate industries that are habitually destabilizing when left to their own devices. And while Krugman's position is cogent, powerful, and essentially correct, I think much of Occupy Wall Street has a different agenda. There are segments that are essentially protesting for the sake of protesting (and flying a Marxist flag to feel important). Those folks can be dismissed out of hand. There's another chunk that is taking up traditional far-left positions that are either entirely economically indefensible (like rejecting free trade), or more nuanced than those people like to think they are (like minimum wage hikes).
But the segment that I think Krugman is correct in sympathizing with, and which is the portion with whom I am most sympathetic, are those who are protesting out of an unspecified frustration with the American economy. They know something is wrong. They know that the economy is in a hole, and ordinary people are struggling while Congresspeople are sitting around and worrying about government solvency at a time when investors are lending to the US government at incredibly low rates and 9% of the workforce is out of work. And they know that super-wealthy people are doing exceptionally well and paying very little in taxes to top it off while ordinary people struggle. But those people don't know exactly what to do about it, while people like Krugman do.
But where I think the movement goes off the rails (and Krugman with it) is in the tenor of the protests. To put it in simple terms, to me, this doesn't look like a "what about us" protest-- it looks like a "let's cut the rich down to size" protest. And the two are very different. Yes, rich people broadly and Wall Street in particular are doing better than the average American. The question, then, is what we can do about it. Cutting CEO pay isn't going to put millions of people back to work. Nor will abolishing Wall Street help the country move forward-- more likely it'll hurt.
The real changes have to come at the policy level, in ways that make the "99%" better off rather than the "1%" worse off (though there's at least some inevitable sacrifice that "1%" will have to make to get that result). Simply put, the economy's problem is massive private debt overhang that is keeping consumers from spending and stifling demand. Wall Street people are smart enough to support such provisions. Goldman, Morgan Stanley, Citigroup, and every other big bank have economists on staff who forecast the economic impact of government stimulus. And those economists, across the board, acknowledge that stimulus will improve the economy. So what's blocking policies that will resolve those issues? My feeling is it's two things. First, this is still a country whose people are widely suspicious of government. Tea Party folks might not like Wall Street any more than the "Occupy Wall Street" folks, but talk to them about stimulus, and they'll wave their pitchforks in the air and mutiny. They've convinced themselves that if government just gets out of the way, business will magically start hiring (for some reason neither they nor their leaders can articulate in any minimally coherent way) and the economy will start booming. These people might not like Wall Street, but they and their leaders refuse to acknowledge that the solution is more rather than less government investment. Second, and this point is more directly related to Wall Street, is the fact that relief for debtors (which is probably the single most significant step government could take to speed up the recovery) would force banks to take write-downs, which in turn would cut into their revenues and damage their balance sheets. And, at a time when Citigroup and Bank of America are especially vulnerable, forced write-downs may not be wise policy. And, at the end of the day, with much of the country still opposed to debt relief for ordinary people (remember, the Tea Party started with Rick Santelli's nonsensical rant about bailing out "losers"; and those "losers" weren't the illiquid banks-- they were homeowners who were underwater on their mortgages), there's no political will to override the creditors' position on that issue.
One solution might be targeted stimulus directed at household balance sheets-- in essence, paying off mortgages for those who are underwater, or combining forced write-downs on the principal of underwater mortgages with subsidies for the banks holding those mortgages. Would this be another bailout? Sure. But economics isn't a morality play. While debtors were certainly irresponsible for taking out loans they couldn't afford, creditors were equally irresponsible for making loans to creditors without doing their due diligence. And such a solution would provide equal relief for both guilty parties. Would this reward the "guilty" (dumb borrowers and lenders) at the expense of the "innocent" (those who borrowed and lent prudently)? Sure again. But it's not like it's only those who are underwater on their mortgages who are struggling. The overhang of debt is having a huge effect on aggregate demand, which in turn affects even the prudent. So a factory worker who is laid off because her company's sales dropped 30% because households started saving to pay down debts instead of spending may have done everything right, but that's no relief to her. And debt relief for underwater homeowners and banks, by shoring up household balance sheets and freeing up funds to spend, would indirectly help her as well.
But I think such nuanced solutions aren't what OWS is fundamentally about-- I kind of get the sense it's more about dragging down "the rich" and "Wall Street" than it is about promoting policies that will actually improve the lives of ordinary people. And I think that's my biggest problem with the nature of the protests.
Monday, October 3, 2011
Expectations and the Fed
Apparently, Obama's jobs bill is dead. At least Eric Cantor says so. Honestly, I'm pretty apathetic at this point. It certainly would have helped, but not nearly enough to make a huge debt in unemployment ($500 billion into a $14 trillion+ economy isn't much). So the last place we can realistically do something about jobs is through monetary policy. And this is where it's worth going into a semi-technical discussion about what the Fed can do to support employment in a liquidity trap.
So right now, the economy is in a textbook liquidity trap-- we're nowhere near full employment, the federal funds rate is as low as it can get, and there's an excess of desired savings over desired investment. As a result, everyone's rushing to hold Treasuries (10-years ended today at 1.79%), businesses are sitting on cash, and investment is depressed along with GDP. Theoretically, this means more monetary policy is just a dead end, right? Well, no, not quite. See, the Fed has a dual mandate-- stable prices and full employment. And while inflation continues to run steady and low (though there was a blip as a commodity blip made its way through the economy), unemployment is unacceptably high. So what can the Fed do about that unemployment problem? Well, step one is to signal its intent. The federal funds rate is already at zero, and we've had two rounds of quantitative easing (buying longer-dated securities), and now we've got Operation Twist (driving down long-term rates to encourage investment). And the impact has been positive, but very muted (on the QE; economists seem to agree that Operation Twist is unlikely to do much).
But Brad DeLong points out an interesting thought experiment by Larry Summers. Summers asks: if the Swiss National Bank wanted to lower the value of the Swiss franc, which step would require it to print more money: announcing that it would print whatever it takes to get the value to where it needs to be, or announcing that it would print X number of francs, then reassess the situation. The answer is, obviously, the latter. It signals an action, while the prior scenario signals a goal. Scott Sumner applies the lesson to the US. He argues that the Fed has plenty of credibility... but it's using that credibility to convince consumers and businesses that inflation will remain low. But why low inflation and a strong dollar are always a good thing is baffling to me. The inevitable response will be, "WEIMAR GERMANY OH NO!". Which would be compelling if it weren't intensely wrong-- yelling about hyperinflation in today's US is like yelling about the risk of hypothermia in Abu Dhabi. But there's no research indicating that, say, 4 or even 5 percent inflation is any worse for the economy than 2 percent inflation. And the Fed committing itself to an explicit inflation target of 4 percent would be a very good thing. Why? Well, it's pretty simple.
Imagine the Fed announced its new inflation target tomorrow and immediately started printing money. Assuming investors and businesses consider the Fed to be credible, they will react rationally. And those investors and businesses are sitting on huge stacks of cash right now. If they expect the real value of that cash to decline by 4 percent in the next year, you'd better bet they're not going to sit on that cash-- they'll deploy it somewhere where they'll get returns. That might mean moving up investment (if you need to replace your factory within the next 5 years, but you expect doing so to be 25% more expensive in 5 years, you're going to do it as soon as possible), or it might mean reinvesting the cash in higher-yielding assets, but either way it discourages holding cash. The same incentives apply to consumers. The important thing to note about consumers is that they are, by and large, still very indebted. But if they expect their wages to rise 4% in the next year, that debt will stop looking as daunting (wages can rise, but debts stay the same size), and their cash will be less encumbered. More importantly, they'll look to spend or invest their savings, which will drive up demand further and get money circulating through the economy.
Of course, avoiding a wage-price spiral is important, but if the Fed has credibility, it can target, say, a 3 year program of 4% annualized inflation, after which it will cut back. With any luck, in that stretch, the economy will grow substantially and we will be in much better shape than we are today. Of course, this is all speculation. My argument really isn't anything unique-- Ben Bernanke made it persuasively in his analysis of the Great Depression and Japan's Lost Decade, and I think if he were the only person in charge at the Fed, it's something he would consider. Unfortunately, there are others at the Fed who fear doing anything, so it's not likely to happen. But the point is that there ARE tools available that the Fed could use to get unemployment down... if only the will to use them existed.
So right now, the economy is in a textbook liquidity trap-- we're nowhere near full employment, the federal funds rate is as low as it can get, and there's an excess of desired savings over desired investment. As a result, everyone's rushing to hold Treasuries (10-years ended today at 1.79%), businesses are sitting on cash, and investment is depressed along with GDP. Theoretically, this means more monetary policy is just a dead end, right? Well, no, not quite. See, the Fed has a dual mandate-- stable prices and full employment. And while inflation continues to run steady and low (though there was a blip as a commodity blip made its way through the economy), unemployment is unacceptably high. So what can the Fed do about that unemployment problem? Well, step one is to signal its intent. The federal funds rate is already at zero, and we've had two rounds of quantitative easing (buying longer-dated securities), and now we've got Operation Twist (driving down long-term rates to encourage investment). And the impact has been positive, but very muted (on the QE; economists seem to agree that Operation Twist is unlikely to do much).
But Brad DeLong points out an interesting thought experiment by Larry Summers. Summers asks: if the Swiss National Bank wanted to lower the value of the Swiss franc, which step would require it to print more money: announcing that it would print whatever it takes to get the value to where it needs to be, or announcing that it would print X number of francs, then reassess the situation. The answer is, obviously, the latter. It signals an action, while the prior scenario signals a goal. Scott Sumner applies the lesson to the US. He argues that the Fed has plenty of credibility... but it's using that credibility to convince consumers and businesses that inflation will remain low. But why low inflation and a strong dollar are always a good thing is baffling to me. The inevitable response will be, "WEIMAR GERMANY OH NO!". Which would be compelling if it weren't intensely wrong-- yelling about hyperinflation in today's US is like yelling about the risk of hypothermia in Abu Dhabi. But there's no research indicating that, say, 4 or even 5 percent inflation is any worse for the economy than 2 percent inflation. And the Fed committing itself to an explicit inflation target of 4 percent would be a very good thing. Why? Well, it's pretty simple.
Imagine the Fed announced its new inflation target tomorrow and immediately started printing money. Assuming investors and businesses consider the Fed to be credible, they will react rationally. And those investors and businesses are sitting on huge stacks of cash right now. If they expect the real value of that cash to decline by 4 percent in the next year, you'd better bet they're not going to sit on that cash-- they'll deploy it somewhere where they'll get returns. That might mean moving up investment (if you need to replace your factory within the next 5 years, but you expect doing so to be 25% more expensive in 5 years, you're going to do it as soon as possible), or it might mean reinvesting the cash in higher-yielding assets, but either way it discourages holding cash. The same incentives apply to consumers. The important thing to note about consumers is that they are, by and large, still very indebted. But if they expect their wages to rise 4% in the next year, that debt will stop looking as daunting (wages can rise, but debts stay the same size), and their cash will be less encumbered. More importantly, they'll look to spend or invest their savings, which will drive up demand further and get money circulating through the economy.
Of course, avoiding a wage-price spiral is important, but if the Fed has credibility, it can target, say, a 3 year program of 4% annualized inflation, after which it will cut back. With any luck, in that stretch, the economy will grow substantially and we will be in much better shape than we are today. Of course, this is all speculation. My argument really isn't anything unique-- Ben Bernanke made it persuasively in his analysis of the Great Depression and Japan's Lost Decade, and I think if he were the only person in charge at the Fed, it's something he would consider. Unfortunately, there are others at the Fed who fear doing anything, so it's not likely to happen. But the point is that there ARE tools available that the Fed could use to get unemployment down... if only the will to use them existed.
Sunday, October 2, 2011
Uncertainty and Taxes are NOT the cause of our economic problems
A pretty popular meme among the usual suspects about why we're not adding jobs nearly fast enough to lower the unemployment rate is that they're "uncertain about taxes and regulation." Basically, the idea is that our economic problems must be government's fault, and lowering taxes and deregulating will somehow fix everything. Of course, that claim is complete baloney. Those who are intellectually honest about it (Robert Lucas) say that they "suspect" that it's the cause and admit that they have no evidence. Others just assert it without bothering to provide evidence.
The Economic Policy Institute's Lawrence Mishel has a very good piece debunking that nonsense claim. Mishel doesn't even have to mention that, as a share of GDP, taxes have been lower in 2009 and 2010 as a share of GDP than they have been in any two-year stretch since 1949 and 1950 (and that's doubly significant considering that GDP has been depressed for those two years). He just compares addition of private sector jobs in the recovery from this recession to their addition in previous recessions (they're actually stronger this time than they were from the 1990-1991 recession under Bush Sr. and the early 2000s recession under Bush Jr.). He also points out that recovery from recessions following financial crises is almost always weaker than from typical cyclical recoveries (Ken Rogoff and Carmen Reinhardt's work makes that case pretty definitively). But most telling is the chart he puts up showing surveys of small business confidence going back to the 70s. The survey asks what the biggest problems facing small business are. And that's where the results are telling. Taxes are cited by about 21% of respondents: marginally more than under Bush Jr. (they look to have averaged between 19 and 20%), but less than during the Clinton era, when private sector job growth was very strong. Similarly, regulations are listed by about 14% of respondents: again, marginally more than under Bush Jr., but less than at any point before him going back to Reagan's second term. So what's the biggest problem cited? Unsurprisingly, POOR SALES (meaning lack of demand), by almost 30% of respondents. What's most remarkable is that this is the highest level at which "poor sales" has been cited since surveying started. By a very broad margin. By comparison, the last peak for "poor sales" was under Bush Jr.'s first term... when a full 15% of respondents cited it. In other words, the numbers are incredibly clear: the problem is lack of demand, NOT the regulatory uncertainty/tax nonsense being peddled by the Wall Street Journal and company.
So, of course, the American Enterprise Institute's James Pethokoukis decided to issue a rebuttal to Mishel's study... which makes it crystal clear that Mishel is spot-on. The response is, in a word, pathetic. It essentially amounts to two claims. First, that businesses still cite taxes and regulations more than they cite poor sales as a cause of their lack of hiring. Ummmm, OK. He kind of ignores the point. Which is that taxes and regulation have ALWAYS been cited more than poor sales as a cause of the lack of hiring. But we've added jobs reasonably well for long stretches of the last 40 years, and poor sales has NEVER been cited close to as much. So what that's telling you is that taxes and regulation aren't any more of a problem now than they were under Clinton, when the private sector added jobs at a better clip than it did pretty much at any point since the 60's (the recovery from the Volcker-induced early 1980s recession possibly excepted; jobs will ALWAYS be added rapidly when interest rates are at 19 percent and the Fed cuts them rapidly). Second, AEI claims that, well, the economy recovered more quickly under Reagan in the early 1980s. The simple answer is, "No kidding." Paul Volcker hiked interest rates to 20% in 1981 to fight inflation. Then he lowered them to 8.5% by the end of 1982. Of course job growth was spurred. By contrast, the federal funds rate was... 0 when Obama took office. And is still zero. That is called a liquidity trap. And it explains why Mr. Pethokoukis's comparison is complete nonsense.
So, when you hear a meme presented without evidence, assume it's wrong. This is a pretty good example of the standard operating procedure of those who just KNOW too much government is the problem and don't bother looking at evidence.
The Economic Policy Institute's Lawrence Mishel has a very good piece debunking that nonsense claim. Mishel doesn't even have to mention that, as a share of GDP, taxes have been lower in 2009 and 2010 as a share of GDP than they have been in any two-year stretch since 1949 and 1950 (and that's doubly significant considering that GDP has been depressed for those two years). He just compares addition of private sector jobs in the recovery from this recession to their addition in previous recessions (they're actually stronger this time than they were from the 1990-1991 recession under Bush Sr. and the early 2000s recession under Bush Jr.). He also points out that recovery from recessions following financial crises is almost always weaker than from typical cyclical recoveries (Ken Rogoff and Carmen Reinhardt's work makes that case pretty definitively). But most telling is the chart he puts up showing surveys of small business confidence going back to the 70s. The survey asks what the biggest problems facing small business are. And that's where the results are telling. Taxes are cited by about 21% of respondents: marginally more than under Bush Jr. (they look to have averaged between 19 and 20%), but less than during the Clinton era, when private sector job growth was very strong. Similarly, regulations are listed by about 14% of respondents: again, marginally more than under Bush Jr., but less than at any point before him going back to Reagan's second term. So what's the biggest problem cited? Unsurprisingly, POOR SALES (meaning lack of demand), by almost 30% of respondents. What's most remarkable is that this is the highest level at which "poor sales" has been cited since surveying started. By a very broad margin. By comparison, the last peak for "poor sales" was under Bush Jr.'s first term... when a full 15% of respondents cited it. In other words, the numbers are incredibly clear: the problem is lack of demand, NOT the regulatory uncertainty/tax nonsense being peddled by the Wall Street Journal and company.
So, of course, the American Enterprise Institute's James Pethokoukis decided to issue a rebuttal to Mishel's study... which makes it crystal clear that Mishel is spot-on. The response is, in a word, pathetic. It essentially amounts to two claims. First, that businesses still cite taxes and regulations more than they cite poor sales as a cause of their lack of hiring. Ummmm, OK. He kind of ignores the point. Which is that taxes and regulation have ALWAYS been cited more than poor sales as a cause of the lack of hiring. But we've added jobs reasonably well for long stretches of the last 40 years, and poor sales has NEVER been cited close to as much. So what that's telling you is that taxes and regulation aren't any more of a problem now than they were under Clinton, when the private sector added jobs at a better clip than it did pretty much at any point since the 60's (the recovery from the Volcker-induced early 1980s recession possibly excepted; jobs will ALWAYS be added rapidly when interest rates are at 19 percent and the Fed cuts them rapidly). Second, AEI claims that, well, the economy recovered more quickly under Reagan in the early 1980s. The simple answer is, "No kidding." Paul Volcker hiked interest rates to 20% in 1981 to fight inflation. Then he lowered them to 8.5% by the end of 1982. Of course job growth was spurred. By contrast, the federal funds rate was... 0 when Obama took office. And is still zero. That is called a liquidity trap. And it explains why Mr. Pethokoukis's comparison is complete nonsense.
So, when you hear a meme presented without evidence, assume it's wrong. This is a pretty good example of the standard operating procedure of those who just KNOW too much government is the problem and don't bother looking at evidence.
WSJ is full of crap
About a week ago, the Wall Street Journal put up this op-ed claiming to prove that boosting aggregate demand (i.e. fiscal stimulus) didn't play a role in ending the Great Depression. Needless to say, their narrative is based on an embarrassing misreading of the facts. Uneasy Money pokes holes in their methodology here. In essence, they either flat out lie about or badly misrepresent the facts to get to their desired conclusion. The relevant garbage collection:
the version of events offered by Cole and Ohanian is still a shocking distortion of what happened before FDR took office in March 1933. In particular, although Cole and Ohanian are correct that the trough of the Great Depression was reached in July 1932, when the Industrial Production Index stood at 3.67, rising to 4.15 in October, an increase of about 13%, they conveniently leave out the fact that there was a double dip; industrial production was flat in November and started falling in December, the Industrial Production Index dropping to 3.78 in March 1933, barely above its level the previous July. And their assertion that deflation continued during the recovery is even farther from the truth than their description of what happened to industrial production. When industrial production started to rise, the Producer Price Index (PPI) increased almost 1% three months in a row, July to September, the only monthly increases since July 1929. The PPI resumed its downward trend in October, falling about 9% from September 1932 t0 February 1933, at the same time that industrial production peaked and started falling again.
That is why most observers date the trough of the Great Depression in the US not in July 1932, but in March 1933 when FDR took office in the midst of a banking crisis that threatened to drive the US economy even deeper into deflation and depression than it had been in July 1932. So when Cole and Ohanian assert that recovery from the Great Depression started in July 1932, and go on to say that the recovery took place during a period of significant deflation, it is hard to avoid the conclusion that they are twisting the facts to suit their own ideological predilection.
The misrepresentation perpetrated by Cole and Ohanian only gets worse when they describe what happened during the period of true recovery, April through July 1933. Contrary to their assertion, deflation stopped in February 1933, the PPI hitting its low point of 10.3. Prices began to rise as soon as FDR suspended the gold standard shortly after taking office in March (not June as Cole and Ohanian mistakenly assert) 1933, the PPI rising to 11.9 in July (an increase of about 14% over February) when industrial production hit a peak of 5.95, 57% above the March low point.
Cole and Ohanian reply to this call-out by suggesting... that they didn't mean what any reasonable reader would conclude they meant. Then Brad DeLong points out that this is complete BS. The relevant part of DeLong's argument.
Cole and Ohanian say:
Cole and Ohanian Reply: Paul Krugman claims our economic history is in "incredibly bad faith" by showing that industrial output is positively correlated with the wholesale price index. The main point of our op-ed, as well as our earlier work, is that most of the increase in per-capita output that occurred after 1933 was due to higher productivity – not higher labor input…
The first three paragraphs of Cole and Ohanian:
HStimulus and the Depression—The Untold Story: About one-half of President Obama's proposed $447 billion American Jobs Act consists of payroll tax holidays designed to boost spending and increase hiring. But these temporary policies will do little to jump-start the economy, much as earlier temporary economic Band-Aids, such as the 2009 stimulus, did little to improve the economy.Proponents justify stimulus spending in part based on the widely held view that government-fueled increases in "aggregate demand" during FDR's New Deal ended the Great Depression and brought recovery. Christina Romer, former chairwoman of Obama's Council of Economic Advisers, has argued in op-eds that government should continue to spend for this reason. And in a 2002 speech as a Federal Reserve governor, current Fed Chairman Ben Bernanke claimed that monetary expansion and the turnaround from the deflation of 1932 to inflation in 1934 was a key reason that output expanded.But boosting aggregate demand did not end the Great Depression. After the initial stock market crash of 1929 and subsequent economic plunge, a recovery began in the summer of 1932, well before the New Deal. The Federal Reserve Board's Index of Industrial production rose nearly 50% between the Depression's trough of July 1932 and June 1933. This was a period of significant deflation. Inflation began after June 1933, following the demise of the gold standard. Despite higher aggregate demand, industrial production was roughly flat over the following year...
I defy anybody to read the first three paragraphs of Cole and Ohanian and not believe that Cole and Ohanian's "main point" is that the level of production is unrelated to aggregate demand--that Romer and Bernanke are wrong in claiming a link. We are told that production "rose nearly 50%… [in] a period of significant deflation". We are told that "despite higher aggregate demand, industrial production was roughly flat…"
If Cole and Ohanian want to delete the first three paragraphs from their op-ed, that would be good.
The proper lesson to be learned here is that the WSJ op-ed authors knowingly mislead their audience.
Monday, September 26, 2011
The Tale of the Insensitive BBC Trader
The latest thing that's got everyone up in arms is a day trader named Alessio Rastani, who got on the BBC and told a story where he seemed to say that he's really eager for the economy to crash so he can profit. Here's the video:
What he's saying is essentially that traders aren't concerned about the fate of the global economy-- they're looking for opportunities to profit based on market trends.
Now, I kinda get where all the outrage is coming from, but it's misguided. The reality is that no trader at a hedge fund or at Goldman Sachs or at Credit Suisse is trying to crash the global economy-- they're looking at the economy, finding opportunities, and trying to deploy their capital in a way that benefits their bottom line. Does that serve a particularly useful social function? Eh, sort of. But it's hardly something to gasp about. It's like starting a funeral service in the middle of a plague-- it's pretty unseemly, but it doesn't do anything actively malicious or harmful.
Another useful way for those who are outraged by it (who are primarily liberals) to see it is by looking at an incident that happened 20 years ago involving liberal icon George Soros. In 1992, the British government was committed to tie the value of the pound to the German mark in a step designed to allow for a smooth transition to a single currency (what would become the Euro). The British exchequer (their Treasury) committed to keep the pound valued within a certain range of the mark. But in 1992, as Germany's economy started to overheat in the aftermath of reunification, the mark strengthened in value. Meanwhile, the British were stuck in a nasty recession. Realizing that the British wouldn't be able to maintain their peg, Soros (and others) took out a massive short position in the pound-- they bought up pounds and exchanged them for marks until the British Treasury ran out of foreign exchange reserves and had to leave the ERM. The resulting devaluation allowed Britain to ultimately escape the nasty recession it was in. In the process, Soros made over $1 billion in pure profit on the trade (at the expense of, essentially, British taxpayers). Was there anything "evil" about this? I don't think so... Soros profited from a market inefficiency that the British hadn't resolved, and the end result was productive for all involved.
Broadly speaking, traders are in the same boat. They watch macro trends and profit from them (if they bet right). They're not evil agents out to undermine the economy-- they're just profiting from governments that can't fix their own economies. So instead of vilifying this clown, it's probably a better idea to vilify the German government, whose policy chokehold over Europe is set to drive the global economy off a cliff.
What he's saying is essentially that traders aren't concerned about the fate of the global economy-- they're looking for opportunities to profit based on market trends.
Now, I kinda get where all the outrage is coming from, but it's misguided. The reality is that no trader at a hedge fund or at Goldman Sachs or at Credit Suisse is trying to crash the global economy-- they're looking at the economy, finding opportunities, and trying to deploy their capital in a way that benefits their bottom line. Does that serve a particularly useful social function? Eh, sort of. But it's hardly something to gasp about. It's like starting a funeral service in the middle of a plague-- it's pretty unseemly, but it doesn't do anything actively malicious or harmful.
Another useful way for those who are outraged by it (who are primarily liberals) to see it is by looking at an incident that happened 20 years ago involving liberal icon George Soros. In 1992, the British government was committed to tie the value of the pound to the German mark in a step designed to allow for a smooth transition to a single currency (what would become the Euro). The British exchequer (their Treasury) committed to keep the pound valued within a certain range of the mark. But in 1992, as Germany's economy started to overheat in the aftermath of reunification, the mark strengthened in value. Meanwhile, the British were stuck in a nasty recession. Realizing that the British wouldn't be able to maintain their peg, Soros (and others) took out a massive short position in the pound-- they bought up pounds and exchanged them for marks until the British Treasury ran out of foreign exchange reserves and had to leave the ERM. The resulting devaluation allowed Britain to ultimately escape the nasty recession it was in. In the process, Soros made over $1 billion in pure profit on the trade (at the expense of, essentially, British taxpayers). Was there anything "evil" about this? I don't think so... Soros profited from a market inefficiency that the British hadn't resolved, and the end result was productive for all involved.
Broadly speaking, traders are in the same boat. They watch macro trends and profit from them (if they bet right). They're not evil agents out to undermine the economy-- they're just profiting from governments that can't fix their own economies. So instead of vilifying this clown, it's probably a better idea to vilify the German government, whose policy chokehold over Europe is set to drive the global economy off a cliff.
The Next Big Crisis
Even though the market meltdown in the aftermath of Lehman's collapse came after about a year of slow boiling in financial markets (beginning with BNP Paribas suspending redemptions on its subprime-invested hedge funds in 2007 and continuing with Bear Stearns's acquisition by JPMorgan and the government's placement of Fannie Mae and Freddie Mac into conservatorship), relatively few people expected the housing crisis to have as profound an effect on the global economy as it did. But now, barely 4 years after Lehman, we're seeing the same kind of build-up coming in slow motion. Except this time, the problem isn't just housing in the US and parts of Europe-- it's European sovereigns.
Now, there's a conventional story people (read: American conservatives, and, on some issues, the Germans) like to tell about why Europe's in trouble, and it's important to know that, for the most part, that story is BS. It's not "massive welfare states" and "irresponsible government spending" that have Europe on the edge of collapse-- that's a major part of the story for Greece, but if that were the story, Spain and Ireland would be fine (they had little debt and budget surpluses in 2007), and Italy would be humming along (it's got a heavy debt burden, but the budget is more or less balanced). The problem, really, is that the Eurozone is fundamentally a problem-- there's a massive mismatch between what the Germans want (low inflation) and what the peripheral countries need (monetary easing combined with fiscal stimulus). To be able to pay off their debt loads, what the peripheral countries need is devaluation-- they need their wages and prices to fall relative to Germany and France's. That would allow them to export more goods to the Germans, boost their employment, and begin to pay off their debts. But the Germans won't play along. While the press focuses on the subsidy the Euro provided to countries like Greece and Ireland (which borrowed at German rates until they didn't), there's a subsidy that Germany gets that is overlooked by the financial press. A huge chunk of Germany's economic success has come from the strength of its export sector. And that export sector has been fueled in large part by the fact that the Euro is (and has long been) valued lower than the Deutschemark would be were it still in existence. That is, while German workers are substantially more productive than Greek or Italian workers on balance, their labor is valued in the same currency units, which allows Germany to export a ton of goods and keeps its economy buzzing along. And the Germans won't readily accept higher inflation that would allow the peripheral countries to revalue because it would mean giving up some of their export advantages in the process. And internal deflation by the peripheral economies without German inflation won't work either because that would boost the real value of those countries' debts and make repayment even harder than it already is.
So Europe is stuck between a rock and a hard place-- its solution so far has been to kick the can down the road, providing loan subsidies tied to austerity demands in hopes that somehow the Greek, Spanish, Irish, Italian and Portuguese economies will magically start growing and will allow them to start making progress on repaying their debts. But that's a fool's hope. It might happen someday, but for now, there's no light at the end of the tunnel-- it looks like Europe is looking at the comatose patient and hoping the feeding tube will be enough to pull him out of his coma.
What Europe actually needs is systemic rebalancing-- it needs substantiallly higher (maybe 4%) inflation in the core countries that will make it relatively less painful for the peripheral countries to devalue compared to the core. It needs significant fiscal transfers from the core to the periphery to jump-start demand, and a Eurobond program that makes individual countries' obligations collective "European" obligations. It also needs looser monetary policy from the ECB-- hyperinflation is bad and all, but worrying about it in the current climate is absurd-- it's like agonizing over heatstroke on the North Pole. Collectively, those steps might make Europe less likely to blow up fast. But even then, it would take quite a bit of luck to diffuse the ticking time bomb on the continent.
While Europe might spend the next few months kicking the can down the road, the reality is that the continent is under speculative attack. And the attackers know that, economically, the rebalancing they're betting on needs to happen, so they'll press their advantage. That means half-measures won't go far: there are two ways to halt a speculative attack-- by definitively resolving the problem, or by caving in. In 1992, when the British pound's peg to the deutschemark was under speculative attack from George Soros and a bunch of other hedge fund giants, the attack ended when Britain had to abandon the peg and leave the exchange-rate mechanism (almost certainly for its own good). In 2008, when the stocks of the stand-alone investment banks came under speculative attack after Lehman collapsed and Merrill Lynch was acquired by Bank of America, Morgan Stanley and Goldman halted the attack by becoming bank holding companies and getting permanent access to the Fed's discount window, instantly allaying concerns about their liquidity. To resolve the issue in Europe, half-measures won't do: to avoid defaults and a rapid, disorderly blowup of the Eurozone, similarly decisive steps are essential. But right now, it doesn't look like we'll get them.
Monday, August 29, 2011
Economic Thoughts for the Week
There are two topics I feel like should be addressed coming out of the news. One is a piece of news and the other is an interesting opinion piece.
I'll start with the news: President Obama nominated Alan Krueger to head his Council of Economic Advisers , replacing Austan Goolsbee at the helm. Krueger's a good appointment, given the constraints-- he's a well-known labor economist from Princeton who's more or less a mainstream, middle of the road thinker when it comes to macro. Which, of course, means Republicans will denounce him as Karl Marx's bastard son (even as George W. Bush and Reagan's CEA chairmen, Greg Mankiw, and Marty Feldstein, praised him). Even though I like Krueger, the politics dictate that not much will be done on the jobs front-- we might get some tax incentives to create jobs, but we're not going to get the kind of massive action we need to get the economy on a sustainable recovery track.
The second interesting article comes from Bush II's speechwriter, David Frum, suggesting the three big mistakes Obama made. As has usually been the case with Frum lately, his arguments are pretty spot-on in substance, but he's pretty awful at apportioning blame. So, in order, the mistakes Frum cited. First, he suggests that Obama left writing the stimulus to Congressional Democrats, and got an ineffective stimulus. I'd argue that, yes, Obama can be blamed for the stimulus, but not because it was Democrats who wrote it, but because what he suggested was too small and was designed to be able to win Republican votes. As mistaken parts of the stimulus, Frum points out $15 billion for Pell grants, $9 billion for rural and community development, and a $20 billion renewable energy tax credit. All of which are pretty much direct stimulus, aside from maybe the Pell grants, which allow the extremely poor to go to college. That's not really direct stimulus, but it's certainly not a waste of money, as it's an investment in the future. Then he attacked aid to state and local governments, which is probably the most direct job-saving there is. States (stupidly) can't borrow to meet budget shortfalls from bad economic times, so without federal funds, the depressed economy would have meant millions of teachers and firefighters would have had to be fired in response to the recession. Then, the last thing Frum argues is that the tax cuts from the stimulus were ineffective. Well, yeah. But it's not Congressional Democrats who are desperate for taxes, under all circumstances (Nonsense from the Fox News types aside, we collected under 15% of GDP in taxes the last two years, despite GDP being depressed. That's the least we've collected at the federal level since 1949 and 1950, before Medicare or Medicaid existed). So, while it can be argued that Obama was insufficiently proactive with the stimulus, the problem isn't what Frum listed, but the insufficient size of the stimulus, and the compromises made in it to appease Republicans.
Second, Frum argues that Obama didn't "mobilize the Fed to support his fiscal stimulus" or get his nominees confirmed to the Fed board. Which is just silly. The Fed is an independent agency. And Obama nominated very, very qualified people to the Fed board, most notably MIT economist Peter Diamond. But confirming Peter Diamond isn't Obama's job, it's Congress's. I suppose he could have recess-appointed Diamond, and you can fault him for not doing that, but Frum essentially acknowledges that Republicans are nuts for obstructing monetary stimulus and refusing to appoint extremely qualified people to the Fed board... then faults Obama for somehow not forcing a party that considers him Hitler reincarnated to confirm those nominees. Again, on substance, Frum is right, but choosing this as a "big mistake" on OBAMA'S part is kind of bizarre...
Third, Frum argues that Obama planned his presidency around the best-case scenario. In that regard, he's spot on. Obama's habitually bet on outcomes that were unlikely, and assumed that the best would happen instead of preparing for the worst. His stimulus was too small, and, crucially, rather than acknowledging that it was too small at the time, Obama pretended that it was just the right size. In essence, instead of doing the maximum and hoping that it was too much, he did the minimum and didn't prepare for scenarios in which that would be insufficient. In that regard, Frum captures the biggest habitual problem of Obama's presidency.
I'll start with the news: President Obama nominated Alan Krueger to head his Council of Economic Advisers , replacing Austan Goolsbee at the helm. Krueger's a good appointment, given the constraints-- he's a well-known labor economist from Princeton who's more or less a mainstream, middle of the road thinker when it comes to macro. Which, of course, means Republicans will denounce him as Karl Marx's bastard son (even as George W. Bush and Reagan's CEA chairmen, Greg Mankiw, and Marty Feldstein, praised him). Even though I like Krueger, the politics dictate that not much will be done on the jobs front-- we might get some tax incentives to create jobs, but we're not going to get the kind of massive action we need to get the economy on a sustainable recovery track.
The second interesting article comes from Bush II's speechwriter, David Frum, suggesting the three big mistakes Obama made. As has usually been the case with Frum lately, his arguments are pretty spot-on in substance, but he's pretty awful at apportioning blame. So, in order, the mistakes Frum cited. First, he suggests that Obama left writing the stimulus to Congressional Democrats, and got an ineffective stimulus. I'd argue that, yes, Obama can be blamed for the stimulus, but not because it was Democrats who wrote it, but because what he suggested was too small and was designed to be able to win Republican votes. As mistaken parts of the stimulus, Frum points out $15 billion for Pell grants, $9 billion for rural and community development, and a $20 billion renewable energy tax credit. All of which are pretty much direct stimulus, aside from maybe the Pell grants, which allow the extremely poor to go to college. That's not really direct stimulus, but it's certainly not a waste of money, as it's an investment in the future. Then he attacked aid to state and local governments, which is probably the most direct job-saving there is. States (stupidly) can't borrow to meet budget shortfalls from bad economic times, so without federal funds, the depressed economy would have meant millions of teachers and firefighters would have had to be fired in response to the recession. Then, the last thing Frum argues is that the tax cuts from the stimulus were ineffective. Well, yeah. But it's not Congressional Democrats who are desperate for taxes, under all circumstances (Nonsense from the Fox News types aside, we collected under 15% of GDP in taxes the last two years, despite GDP being depressed. That's the least we've collected at the federal level since 1949 and 1950, before Medicare or Medicaid existed). So, while it can be argued that Obama was insufficiently proactive with the stimulus, the problem isn't what Frum listed, but the insufficient size of the stimulus, and the compromises made in it to appease Republicans.
Second, Frum argues that Obama didn't "mobilize the Fed to support his fiscal stimulus" or get his nominees confirmed to the Fed board. Which is just silly. The Fed is an independent agency. And Obama nominated very, very qualified people to the Fed board, most notably MIT economist Peter Diamond. But confirming Peter Diamond isn't Obama's job, it's Congress's. I suppose he could have recess-appointed Diamond, and you can fault him for not doing that, but Frum essentially acknowledges that Republicans are nuts for obstructing monetary stimulus and refusing to appoint extremely qualified people to the Fed board... then faults Obama for somehow not forcing a party that considers him Hitler reincarnated to confirm those nominees. Again, on substance, Frum is right, but choosing this as a "big mistake" on OBAMA'S part is kind of bizarre...
Third, Frum argues that Obama planned his presidency around the best-case scenario. In that regard, he's spot on. Obama's habitually bet on outcomes that were unlikely, and assumed that the best would happen instead of preparing for the worst. His stimulus was too small, and, crucially, rather than acknowledging that it was too small at the time, Obama pretended that it was just the right size. In essence, instead of doing the maximum and hoping that it was too much, he did the minimum and didn't prepare for scenarios in which that would be insufficient. In that regard, Frum captures the biggest habitual problem of Obama's presidency.
Sunday, August 21, 2011
Jobs!
Apparently, Obama is set to start talking about jobs now that the debt ceiling fiasco is over. My first reaction is that it's about time. Jobs are definitely the most pressing economic issue the country faces. Deficits right now are a made-up problem. There's a long-run health care cost problem, and a short-run growth problem. Logic and reason say we should address the short-run growth problem, and deal with the long-run health care cost problem later. But politics says we ignore the short-run growth problem and... pass a deficit-reduction plan that doesn't restore growth or fix the deficit. The worst part is it doesn't have to be this way: most Americans' primary concern is (rightly) jobs, and it's what the political system should be dealing with.
This article provides two competing solutions, one of which makes sense, the other of which doesn't. The correct suggestion is that the government subsidize private-sector jobs. This has two positive effects. First, it gets long-term unemployed workers back to work, which keeps their skills from eroding and thereby improves their long-term productivity. Second, it is a backdoor way to get demand into the economy-- if the government pays workers' wages, those wages will be spent, which stimulates demand and encourages other firms to hire. The obvious alternate demand-side policy option is for the government to hire workers directly. There are benefits and drawbacks to the subsidy approach in this regard. The benefit is that, by getting workers into private sector jobs, it better prepares those workers for the kinds of jobs that they will be doing when the economy returns to something resembling full employment (whenever that might be). The biggest drawback, though, is that you're left with the same chicken-and-egg problem as you have with tax cuts: sure, hiring workers is cheaper, but hiring workers means expanding, and if consumers aren't buying products, there's no market to expand into. So you'll be making it easier to hire... but companies don't have any reason to hire anyway because the demand isn't there. So the effects are less direct than if the government hires workers directly and puts them to work.
But this option is still superior to the alternative, which is government-sponsored job training. This approach is pretty nonsensical, given the nature of the issue. Does improving workers' skill make them more attractive to hire? Sure. But the training does absolutely nothing to resolve the demand problems the economy has. This approach would make sense if our economy had some sectors with too many workers for too few jobs, and other sectors with too many jobs for too few workers. That's not our problem. Our problem is an across-the-board lack of demand in all sectors, a finding which is borne out by the data. So training workers isn't going to do any good if the demand isn't there.
But, while the latter approach is a waste of money, the former approach would have to be implemented on a large scale to be effective. Given all the deficit scaremongering, it's not going to happen. Never mind that fixing the employment problem is the best way to shrink the deficit...
This article provides two competing solutions, one of which makes sense, the other of which doesn't. The correct suggestion is that the government subsidize private-sector jobs. This has two positive effects. First, it gets long-term unemployed workers back to work, which keeps their skills from eroding and thereby improves their long-term productivity. Second, it is a backdoor way to get demand into the economy-- if the government pays workers' wages, those wages will be spent, which stimulates demand and encourages other firms to hire. The obvious alternate demand-side policy option is for the government to hire workers directly. There are benefits and drawbacks to the subsidy approach in this regard. The benefit is that, by getting workers into private sector jobs, it better prepares those workers for the kinds of jobs that they will be doing when the economy returns to something resembling full employment (whenever that might be). The biggest drawback, though, is that you're left with the same chicken-and-egg problem as you have with tax cuts: sure, hiring workers is cheaper, but hiring workers means expanding, and if consumers aren't buying products, there's no market to expand into. So you'll be making it easier to hire... but companies don't have any reason to hire anyway because the demand isn't there. So the effects are less direct than if the government hires workers directly and puts them to work.
But this option is still superior to the alternative, which is government-sponsored job training. This approach is pretty nonsensical, given the nature of the issue. Does improving workers' skill make them more attractive to hire? Sure. But the training does absolutely nothing to resolve the demand problems the economy has. This approach would make sense if our economy had some sectors with too many workers for too few jobs, and other sectors with too many jobs for too few workers. That's not our problem. Our problem is an across-the-board lack of demand in all sectors, a finding which is borne out by the data. So training workers isn't going to do any good if the demand isn't there.
But, while the latter approach is a waste of money, the former approach would have to be implemented on a large scale to be effective. Given all the deficit scaremongering, it's not going to happen. Never mind that fixing the employment problem is the best way to shrink the deficit...
Tuesday, August 9, 2011
Tuesday Musings
Looks like the ECB's effort to stop the fire in Europe is actually working. Italian 10-year bond yields dropped significantly today after the ECB's bond-buying program, meaning there's a bit less fear of contagion. Some might claim that this is obvious-- if the ECB is buying bonds, of course the yield will go down. But the alternate scenario would be bondholders revolting at holding bonds they see as risky that don't yield enough to compensate them for the risk. Luckily, they aren't. And, on the fundamentals, I think they're right. Italy is running a primary budget surplus, so as long as the interest payments on their large debt burden stay manageable, they should be able to tread water and avoid contagion from the Greek travesty.
In other news, since S&P "downgraded" the US, yields on 10-year Treasuries have fallen by 38 basis points, and rates on 30-year Treasuries have fallen by 26 basis points. And real yields (which take into account inflation expectations are at 0 for 10-year Treasuries and about 1% for 30-year Treasuries. The real yields are actually NEGATIVE for 5- and 7-year bonds, meaning that you're essentially paying to lend the government money for that length of time (people still lend to the government at negative real rates because nominal rates are positive, so holding cash always has a negative real return over time unlses inflation is negative). The point to take from this is: so much for S&P's downgrade throwing the US's solvency into question.
In other news, since S&P "downgraded" the US, yields on 10-year Treasuries have fallen by 38 basis points, and rates on 30-year Treasuries have fallen by 26 basis points. And real yields (which take into account inflation expectations are at 0 for 10-year Treasuries and about 1% for 30-year Treasuries. The real yields are actually NEGATIVE for 5- and 7-year bonds, meaning that you're essentially paying to lend the government money for that length of time (people still lend to the government at negative real rates because nominal rates are positive, so holding cash always has a negative real return over time unlses inflation is negative). The point to take from this is: so much for S&P's downgrade throwing the US's solvency into question.
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