Economist's View

"Recovery Act Kept 4.5 Million People Out of Poverty in 2009"

According to this CBPP analysis, the ARRA lifted millions out of poverty:

Recovery Act Kept 4.5 Million People Out of Poverty in 2009, Helping Keep Poverty Flat: Our analysis of data that the Census Bureau released this week shows that the 2009 American Recovery and Reinvestment Act was one of the single most effective pieces of antipoverty legislation in decades. In 2009, the Recovery Act’s temporary expansion of the safety net kept 4.5 million people out of poverty.

...On Tuesday, the Census Bureau released several new poverty figures for 2009 that rely on alternative, broader poverty measures — ones that include tax credits and non-cash benefits. Under almost all of these alternative measures, the safety net as a whole, including the Recovery Act expansions, prevented any rise in poverty in 2009, despite the deep recession and very high unemployment. ... We examined the Census data to see how much of that poverty-reducing impact came from the Recovery Act expansions. We found that they kept more than 4.5 million people out of poverty in 2009 (see graph)...

"Time to Cut the Cord"

Tim Duy has had enough:

Time To Cut The Cord: I see that Comcast just raised cable prices.  I find it remarkable that cable companies apparently can not see the train wreck ahead.  I figure that I can drop the cable and the phone (who uses a landline anymore?), ugrade to a faster internet connection and still come out ahead nearly $100 a month.

$100 a month will buy more AppleTV rentals than I can watch, especially given the vast amount of free content now available.  Pay a dollar, rent a show commerical free, or watch online for free with limited commerical interruptions.  Skip the middle men of the cable companies. How long do the cable companies think they can last charging people for dozens of channels they never watch?  I don't see how that model survives.

The one challenge I know I will face is sports programming.  But I think I can find plenty of places in town to watch the Ducks play and socialize at the same time. 

Anyone else cutting the cord?  Happy with the decision?

The CBO Rebuts Republican Claims About the Affordable Care Act

The CBO knocks down the Republican claim that the health care legislation passed last year is a "job-killer." The CBPP explains:

No Evidence for House Republican Charge that Health Reform Is a “Job-Killer”, by Chad Stone and Paul N. Van de Water: Health reform will change the American economy in many ways over the next few decades, but it will not significantly change the number of jobs or the unemployment rate. A nonpartisan economic assessment by the Congressional Budget Office (CBO) finds a variety of possible labor market effects, some positive and some negative, but nothing that justifies the inflammatory “job-killing” rhetoric invoked in House Republicans’ efforts to repeal the legislation.

House Republican claims that the legislation (the Affordable Care Act) is a “job-killer” imply that health reform measures will be a major drag on the economy because they will allegedly increase employers’ costs. But these claims are not supported by evidence, and they are at odds with leading non-partisan assessments of how health reform legislation will affect the economy and labor markets. ...

Unlike House Republicans’ claims that health reform is a “job killer,” CBO’s assessment that health reform will have only modest effects (both positive and negative) on U.S. labor markets is based on an examination of the evidence. ...

The CBO also notes that the Republicans' plans to repeal the Affordable Care Act will cause the federal deficit to increase by qa substantial amount. Jonathan Cohn has the numbers:

CBO Paints Grim Picture of Repeal, TNR: ...The CBO is projecting that repeal would increase the federal deficit by around $230 billion in the next decade and by an even larger amount after that.

Wait, there's more. The CBO also estimated how repeal would affect insurance premiums. And, once again, the effect is entirely predictable. Premiums for people buying coverage on their own would fall a bit, but only because people were getting less protective insurance and because many with pre-existing conditions would be locked out of the market altogether. And even though premiums would be lower, many people buying coverage on their own would still end up paying more for their policies, because they would not benefit from the enormous subsidies that the Affordable Care Act makes available.

Speaking of people locked out of the insurance market, the CBO ran the numbers on the uninsured. An additional 32 million people would be expected to go without health insurance, bringing the percentage of non-elderly adults without coverage to 17 percent, which is more or less what it is today.

So there you have it: According to one of our most reliable and nonpartisan authorities, repealing the Affordable Care Act would mean higher deficits plus insurance that is less comprehensive, less available, and in many cases more expensive. 

A large increase in the deficit, more expensive, less comprehensive, harder to obtain coverage, and no increase in employment. Heck of a plan.

Fed Watch: Generally Positive

Tim Duy is "generally positive" about the economy, but still sees reasons to worry:

Generally Positive, by Tim Duy: Today's ISM nonmanufaturing headline figure provided further evidence the US economy left 2010 on firmer footing. Generally solid internals as well, with both production and new orders posting solid gains. Like its manufacturing cousin, the weak spot was employment, a critical determinant for the evolution of Fed policy this year.

In contrast, the ADP numbers were released with great fanfare, suggesting a 297k gain in private nonfarm payrolls. A potential blowout in the making given that expectations for Friday's employment report was 140k overall. However, a word of caution regarding the ADP figure via the Wall Street Journal:

But there is a seasonal quirk in the ADP number that may have inflated the December number. ADP and Macroeconomic Advisers do a seasonal adjustment that takes into account a typical December purge, where employers who have fired workers over the course of the year but don’t remove them from officials payrolls right away clear the rolls.

Ben Herzon of Macroeconomic Advisers explains: "If companies were laying off fewer employees throughout 2010 than had been the case in recent years, the amount by which the seasonal adjustment process subtracted from [ADP National Employment Report] growth last year through November was too great. Following the same logic, fewer layoffs through November implies fewer December purges than in recent years, so the boost to December employment growth to offset the normal December purge may have been too large."

On the inflation outlook, today's ISM release revealed a higher percentage of firms reporting higher prices. Firming demand may allow firms to pass on some of these cost increases to consumers, but as the Wall Street Journal notes, this isn't a bad outcome:

If higher commodities prices do trigger a small but manageable pickup in U.S. inflation, it will count as a success for the Fed’s extraordinary efforts to avoid the ravages of deflation that have beset Japan these past two decades.

Three additional factors likely to weigh on the Fed: Housing, state and local budgets, and Europe. From the FOMC minutes:

Others pointed to downside risks to growth. One common concern was that the housing sector could weaken further in light of the considerable supply of houses either on the market or likely to come to market. Another concern was the ongoing deterioration in the fiscal position of U.S. states and localities, which could lead to sharp cuts in spending and increases in taxes. In addition, participants expressed concerns about a possible worsening of the banking and financial strains in Europe, which could spill over to U.S. financial markets and institutions, and so to the broader U.S. economy.

Despite an improving revenue picture, state and local budgets are expected to fall short of what is necessary to maintain current service levels, especially given escalating wage and benefit costs. This is likely to remain a drag on growth - and jobs - until the governments realign spending and revenue growth trends. Nothing really new here, just an ongoing concern.

And, finally, Europe. Via CR, Europe looks to be heading to renewed crisis. It would appear that despite all the EU interventions, investors believe a day of reckoning is still at hand, that at most sovereign defaults have simply been pushed out three years. I find it difficult to see how the situation is resolved without an enhanced fiscal authority in Europe with the power to make transfers, not loans, from solvent to insolvent regions, the exit of some nations from the Euro, or some combination of these two. I wish that European leaders would see the light sooner than later rather than dragging us through two or three more crises.

Bottom Line: Data continues to be supportive, with at least one more hint of solid job growth to add to the improving trend evidence in initial claims. Still, the hole we are in is deep, not every piece of data has fallen into line, the positive trends are relatively recent, and at least three swords are still holding over the heads of FOMC members. The combination should keep policymakers clinging to the current stance of monetary policy, although even the more dovish will need to publicly recognize the more solid pattern of data sooner than later.

links for 2011-01-05

• Group Effects and Economic Outcomes - Bruce Weinberg
• Disasters and the traps of poverty and wealth - OECD Insights
• Income inequality: Our global oligarchs - The Economist
• Prison Populations, Crime and “Present Orientedness” - Rortybomb
• The Scientific Value of Attaching Significance to Arbitrary Dates - Cheap Talk
• Blogging, brand building and idea retention - Abnormal Returns
• Fed’s Hoenig Defends Role of Dissenter - Real Time Economics
• The New Financial Elite, Rubinites and the Democratic Party - Rortybomb
• The Caveat Behind the Strong ADP Jobs Gain - Real Time Economics
• France as Theodore Zeldin saw it - UnderstandingSociety
• Fiscal Shock - Paul Krugman
• Who Benefits from Tax Expenditures? - The Baseline Scenario
• Gene Sperling 101 - NYTimes.com
• Confronting Model Misspecification in Macroeconomics - NEP-DGE Blog
• The Shameful Attack on Public Employees - Robert Reich
• Free markets can still feed the world - Robert Zoellick
• Bernanke to Take Journalists’ Questions - Real Time Economics
• Diamond Gets Third Shot at Central Bank Seat - Real Time Economics

"The Income Distribution"

Stephen Williamson takes issue with my column on inequality. He says education rather than redistribution of income is the answer:

The Income Distribution, by Stephen Williamson: This piece by Mark Thoma is a strange one, but it at least got me thinking. Mark starts with:

There is an equivalent of a Laffer curve for inequality, but the variable of interest is economic growth rather than tax revenue. We know that a society with perfect equality does not grow at the fastest possible rate. When everyone gets an equal share of income, people lose the incentive to try and get ahead of others. We also know that a society where one person has almost everything while everyone else struggles to survive – the most unequal distribution of income imaginable – will not grow at the fastest possible rate either. Thus, the growth-maximizing level of inequality must lie somewhere between these two extremes.

The "Laffer curve for inequality" is new to me, so I was hoping for a little more in terms of theory, but I guess the rest of the paragraph will have to do. Here's what Mark might have in mind here, though it's hard to tell. From standard neoclassical growth theory, we know that growth in our standard of living is driven by growth an aggregate TFP (total factor productivity), which in turn depends on technological innovation, and the efficiency with which factor inputs are allocated across productive units. Suppose we focus only on technological innovation. Innovators of course need incentives. Innovation is costly, and the reward needs to be sufficient to make it worthwhile. Now, imagine a population of identical people who have two choices: they can engage in risky innovation, or they can engage in subsistence farming. Also, suppose that there is one person - call him Kim Jong-Il - in this society, who has the power to redistribute income at will.

Suppose, on the one hand, that Kim Jong-Il is an egalitarian, and chooses to equalize income across the population. Then, there is no innovation, and this economy will be stuck in subsistence farming forever. On the other hand, suppose that Kim Jong-Il is, well, Kim Jong-Il. He starves the population, actually keeping them below what we would think of as subsistence, but still healthy enough to produce some extra stuff for the dear leader. There is no innovation in this society either, and it remains stuck.

So, now we have two points on the Laffer curve for inequality. What happens in between? Well, there are many ways in which we can redistribute income. We can provide some minimum quantity of a particular service - e.g. health care - for everyone; we can provide insurance against bad events - e.g. unemployment; we can tax some people and use the proceeds to provide public education for anyone who wants it. The effects on innovation will of course have a lot to do with how we do the redistribution. For example, unemployment insurance and welfare could have the effect of deterring innovation through poor incentives, but if the risk of innovation is difficult or impossible to insure through private financial markets, social insurance might actually increase innovation.

This certainly seems interesting. Now, where is Mark going with this? He drops this one:

We may be near or even past the level of inequality where growth begins falling.

So, Mark's concern is that we are entering Kim Jong-Il territory, which would certainly be distressing. What's the evidence for this?

The evidence on this is highly uncertain, so it’s difficult to say.

So Mark admits to not knowing what is going on, but he's quite willing to bull ahead with a policy recommendation:

But increasingly I am of the view that even if we could level the domestic playing field, it still won’t solve our wage stagnation and inequality problems. Redistribution of income appears to be the only answer.

Basically, Mark wants to throw in the towel on education and embark on an income redistribution project. Though the details of the redistribution are critical, Mark avoids specifics.

What do I think? What anyone can see with their own eyes in American cities is appalling. Many of our graduate students come from countries where people are much less well-off than is the average American, and they find it appalling. In many cases, for example here in St. Louis, the first world lives comfortably a short distance from the third world. The dispersion in income across the population in the US is large relative to what it is in other wealthy countries, and that dispersion has increased over the last few decades. Maybe we would not be too bothered by that if we thought that there was high mobility among income classes over time, but we know that there is a significant fraction of the population that is stuck near the bottom.

What's to be done? I'm certain that dumping cash in the inner cities will not promote economic growth in the United States, just as dumping cash in sub-Saharan Africa will not increase world economic growth. The answer has to be education. Here's an example of a sharp economist who has not thrown in the towel. Art Rolnick, recently retired from the Federal Reserve Bank of Minneapolis, has been an advocate of early childhood education. He uses economic evidence, including work by Heckman, to argue that the benefit/cost ratio for funds spent on early childhood education is very large. Further, he puts his time and effort where his mouth is. Indeed, Art embodies what is best in the economics profession: productive work toward a better society using a solid foundation of theory and empirical evidence.

I hope people realize that I have space constraints in the column, so I can't cover every point in depth.

Williamson is wrong to assert that I advocate "throwing in the towel" on education. But I don't think we should exaggerate our ability to make progress in this area either. Let me repeat something I wrote recently in response to a Mankiw column making the same argument as Williamson:

No disagreement on the need to provide better education. But to suggest that we can somehow fix education and solve the problem -- something we've been trying to do without success for decades now -- is wishful thinking. And even if we could somehow fix the education problem, it will be decades before it brings results, it does nothing to resolve existing problems that have built up over time due to our failure to provide a level playing field (which extends well beyond just education). For those who are worried about losing their "hard-earned cash," this is a convenient argument for forestalling redistributive policies that might correct for past inequities. But practically we shouldn't expect that somehow we are going to magically transform education and solve these problems. We need much more than that, and it will require those who have benefited so much from our economic system in the past several decades to help those who have seen their incomes stagnate.

And let me add one more argument from the past -- even if we could improve education overnight, it is not the answer for everyone:

[W]hen the private sector finally begins reabsorbing the unemployed, the underemployed, and the discouraged, we want people to be able to find jobs with decent wages and benefits -- jobs that are as good or better than the jobs they had before.

But where, exactly, will those jobs come from? I wish I had the answer.

Education is part of it, better education means better jobs on average, and it's easy to imagine a substantial fraction of the population benefiting from an educational advantage. So I won't back off prior calls to improve education at all levels.

But even if we substantially improve education, it won't fully solve the problem. There will still be a need for quality jobs that are not all that dependent upon knowledge based skills. However, it's harder to imagine an emerging set of industries that will provide the large number of quality jobs that we need to replace those lost from industries in decline.

If these jobs fail to be created in the next years and decades, the result will be an ever widening gap in the distribution of income with, as now, a group at the top doing relatively well, and everyone else treading water at best.

Is it overly pessimistic to worry that we may be headed in that direction?

"Debt Ceiling Politics"

Jim Hamilton:

Debt ceiling politics, Econbrowser: The decision to raise the debt ceiling will be the first test of whether the Republicans can move from tree shaking to jelly making.

Some, like Rep. Mike Kelly (R-PA), don't seem particularly keen on making jelly just yet, declaring

Raising the debt ceiling to me is absolutely irresponsible.

Rep. Michele Bachmann (R-MN) has an online petition in which people are asked to agree that:

With national debt $13.8 trillion and counting, Congress' spending frenzy cannot continue. It's time to force our elected officials to stop spending cold turkey, and we can start by making sure they do not raise the debt ceiling.

That's why I'm asking you to personally tell Congress not to increase the amount of money the government can borrow by adding your name to the "Don't Raise the Debt Ceiling" petition.

Which inspires me to reproduce a statement I made four years ago:

There is of course an accounting identity that relates the government budget deficit (the excess of spending over receipts) to the government debt (the total amount that the government has borrowed). A deficit necessarily implies an increase in the debt by the same magnitude.

One of the peculiar embarrassments of the American political process is the fact that Congress votes separately on the deficit and debt, as if they were two different decisions. This bizarre arrangement allows Congress the luxury of instructing the Treasury to spend more than it takes in as revenue while at the same time voting to deny the authority to borrow the funds that would be necessary to implement the plan.

If the government is (a) required by the deficit legislation to spend, and (b) precluded by the debt legislation from borrowing, the Treasury would be forced into default. The greater the likelihood markets attach to such an event, the higher will be the interest rate the government has to pay on Treasury debt. A politician who votes for the spending and tax measures that produced the deficit but against a debt ceiling consistent with these is deliberately wasting taxpayer dollars for no purpose other than to grandstand before voters as a "fiscal conservative". Anyone playing such a game has complete contempt for the intelligence of their constituents.

...If you have a concrete proposal to raise tax revenue or cut spending, then put it on the table. But if you simply want to grandstand on the debt ceiling as if it were a stand-alone issue, it is clear that you have nothing but contempt for the voters.

And if so, then you deserve the same in return.

GOP Backs Away from Promise to Cut Spending

I thought Republicans would end up backing off their pledge to cut expenditures by $100 billion this year, a move that would have led to massive layoffs at the federal level (because at this point in the budget cycle, that's the only way to make it happen) and put the GOP on record as favoring large cuts to popular programs that wouldn't happen anyway, but I didn't think they'd do it so soon (though trying to reduce Tea party expectations as soon as possible is probably wise):

G.O.P. Aims Smaller for Cuts to Budget, NY Times: Many people knowledgeable about the federal budget said House Republicans could not keep their campaign promise to cut $100 billion from domestic spending in a single year. Now it appears that Republicans agree. ...

While House Republicans were never expected to succeed in enacting cuts of that scale, given opposition in the Senate from the Democratic majority and some Republicans, and from President Obama, a House vote would put potentially vulnerable Republican lawmakers on record supporting deep reductions of up to 30 percent in education, research, law enforcement, transportation and more.

Now aides say that the $100 billion figure was hypothetical... Yet “A Pledge to America,” the manifesto House Republicans published last September, included the promise, “We will roll back government spending to pre-stimulus, pre-bailout levels, saving us at least $100 billion in the first year alone.” Republican leaders have repeatedly invoked the number. ...

Does Statistical Significance Stink?

Steve Ziliak emails:

Dear Mark,

When is anosmia - the permanent loss of smell - "significant"?

[There is] a Supreme Court case - to be argued on January 10, 2011 - involving the difference between "statistical" and "practical" significance.

Should drug manufacturers and other companies be required to report the adverse effect of a product on users, if the effect is not statistically significantly different from zero at the 5% level? Can people file claims against companies which fail to warn shareholders about adverse effects that are not statistically significant at the 5% level? These are two of the questions to be decided by the Supreme Court in light of the Securities Exchange Act of 1934.

The case at hand involves Zicam, a zinc-based common cold medicine from Matrixx which evidently causes some users to permanently lose their sense of smell. (It's the nasal form of Zicam, spray and swab, not the pill, that seems to be the main culprit. Over 200 users in the U.S. have filed law suits, with more pending.)

On November 12, 2010, the economist Deirdre N. McCloskey and I filed an amicus brief with the Supreme Court of the United States.

Matrixx, the maker of Zicam, claims that the adverse effect (loss of smell) was not in clinical trials "statistically significant" at the 5% level of statistical significance and thus they claim, incorrectly it turns out, that the adverse effect was not "important" to human health nor to shareholders' wealth. Goodbye, Italian beef! So long lovers, English gardens, and wines of Bordeaux! Your scent is not significant.

Our brief explains - as we do in many articles and in a book, The Cult of Statistical Significance (2008) - why the Supreme Court should not use a bright-line standard of statistical significance, 5% or other, to determine materiality. What matters is in a word "Oomph" (real practical, human, and economic effect) and the odds of getting it. We call it in the brief, "practical importance".

The Acting Solicitor General of the U.S., the AARP, and other economists and lawyers (such as Joseph Mason and Robert Litan) agree. They understand the danger and costs of the current "significance" rule, and contributed a brief saying so to the Supreme Court.

The oral argument is scheduled for January 10, 2011. It is said to be one of the top ten cases of the year as the Court's decision has general and large implications for liability, regulation, and reporting by the Securities and Exchange Commission. Billions of dollars are at stake, true. But so are billions of lives - live smells included. In lower court trials the company claimed it hasn't harmed shareholders or users for not reporting the adverse effect.

Here is our amicus brief. Here is a short paper describing Ziliak's and McCloskey's objection to statistical significance and advocacy of an "economic approach to the logic of uncertainty."

(The above paper, on The Cult of Statistical Significance, is a copy of a lecture I gave at the American Statistical Association/Joint Statistical Meetings, August 2009, in Washington, DC.)

And here are some related articles by me on randomization and significance in medical and economic trials, published in The Lancet (link, link)

Hope your New Year is peaceful and lovely, with all the best smells and tastes,

Sincerely,

Steve Ziliak

A Laffer Curve for Inequality?

We are, once again, live:

A Laffer Curve for Inequality?

I've resisted this, but I've come to the conclusion that income redistribution may be the only way to ensure that the gains from economic growth go to everyone, not just those at the very top.

links for 2011-01-04

• Issa, Senior Republican, Asks Businesses Which Rules They Dislike - NYT
• Why do some rich economies grow faster than others? - Lane Kenworthy
• Measures of Underlying Inflation Below 1% - FRBSF
• Looking back, looking forward - macroblog
• Federal Spending More Popular than the Tea Party Says - Stan Collender
• In the grip of a great convergence - Martin Wolf
• Happy 2011? - voxeo.org
• Urban recovery: Pareto improvement is hard - Richard Green
• Do Public Workers' Diplomas Justify Their Pay? - NYTimes.com
• Fearing (Another) U.S. Debt Default - NYTimes.com
• Where to Draw a Line on Ethics - Edward L. Glaeser
• Jobs Vs The Deficit - Newgeography.com
• Tax-Exempt Bonds for Beginners - The Baseline Scenario

Facing a Marked Global Reversal

Joe Stiglitz is pesimistic aboout globalization:

Facing a marked global reversal, by Joseph Stiglitz, Financial Times: 2011 will be a hard year for globalisation. ... America’s quantitative easing is now viewed as an update of the policies that marked the Great Depression. The world is waking up to the way exchange rates can be used in self-promotion at the expense of others...

Such beggar-thy-neighbour policies didn’t work in 1930s, because countries responded in kind. Today the same will happen. Indeed, emerging markets are already responding... The result? More uncertainty in financial markets, greater fragmentation of capital markets, and a marked reversal in globalisation.

Globalisation’s cheerleaders will thus face an increasingly hard time, as the boom in Asia is seen to come at the expense of jobs elsewhere. .. Those Americans and Europeans who risk losing their jobs will be especially vocal in protest. ...

Fed Watch: A Solid Start To 2011

One more from Tim Duy:

A Solid Start To 2011, by Tim Duy: The ISM manufacturing number was not a blowout by any means. Indeed, the rise to 57.0 headline number was slightly below expectations. Still, it is a solid number and the internals were generally supportive. New orders gained while inventory measures declined, suggesting solid sales that will sustain future production. Not surprisingly, the pricing component remains high, consistent with rising commodity prices - indeed, according to the report, no industries reported falling prices.

The disappointment in the report was the employment measure, which fell from 57.5 to 55.7. I am not sure this tells us much about the impending employment report for the final month of 2010 - I don't think anyone had high hopes that the manufacturing sector would lead a jobs recovery; the minimal gains in durable goods manufacturing stalled out in the second half of 2010 while employment in nondurable goods generally continued the free fall initiated in the mid-90s.

Overall, the ISM report was generally consistent with the relatively upbeat flow of data seen in recent weeks suggesting that growth accelerated to something above trend at the end of 2010. This, coupled with decreasing initial unemployment claims, supports the consensus expectation for 140k nonfarm payroll gain in Friday's report. While well above the dismal October report, it would promise persistent high unemployment, as 140k would be at the top end of estimates of natural labor force growth.

Paul Krugman worries that policymakers will ignore the depth of the recession and instead grab onto the positive data flow to press for fiscal and/or monetary consolidation. On the latter:

I’m also worried about monetary policy. Two months ago, the Federal Reserve announced a new plan to promote job growth by buying long-term bonds; at the time, many observers believed that the initial $600 billion purchase was only the beginning of the story. But now it looks like the end, partly because Republicans are trying to bully the Fed into pulling back, but also because a run of slightly better economic news provides an excuse to do nothing.

There’s even a significant chance that the Fed will raise interest rates later this year — or at least that’s what the futures market seems to think. Doing so in the face of high unemployment and minimal inflation would be crazy, but that doesn’t mean it won’t happen.

I was not optimistic the Fed would opt to continue running the printing press once the current $600 billion of asset purchases is on the balance sheet, and even less so as the data continued to suggest above trend growth. It was only the mid-year slowdown that forced the Fed's hand in the first place. Without that slowdown, the Fed would probably have sat on their hands despite high unemployment.

Will Bernanke & Co. move in reverse this year and actually raise rates? I find that hard to believe given the likelihood growth will fall well short of that required to drive the unemployment rate significantly lower. But I am also not surprised that future markets are pointing in that direction. Indeed, that should be expected given that rates are effectively set near zero - traders have nothing to bet on but a rate increase! That is simply the direction the risk lies.

I am looking for more upbeat data to influence upcoming Fedspeak, confirming expectations that the Fed is preparing to move to the sidelines. On the other hand, I am not hopeful such talk will make its way into Federal Reserve Chairman Ben Bernanke's upcoming Senate testimony. He has displayed a willingness to play his cards close to the chest, not eager to stake out a policy shift in advance of other FOMC members. I don't expect much deviation from the message of December's FOMC statement, with the risk being obvious - that he follows the upbeat flow of data.

Bottom Line: More confirmation that the economy accelerated as we exited 2010, enough to justify winding down the large scale asset purchases and to push more FOMC members to once again think about the exit strategy, but not enough to justify an imminent tightening of monetary policy.

"What Is Rubin's Legacy?"

Tim Duy responds to Brad DeLong's defense of Robert Rubin:

What Is Rubin's Legacy, by Tim Duy: As the candidates for the next NEC chair narrow, a debate has erupted regarding the suitability of candidates either too directly related to former US Treasury Secretary Robert Rubin or Wall Street. Mark Thoma came out first:

I still think a break from the Wall Street connected side of the Clinton administration would have political value.

Brad DeLong subsequently declared his support for Gene Sperling. Next up was Felix Salmon, who, like Thoma, notes that the three leading candidates, Gene Sperling, Roger Altman, and Richard Levin, are all "multi-millionaires with close ties to Wall Street." He singles out Sperling for a particularly harsh criticism, first questioning the nature of Sperling's ties to Wall Street:

...there’s Sperling, who in some ways is the worst of the three when it comes to grubbing money from Wall Street.

Salmon relies on Ezra Klein to paint a picture of Sperling as a low-class influence peddler, and then extends his attack to Sperling's competence:

Noam Scheiber does his best to defend Sperling, but is far from persuasive—the general picture he paints is of a man whose heart might be in the right place but who never seems to get anything done. The last time he was at the NEC he sat quietly by while Treasury pushed through various deregulatory measures; within the Obama administration his main claim to fame seems to be the bank tax, which never actually got enacted.

Finally, he echo's Thoma's concerns:

More generally, Sperling has done nothing to counter the general impression that he’s one of many Rubinites in the administration, in the context of a political atmosphere where one of the few points of agreement between the right and left is that the departure of Summers can and should be taken as an opportunity to finally put as much distance between Obama and Rubin as possible.

This elicits a response from DeLong, who defines himself as a long-time Rubinite and launches into a spirited defense of Rubin:

Robert Rubin went to work for the Clinton Administration in 1993 with four goals: (1) to make the decision-making process work smoothly; (2) to match the tax revenues of the federal government to its spending commitments; (3) to make the tax and transfer system more progressive so that people like him paid more and America's working class paid less; and (4) to make the financial system work more smoothly and transparently and so diminish the rents earned because of market position and institutional connections by people like him.

(1), (2), and (3) were big successes. (4) was a failure--the belief that financial deregulation would diminish Wall Street payouts because organizations like Goldman Sachs would face new competition from deep-pocket commercial banks--turned out to be wrong. Why it was wrong I do not understand. But it was a failure. However, it was not a catastrophic failure--it was not the repeal of Glass-Steagall that caused our current downturn, but rather other and different regulatory failures long after Rubin had left office...

DeLong does acknowledge that Citigroup shareholders have a legitimate gripe, and so do the American people:

I think that if you are an American or a citizen of the world you have a beef with Rubin for believing--as I did--in the "Greenspanist" doctrine that the Federal Reserve had the tools to put a firewall between finance and employment and should thus regard bubbles principally with benign neglect.

What I find curious is that DeLong neglects to mention what I believe was a central element of the Rubin agenda, and an element that was in fact the most disastrous in the long run - the strong Dollar policy.

The strong Dollar policy takes shape in 1995. At that point, Rubin made it clear that the rest of the world was free to manipulate the value of the US Dollar to pursue their own mercantilist interests. This should have been more obvious at the time given that China was last named a currency manipulator in 1994, but the immensity of that decision was lost as the tech boom engulfed America.

Moreover, Rubin adds insult to injury in the Asian Financial Crisis, by using the IMF as a club to enact far reaching reforms on nations seeking aid. The lesson learned - never, ever run a current account deficit. Accumulating massive reserves is the absolute only way to guarantee you can always tell the nice men from the IMF and the US Treasury to get off your front porch.

In effect, Rubin encourages the US to unilaterally enact a new Plaza Accord on itself. Michael Pettis reminds us of what the Plaza Accord meant for Japan:

Not only did Tokyo wait way too long to begin the rebalancing process, but when the rest of the world (i.e. the US) refused to absorb its huge and expanding trade surplus and forced up the value of the yen, Tokyo made things worse – it counteracted the impact of the rising yen by expanding investment, expanding credit, and lowering interest rates. This accelerated Japan’s structural imbalances, set off a further frenzied rise in asset prices and capacity, and worsened the eventual adjustment. This also seems to have happened after China began revaluing the RMB after July 2005.

This sounds like an eerily similar story. To counteract the impact of the rising trade deficit, US policymakers increasingly relied on asset bubbles to support domestic demand. It goes beyond benign neglect, which assumes you know acknowledge you have a bubble. US policymakers didn't even see the train wreck ahead. They simply enjoyed the fruits of the bubble thinking it reflected sound economic policy. Back to 2005:

Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households.

At least Japan had the excuse that they were forced into the Plaza Accord, perhaps justifiably given their expanding current account surplus of the time. Rubin has no such excuse - the strong dollar policy was entirely a self inflicted wound that goes far beyond simple "benign neglect" of bubbles. To be sure, Yves Smith argues in Econned that Asian central banks were threatening to sell Dollar assets, but adds that the main motivation was supporting Japan. Most importantly, Rubin entirely missed how Chinese policymakers would take advantage of America's newfound love for an artificially strong currency.

But did he really miss it? Wall Street was making money hand over foot intermediating the current account deficit, which raises the question that many of us still have: Was Rubin working for the American people or Wall Street? As far as I can tell, the greatest coup of the last two decades was how easily Wall Street managed to secure the support of Democrats, knowing of course they always had the support of Republicans.

And what has been the ultimate achievement then of the Rubin era? A lost decade for jobs and industrial production and a massively unbalanced global economy. The promised compensating job surge in other sectors has so far been absent. Ultimately, didn't Rubin simply lay the foundation for today's economy that is decried by DeLong?:

From here it does look like a two-tier, profit-driven recovery--no parking places within a quarter mile of Tiffanys and long lines at Williams and Sonoma and Sur la Table, with people buying $12 cans of almond paste, while some of my daughter's high school classmates are now being told they cannot afford to go to college next year.

And by the way, it is not clear that we did China any favors either by the strong Dollar policy, as they are now faced with a massive internal rebalancing act - there is no guarantee anymore that China is the future, nor that China will escape the fate of Japan.

I agree with DeLong that being associated with the Wall Street, the Clinton Administration in general and Rubin in particular should not alone disqualify one from serving in the Obama Administration. But we shouldn't give Rubin a free pass either. The strong dollar policy reinforced and entrenched massive and disruptive distortions to patterns of global consumption and production. Unwinding those disruptions is proving to be very costly. The long-term impact of the strong Dollar policy needs to be counted among Rubin's legacies.

links for 2011-01-03

• Making the grade: Equity and efficiency in education - voxeu.org
• States Seek Laws to Curb Power of Unions - NYTimes.com
• He Worked for Goldman Sachs -- But He Didn't Inhale - Andrew Samwick
• House Republicans Outline Budget Cuts - NYTimes.com
• Book review: Dan Gardner's "Future Babble" - Stephen Gordon
• On Reading "The Financial Crisis Primer" - Econbrowser
• The Big Lie - Robert Reich
• Revealing Study of FOMC References to the Fed's Mandate - John Taylor
• Felix Salmon smackdown watch, Rubin/Sperling edition - Felix Salmon
• Saving conservatives from themselves - TheMoneyIllusion
• I'll Never Ration. Not Me. Not I. - NYTimes.com
• Five Possible Dark Clouds Over Brightening Skies - Real Time Economics
• Tax Cuts Trump Deficit Reduction for House Republicans - CBPP
• The Jobs They Are A-Changin' - NYTimes.com
• Taking Aim at Public Workers - NYTimes.com
• Central banks underpin euro and diversify,,, - Rebecca Wilder
• Angus tries to be a one armed economist - Kids Prefer Cheese
• Downward to Stagnation: Wage policies in times of crisis - TripleCrisis
• The Euro and the European Project - Paul Krugman
• Tree-conomics - Nancy Folbre
• Replacing Summers with a Wall Street millionaire - Felix Salmon
• I Am Now, and Have for Eighteen Years Been, a Rubinite... - Brad DeLong
• The End of Relativism? - History of Economics Playground

Rogoff: Armageddon Can Wait

Ken Rogoff:

Armageddon Can Wait, by Kenneth Rogoff, Commentary, Project Syndicate: Where are global currencies headed in 2011? After three years of huge, crisis-driven exchange-rate swings, it is useful to take stock both of currency values and of the exchange-rate system as a whole. And my best guess is that we will see a mix of currency wars, currency collapses, and currency chaos in the year ahead – but that this won’t spell the end of the economic recovery, much less the end of the world. ...[continue reading]...

Paul Krugman: Deep Hole Economics

I've been worried about this as well. Let's Hope against Hope that policymakers don't pursue "economically harmful spending cuts":

Deep Hole Economics, by Paul Krugman, Commentary, NY Times: If there’s one piece of economic wisdom I hope people will grasp this year, it’s this: Even though we may finally have stopped digging, we’re still near the bottom of a very deep hole.

Why do I need to point this out? ... What particularly concerns me is the risk ... that policy makers will look at a few favorable economic indicators, decide that they no longer need to promote recovery, and take steps that send us sliding right back to the bottom. ...

Jobs, not G.D.P. numbers, are what matter to American families. And when you start from an unemployment rate of almost 10 percent, the arithmetic of job creation — the amount of growth you need to get back to a tolerable jobs picture — is daunting.

First of all, we have to grow around 2.5 percent a year just to keep up with rising productivity and population, and hence keep unemployment from rising. ... Now do the math. Suppose that the U.S. economy were to grow at 4 percent a year, starting now and continuing for the next several years. Most people would regard this as excellent performance...

Yet the math says that even with that kind of growth the unemployment rate would be close to 9 percent at the end of this year, and still above 8 percent at the end of 2012. We wouldn’t get to anything resembling full employment until late in Sarah Palin’s first presidential term.

Seriously, what we’re looking at over the next few years, even with pretty good growth, are unemployment rates that not long ago would have been considered catastrophic — because they are. Behind those dry statistics lies a vast landscape of suffering and broken dreams. ...

So what can be done to accelerate this all-too-slow process of healing? A rational political system would long since have created a 21st-century version of the Works Progress Administration — we’d be putting the unemployed to work doing what needs to be done, repairing and improving our fraying infrastructure. ...

Realistically, the best we can hope for from fiscal policy is that Washington doesn’t actively undermine the recovery. Beware, in particular, the Ides of March: by then, the federal government will probably have hit its debt limit and the G.O.P. will try to force President Obama into economically harmful spending cuts.

I’m also worried about monetary policy. Two months ago, the Federal Reserve announced a new plan to promote job growth by buying long-term bonds; at the time, many observers believed that the initial $600 billion purchase was only the beginning of the story. But now it looks like the end, partly because Republicans are trying to bully the Fed into pulling back, but also because a run of slightly better economic news provides an excuse to do nothing.

There’s even a significant chance that the Fed will raise interest rates later this year — or at least that’s what the futures market seems to think. Doing so in the face of high unemployment and minimal inflation would be crazy, but that doesn’t mean it won’t happen.

So back to my original point: whatever the recent economic news, we’re still near the bottom of a very deep hole. We can only hope that enough policy makers understand that point.

Robert Johnson: Deficit Fantasies in the Great Recession

"G.O.P. Vows to Cut Spending and Roll Back Health Care Bill"

In case you had any doubts:

G.O.P. Vows to Cut Spending and Roll Back Health Care Bill, NYT: Congressional Republicans vowed Sunday to use their new majority in the House and their stronger position in the Senate to roll back the Obama administration’s health care overhaul and press for sharp, rapid cuts in spending.

But there is hope:

A flat-out repeal of the health care law would face a steep hurdle in the Senate, where Democrats will cling to a slim majority

This is just the beginning:

Representative Fred Upton of Michigan ... said "...we’re going to go after this bill piece by piece.” Mr. Upton also said the House could use the Congressional Review Act to roll back the Environmental Protection Agency’s sweeping regulations of climate-altering gases from factories and power plants. ... Senator Lindsey Graham, Republican of South Carolina, said ... that the fight over health care would most likely be waged in Congress by cutting financing for implementation, and in state capitals by fighting the law’s new requirements.

And:

Congress will face two major spending-related fights: a vote to extend a continuing resolution to finance the operations of the government, and a vote to raise the ceiling on the public debt. Tea Party activists have vowed to use the votes to make a point about the need for fiscal discipline. ...

Senator Graham ... agreed that an unprecedented default by the federal government “would be very bad for the position of the United States and the world at large,” but promised to use the debt-ceiling vote as an opportunity to exert discipline.

“I will not vote for the debt ceiling increase until I see a plan in place that will deal with our long-term debt obligation starting with Social Security,” he said, adding, “I’m not going to vote for a debt-ceiling increase unless we go back to 2008 spending levels, cutting discretionary spending.”

Last time the GOP held the economy hostage, Obama and the Democrats folded their hand. Maybe there's not so much hope after all?

links for 2011-01-02

• Energy cornucopia? - Econbrowser
• Parking Regulations - Kevin Drum
• How Videogames Are Changing the Economy - Andy Kessler
• How much is that can of whoop-ass?? - Kids Prefer Cheese
• Philanthrocapitalism or Paternalism in New Guise? - Maxine Udall
• Stupidest Man Alive Nominations... - Brad DeLong
• The Very Real Threat of a U.S. Debt Default - Bruce Bartlett
• The Ninth Decision… and the Road Ahead - Economic Principals
• Coal, Steel, and the Euro - Paul Krugman

Stiglitz: New Year's Hope against Hope

Joseph Stiglitz:

New Year’s Hope against Hope, by Joseph E. Stiglitz: ...It has become fashionable among politicians to preach the virtues of pain and suffering, no doubt because those bearing the brunt of it are those with little voice – the poor and future generations. To get the economy going, some people will, in fact, have to bear some pain, but the increasingly skewed income distribution gives clear guidance to whom this should be: Approximately a quarter of all income in the US now goes to the top 1%, while most Americans’ income is lower today than it was a dozen years ago. Simply put,... should innocent victims and those who gained nothing from fake prosperity really be made to pay even more? ...

Debt restructuring – writing down the debts of homeowners and, in some cases, governments – will be key. It will eventually happen. But delay is very costly – and largely unnecessary. Banks never wanted to admit to their bad loans, and now they don’t want to recognize the losses, at least not until they can adequately recapitalize themselves through their trading profits and the large spread between their high lending rates and rock-bottom borrowing costs. ...

But ... there is life after debt restructuring. No one would wish the trauma that Argentina went through in 1999-2002 on any other country. But ... Argentina’s poverty rate has fallen by some three-quarters from its crisis peak, and the country weathered the global financial crisis far better than the US did...

So this is my hope for the New Year: we stop paying attention to the so-called financial wizards who got us into this mess – and who are now calling for austerity and delayed restructuring – and start using a little common sense. If there is pain to be borne, the brunt of it should be felt by those responsible for the crisis, and those who benefited most from the bubble that preceded it.

Reducing the deficit -- austerity -- is not the real goal of the Pain Caucus, it is only a means to an end. The real goal is to scale back government programs they oppose. If the Pain Caucus thought there was any chance that at all they'd be the ones who end up paying most of the costs of the policies they are calling for through, say, higher taxes, they never would have bothered to try to use the deficit as a means of scaling back government programs in the first place. That the austerity advocates have so little fear that their calls for deficit reduction might result in their having to share in the costs says a lot about the unequal distribution of political power.

"How to Break Bread with Republicans"

Greg Mankiw gives the president advice on "How to Break Bread with Republicans." It's not clear to me that Obama needs such advice, he's not far from Republicans on many issues as it is, but in any case the advice appears to be -- surprise surprise -- to accept Republican ideas and do the things that the GOP wants to get done:

I am here to help. As a sometime adviser to Republicans, I’d like to offer a few guidelines to understanding their approach to economic policy. Follow these rules of thumb and your job will be a lot easier.

His first piece of advice is to

FOCUS ON THE LONG RUN ...starting with the stimulus package in early 2009, your economic policy has focused on the short-run problem of promoting recovery from the financial crisis and economic downturn.

But now it is time to pivot and address the long-term fiscal problem.

I'm surprised he would even suggest cutting the deficit before the economy is ready for it. He doesn't say whether this should be a plan that is developed now, but not put into place until the economy is healthy again, or whether it should be immediate cuts (though it seems to suggest "now is the time:"). But, apparently, "focus on the long-run" means we should ignore the chance that cutting the deficit might impede the recovery or even make things worse in the short-run. I think the millions of people who are still unemployed might disagree with that approach.

His second piece of advice is really just a hidden plea to extend tax cuts to the wealthy. You see, it's not fair when only the lower and middle classes get tax breaks:

THINK AT THE MARGIN Republicans worry about the adverse incentive effects of high marginal tax rates. A marginal tax rate is the additional tax that a person pays on an extra dollar of income.

From this perspective, many of the tax cuts you have championed look more like tax increases. For example, the so-called Making Work Pay Tax Credit is phased out for individuals making more than $75,000 a year. That is, because many Americans lose some of the credit as they earn more, the credit reduces their incentive to work. In effect, it is an increase in their marginal tax rate. From the standpoint of incentives, a tax cut is worthy of its name only if it increases the reward for earning additional income.

A tax cut/credit that is phased out as income rises is the same as a tax increase? If I cut taxes for those making less than $75,000, but not for those above this amount, that's the same as a tax increase on the wealthy? I get what he's saying from an incentive point of view, though as I explained here there's little evidence that the incentive effects are very strong for the wealthy, but by this reasoning all progressive taxes should be abolished (because, in effect, taxes go up as income rises).

Here's what the GOP seems to believe. If you give lower income households a tax cut, it will cause them to be lazy and stop working, but if you give the wealthy a tax cut, they will work harder. At it's core, this is mostly just hidden moralizing.

Next, Mankiw is once again worried that someone might reach into his pocket, take his hard-earned, well deserved money and give it to someone who didn't earn it like he did:

STOP TRYING TO SPREAD THE WEALTH Ever since your famous exchange with Joe the Plumber, it has been clear that you believe that the redistribution of income is a crucial function of government. A long philosophical tradition supports your view. ...

Many Republicans, however, reject this view of the state. From their perspective, it is not the proper role of government to fix the income distribution in an attempt to achieve some utopian vision of fairness. They believe, instead, that in a free society, people make money when they produce goods and services that others value, and that, as a result, what they earn is rightfully theirs. ...

In a world where markets are competitive, political power is shared equally, nobody gets an advantage from wealthy bequests, etc., etc. the playing field might be level and such an approach might be justified. But that's not the world we live in. So long as imperfections in the market system and the political system result in mal-distributions of income -- people getting things they did not earn due to the imperfections -- there will be a role for government to take corrective action.

Next, Mankiw sort of agrees with the argument that was just made, i.e. that we need to make sure everyone has equal opportunity. But as just noted, even though such change is needed, he sees no need to correct the problems that lack of opportunity has caused :

SPREAD OPPORTUNITY INSTEAD Despite their rejection of spreading the wealth, Republicans recognize that times are hard for the less fortunate. Their solution is not to adjust the slices of the economic pie, as if they had been doled out by careless cutting, but to expand the pie by providing greater opportunity for all.

Since the mid-1970s, the gap between rich and poor has grown considerably. One of best analyses of this long-term trend is by ... Claudia Goldin and Lawrence Katz in their book, “The Race Between Education and Technology.” The authors conclude that widening inequality is largely a symptom of the educational system’s failure to provide enough skilled workers to keep up with the ever increasing demand.

Educational reform, therefore, should be a high priority. To be sure, this is easier said than done. But research suggests that one key is getting rid of bad teachers. In a recent study, the economist Eric Hanushek says that “replacing the bottom 5 to 8 percent of teachers with average teachers could move the U.S. near the top of international math and science rankings.”

No disagreement on the need to provide better education. But to suggest that we can somehow fix education and solve the problem -- something we've been trying to do without success for decades now -- is wishful thinking. And even if we could somehow fix the education problem, it will be decades before it brings results, it does nothing to resolve existing problems that have built up over time due to our failure to provide a level playing field (which extends well beyond just education). For those who are worried about losing their "hard-earned cash," this is a convenient argument for forestalling redistributive policies that might correct for past inequities. But practically we shouldn't expect that somehow we are going to magically transform education and solve these problems. We need much more than that, and it will require those who have benefited so much from our economic system in the past several decades to help those who have seen their incomes stagnate.

Finally:

DON’T MAKE THE OPPOSITION YOUR ENEMY Last month, when you struck your tax deal with Republican leaders, you said you were negotiating with “hostage takers.” In the future, please choose your metaphors more carefully.

Republicans are not terrorists. They are not the enemy. Like you, they love their country, and they want what is best for the American people. They just have a different judgment about what that is.

Let me propose a New Year’s resolution for you: Have a beer with a Republican at least once a week. The two of you won’t necessarily agree, but you might end up with a bit more respect for each other’s differences.

I guess the advice here is don't act like Republicans. Let the GOP say whatever they want, twist the facts, lie, whatever, but don't dare return fire -- it might undermine the effectiveness of the Republican media machine (or hurt the feelings of a business leader). And if you do hold your tongue for a couple of years while the other side trashes you only to finally respond, you should expect to be blamed for the lack of partisanship. Nevermind that some in the GOP have sworn to do everything they can to ensure Obama's failure. It is, of course, all Obama's fault for making the opposition the enemy.

Update: Brad DeLong:

Budget-Arsonists-Wearing-Firechief-Hats Watch: Greg Mankiw vs. Greg Mankiw: Why oh why can't we have a better press corps?

Let the record show that when Greg Mankiw was chair of the President's Council of Economic Advisers he worked for a president, George W. Bush, who took less than zero regard for the long-term fiscal stability of the United States. And let the record show that Mankiw did not put his or his staff's credibility on the line in an attempt to reverse either of the five big budget-busting decisions--the 2001 abandonment of congressional PAYGO, the 2003 shift of taxes from the present into the future, the 2003 decision not to raise taxes to pay for any portion of the war in Iraq, and the 2003 decision not to find a revenue source to cover any part of the expense of Medicare Part D--of the George W. Bush administration.

Greg Mankiw, 2004, as observed by Noam Scheiber--working for

Out of Depth: [Y]ou can practically see the dissonance spelled out on Mankiw's face. He appears to wince when he gets a question from the generally anodyne NABE crowd about the administration's dubious promise to cut the deficit in half in five years.... [He explains] that the administration plans to achieve its goal through a mixture of spending restraint and entitlement reform. He cites the recent Medicare reform bill as an example:

The easy thing to do would have been to take the existing system and add a prescription-drug benefit on top of it.

But, instead, he continues--utterly unconvincingly--the president demanded changes that will save real money over the long term. (This, describing a bill recently estimated to cost $534 billion over ten years.) "So there's--there's a fundamental rethinking" going on, he concludes...

And let the record show that there have been four big moves on the long-term budget in the past year: (1) the inclusion in the Affordable Care Act of the IPAB to slow the growth rate of Medicare spending (good for long-run fiscal stability, and which the Republicans have sworn to repeal), (2) the inclusion in the Affordable Care Act of the tax on high-cost health plans (good for fiscal stability, and which the Republicans have sworn to repeal), (3) the late 2010 Obama-McConnell deal on extending the shift of taxes from the present to the future (bad for fiscal stability, which the Republicans supported), and (4) the abandonment of PAYGO by the Republican House majority (bad for fiscal stability). Let the record show that Greg Mankiw has not endorsed (1) or (2), and has not lamented (3) or (4).

But he does put on his firechief hat and lecture Obama about how concerned conservative economists like him are with long term fiscal stability. Greg Mankiw, 2011:

How Obama Can Work With Republicans: In a matter of days, Republicans will control the House of Representatives and have a larger voting bloc in the Senate. If economic policy is to make any progress over the next two years, you really will have to be bipartisan. To do so, you’ll need to get inside the heads of the opposition. I am here to help. As a sometime adviser to Republicans, I’d like to offer a few guidelines to understanding their approach to economic policy. Follow these rules of thumb and your job will be a lot easier.

FOCUS ON THE LONG RUN Charles L. Schultze, chief economist for former President Jimmy Carter, once proposed a simple test for telling a conservative economist from a liberal one. Ask each to fill in the blanks in this sentence with the words “long” and “short”: “Take care of the _ run and the _ run will take care of itself.” Liberals, Mr. Schultze suggested, tend to worry most about short-run policy. And, indeed, starting with the stimulus package in early 2009, your economic policy has focused on the short-run problem of promoting recovery from the financial crisis and economic downturn.

But now it is time to pivot and address the long-term fiscal problem. In last year’s proposed budget, you projected a rising debt-to-G.D.P. ratio for as far as the eye can see. That is not sustainable. Conservatives believe that if the nation credibly addresses this long-term problem, such a change will bolster confidence and have positive short-run effects as well...

links for 2011-01-01

• Beauty as a public good - The Leisure of the Theory Class
• Electronic Trading Creates a New Financial Landscape - NYTimes.com
• Dashed expectations: Individual reactions to the global crisis - voxeu.org
• Resolved - Fix the Filibuster - Walter Mondale
• Can trade in services offer an alternative to migration? - voxeu.org
• ‘Inflated’ Looks at the Cost of Prosperity - Book Review - NYTimes.com
• How Obama Can Work With Republicans - Greg Mankiw
• CPM in West Bengal - UnderstandingSociety
• The Long Road Ahead - Paul Krugman

"Why Cancun Trumped Copenhagen"

Robert Stavins seems happy with the progress of the recent climate talks in Cancun:

Why Cancun Trumped Copenhagen, by Robert Stavins: ...After the modest results of the climate change talks in Copenhagen a little more than a year ago, expectations were low for the follow-up negotiations in Cancun last month. ...

But a funny thing happened on the way to that much-anticipated failure: During two intense weeks of discussions..., the world’s governments quietly achieved consensus on a set of substantive steps forward. And equally important, the participants showed encouraging signs of learning to navigate through the unproductive squabbling between developed and developing countries that derailed the Copenhagen talks.

The tangible advances were noteworthy: The Cancun Agreements set emissions mitigation targets for some 80 countries, including all the major economies. That means that the world’s largest emitters, among them China, the United States, the European Union, India, and Brazil, have now signed up for targets and actions to reduce emissions by 2020.

The participating countries also agreed – for the first time in an official United Nations accord – to keep temperature increases below a global average of 2 degrees Celsius. ... The Cancun Agreements on their own are clearly not sufficient to keep temperature increases below 2 degrees Celsius, but they are a valuable step forward...

The progress was as much about changing the mindset of how to tackle climate disruption. ... That they met this challenge owes in good measure to ... the tremendous skill of Mexican Foreign Minister Patricia Espinosa in presiding over the talks.

For example, at a critical moment she took note of objections from Bolivia and a few other leftist states, and then ruled that the support of the 193 other countries meant that consensus had been achieved and the Cancun Agreements had been adopted. She pointed out that “consensus does not mean unanimity.” Compare that with Copenhagen, where the Danish prime minister allowed objections by five small countries to derail the talks.

Mexico’s adept leadership also made sure smaller countries were able to contribute fully..., avoiding the sense of exclusivity that alienated some parties in Copenhagen. ...

It’s also vital to note that China and the United States set a civil, productive tone, in contrast to the Copenhagen finger-pointing. From the sidelines in Cancun, I can vouch for the tremendous increase in openness of members of the Chinese delegation.

The acceptance of the Cancun Agreements suggests that the international community may now recognize that incremental steps in the right direction are better than acrimonious debates over unachievable targets.

With Republicans taking control of the House, I will be pleasantly surprised if we make any progress on this issue domestically (I can imagine the GOP perhaps buying into tax cuts designed to encourage investment into research in this area, but not much else).

Happy New Year

Happy New Year from Tim Duy (and from me too).

links for 2010-12-31

• "Threshold earners" and economic inequality - Andrew Gelman
• A code of ethics for law professors? - Erik Gerding
• Pinning down 'Obamanomics' - Ezra Klein
• Charity is never a substitute for public welfare - Peter Wilby
• A Prediction for 2011 - Jeffrey Miron
• A Big question... - History of Economics Playground
• ‘Grand Challenges’... - History of Economics Playground
• Unemployment Claims and Employment Growth - Paul Krugman
• naked capitalism - links
• Abnormal Returns - links

Does Recovery Mean New Jobs at Lower Pay?

This is something I've been worried about:

Career Shift Often Means Drop in Living Standards, by Catherine Rampell, NYTimes: ...A new study of American workers displaced by the recession sheds light on the sacrifices a large number have made to find work. Many, it turns out, had to switch careers and significantly reduce their living standards. ...

The study, conducted ... at Rutgers, was based on a survey of Americans around the country who were unemployed as of August 2009... As of November 2010, only about one-third had found replacement jobs, either as full-time workers (26 percent) or as part-time workers not wanting a full-time job (8 percent).

And of those who successfully found work, 41 percent had switched into a new career or field. ... Nearly 7 in 10 of the survey’s respondents who took jobs in new fields say they had to take a cut in pay, compared with just 45 percent of workers who successfully found work in their original field.

Of all the newly re-employed..., 29 percent took a reduction in fringe benefits in their new job. Again, those switching careers had to sacrifice more...

From June:

Where Will the Good Jobs Come From?: I have emphasized short-run job creation quite a bit recently, and I have noted, implicitly at least, that we shouldn't be too picky about the quality of the jobs that are created. Most jobs will do.

But in the long-run the quality of jobs matters a lot, and when the private sector finally begins reabsorbing the unemployed, the underemployed, and the discouraged, we want people to be able to find jobs with decent wages and benefits -- jobs that are as good or better than the jobs they had before.

But where, exactly, will those jobs come from? I wish I had the answer.

Education is part of it, better education means better jobs on average, and it's easy to imagine a substantial fraction of the population benefiting from an educational advantage. So I won't back off prior calls to improve education at all levels.

But even if we substantially improve education, it won't fully solve the problem. There will still be a need for quality jobs that are not all that dependent upon knowledge based skills. However, it's harder to imagine an emerging set of industries that will provide the large number of quality jobs that we need to replace those lost from industries in decline.

If these jobs fail to be created in the next years and decades, the result will be an ever widening gap in the distribution of income with, as now, a group at the top doing relatively well, and everyone else treading water at best. 

Paul Krugman: The New Voodoo

Republicans used to claim that tax cuts paid for themselves so that they could rail against the deficit and cut taxes at the same time. Though some in the GOP still resort to this defense of tax cuts, now that the "tax cuts pay for themselves" myth has been exposed, Republicans are turning to a new defense of simultaneously cutting taxes and giving "impassioned speeches denouncing federal red ink" that is every bit as flimsy as the old one:

The New Voodoo, by Paul Krugman, Commentary, NY Times: Hypocrisy never goes out of style, but, even so, 2010 was something special. For it was the year of budget doubletalk — the year of ... railing against deficits while doing everything they could to make those deficits bigger. ...

In the first half of 2010, impassioned speeches denouncing federal red ink were the G.O.P. norm. And concerns about the deficit were the stated reason for Republican opposition to extension of unemployment benefits, or for that matter any proposal to help Americans cope with economic hardship.

But the tone changed during the summer, as B-day — the day when the Bush tax breaks for the wealthy were scheduled to expire — began to approach. My nomination for headline of the year comes from the newspaper Roll Call, on July 18: “McConnell Blasts Deficit Spending, Urges Extension of Tax Cuts.”

How did Republican leaders reconcile their purported deep concern about budget deficits with their advocacy of large tax cuts? Was it that old voodoo economics — the belief, refuted by study after study, that tax cuts pay for themselves — making a comeback? No, it was something new and worse. ...

2010 marked the emergence of a new, even more profound level of magical thinking: the belief that deficits created by tax cuts just don’t matter. For example, Senator Jon Kyl of Arizona — who had denounced President Obama for running deficits — declared that “you should never have to offset the cost of a deliberate decision to reduce tax rates on Americans.”

It’s an easy position to ridicule. After all, if you never have to offset the cost of tax cuts, why not just eliminate taxes altogether? But the joke’s on us because ... the incoming House majority plans to make changes in the “pay-as-you-go” rules ... that effectively implement Mr. Kyl’s principle. Spending increases will have to be offset, but revenue losses from tax cuts won’t. Oh, and ... any spending increase must be offset by spending cuts elsewhere; it can’t be paid for with additional taxes.

So if taxes don’t matter, does the incoming majority have a realistic plan to cut spending? Of course not. Republicans say that ... defense, Medicare and Social Security — all the big-ticket items — are off the table. So they’re talking about a 20 percent cut in what’s left, which includes things like running the judicial system and operating the Centers for Disease Control and Prevention; they have offered no specifics about where the cuts will fall.

How will this all end? I have seen the future, and it’s on Long Island, where I grew up.

Nassau County — the part of Long Island that directly abuts New York City — is one of the wealthiest counties in America and has an unemployment rate well below the national average. So it should be weathering the economic storm better than most places.

But a year ago, in one of the first major Tea Party victories, the county elected a new executive who railed against budget deficits and promised both to cut taxes and to balance the budget. The tax cuts happened; the promised spending cuts didn’t. And now the county is in fiscal crisis. ...

Nassau County shows how easily responsible government can collapse in this country, now that one of our major parties believes in budget magic. All it takes is disgruntled voters who don’t know what’s at stake — and we have plenty of those. Banana republic, here we come.

 

 

links for 2010-12-30

• Academic Economists To Consider Ethics Code - NYTimes.com
• The Lender of Last Resort - Nick Rowe
• Two-speed Recovery to Extend into 2011, Says IMF - IMF Survey
• Income Effects don't really exist - Worthwhile Canadian Initiative
• Fresh Crises Loom in Europe and the United States - Simon Johnson
• The standard of living across time and space - UnderstandingSociety
• Defense of Resolution Authority, Part 2 - Economics of Contempt
• Should Old Acquaintance Be Forgot - Rajiv Sethi
• Hazards in Interpreting Seasonals - Econbrowser

"Hazards in Interpreting Seasonals"

Once again, Menzie Chinn finds that an analysis from Casey Mulligan does not hold up to closer scrutiny:

Hazards in Interpreting Seasonals, by Menzie Chinn: Professor Casey Mulligan has an interesting post, in which he observes that while retail sales are about 15-20% higher in December than in the previous three months, retail employment is only about 4% higher in December than October, thus proving that fiscal stimulus cannot be very effective at raising employment. ...

Professor Mulligan's calculation is essentially a one observation regression of the change nominal retail sales on change in retail employment. ... But I think this ... is irrelevant. First, the employment that is relevant is the total employment associated with Christmas-goods production and distribution (in addition to retail employment). Second, the activity variable that is relevant is not sales, but US related value-added. So not:

Δ(sales)/Δ(employment_retail)

But:

Δ(value added)/Δ(employment)

The value of retail sales incorporates the value added from retail services, plus the value imbedded in the goods themselves. Those goods were produced over the entire year (i.e., not all Christmas ornaments are made in December). The counter-objection could be that Christmas ornaments aren't typically made in the US. But then I know that at least some of the gifts are American made (after all, Wisconsin cheese makes a fine holiday gift! And most of the gifts I received were American made). That relates to the value added component. Thus, the relevant numerator is smaller, and the relevant denominator bigger, implying the relevant ratio is smaller than Professor Mulligan purports. ...

There are many valid approaches to critiquing the idea of fiscal stimulus efficacy (e.g., CBO (Nov. 2010). This is not one of them. ...

By the way, this article highlights the hazards of over-interpreting seasonal effects. The canonical example occurred forty years ago, when Arthur Laffer interpreted the seasonal correlation of GDP and money as a causal relationship [4] (critique here). (This episode is not written down in any textbook as far as I know, but is passed down by word-of-mouth as a cautionary tale.)

Menzie also points to this statement from Mulligan:

...the fiscal-stimulus act depresses supply, because many of its major programs -- the unemployment-insurance extension, the food-stamp program expansion, the home buyer tax credit and more -- are directed at people with low incomes.

In other words, the less you work and earn, the larger your entitlement to various components of the act. By reducing supply as it increases demand, the fiscal-stimulus act could well reduce total employment...

According to this view of the world, a big part of our economic and employment problem right now is that "people with low incomes" would rather live on unemployment insurance and food stamps than work. It's not the lack of jobs that is the problem, it's the fact that people won't take jobs that aren't there.

It would be silly to say that nobody ever exploits the existence of a government program, of course that happens (but that doesn't mean the costs of these programs exceed the benefits, i.e. the mere existence of a cost is not enough to conclude that a program should be discontinued, it's the net benefits that matter). However, to attribute the major part of our employment problem to this behavior flies in the face of the available evidence on hiring behavior by firms relative to the number of people seeking jobs. There simply aren't enough jobs to go around, and we have not been creating jobs at a fast enough pace to keep up with population growth, let alone reabsorb the millions of workers who have lost their jobs during the recession.

Our problems did not arise with "people with low incomes," though there seems to be a concerted effort to place the blame on this segment of society (e.g., see the claims from conservatives that the CRA caused the crisis, claims that have been thoroughly rebutted but persist nonetheless). To find those who are actually to blame, looking a bit further up in the income distribution -- somewhere up near the very top -- would be more fruitful.

Initial Claims for Unemployment Insurance Fall Below 400,000

At CBS MoneyWatch, a reaction to today's news on initial claims for unemployment insurance:

Initial Claims for Unemployment Insurance Fall Below 400,000

Update: I should add the cautionary note that seasonal adjustment procedures can be misleading near holidays, so the good news in the report comes with lots of uncertainty.

Who Should Replace Larry Summers?

Noam Scheiber defends Gene Sperling as "a leading candidate or the leading candidate to replace Larry Summers as head of Obama’s NEC":

Is the Favorite to Replace Larry Summers Too Close To Wall Street?, by Noam Scheiber, TNR: ...Gene Sperling, a counselor to Secretary Tim Geithner,... was director of Bill Clinton’s National Economic Council (NEC) in the late ‘90s, a period when the White House got pretty good marks for its understanding of business and the broader economy. But ... Sperling often speaks up for the little guy in internal deliberations—he was one of the administration wonks most concerned about executive pay, and he argued passionately for saving Chrysler...

Sperling’s record has suddenly become highly relevant because, depending on who you talk to, he’s either a leading candidate or the leading candidate to replace Larry Summers as head of Obama’s NEC. In light of the forgoing, you might also think he’d be a liberal favorite for the job. But Sperling has recently taken some lumps in the Huffington Post for his alleged sympathy for bankers and his ties to former Clinton Treasury Secretary Robert Rubin. ...

Sperling was NEC director when the Clinton administration ushered in some unfortunate deregulatory changes, pretty much every account I’ve either read or heard from people involved confirms that ... Sperling was a marginal player at best. ...

What about his instincts when he did work on issues of interest to Wall Street? ... Sperling turns out to be the Treasury official who was most influential in helping persuade Geithner to embrace a fee on large financial firms to make the government whole after TARP, the vehicle for its various bailouts. The president unveiled the 10-year, $90 billion fee in January of 2010. Wall Street promptly howled. ...

Long story short: This hardly strikes me as the profile of a man out to do the banks’ bidding. Sperling may not be the kind of populist who makes the average HuffPo reader swoon. But I doubt his record as a policymaker inspires much chuckling on Wall Street.

I still think a break from the Wall Street connected side of the Clinton administration would have political value. Even better, no matter the choice, would be to show through action that the administration is, in fact, determined to reduce the chances of another meltdown by being tough on the financial sector. But, so far as I can tell, that doesn't seem to be the direction Obama intends to go.

Would a Revival of Cities Spur Economic Growth?

Ed Glaeser makes the case for cities:

America’s revival begins in its cities, by Edward L. Glaeser, Commentary, Boston Globe: ...America’s 12 largest metropolitan areas collectively produced 37 percent of the country’s output in 2008, the last year with available data. ...

During the 1980s, we looked at Japan and saw an economy that seemed to be surpassing our own. Today, we watch with unease as China surges. Yet American decline is not inevitable. During the 25 years after 1982, our real gross domestic product increased by 3.3 percent per year... Our post-1982 growth involved massive economic restructuring. Manufacturing employment fell by 39 percent from its peak ... in 1979. The 1979-2009 manufacturing decline was more than offset by the 126 percent increase in employment in “professional and business services” and the 184 percent increase in education and health jobs. ...

To succeed in the future, the country needs to produce a stream of new ideas, like personal computers, Facebook, and steerable catheters. We must produce goods and services innovative enough to command the high prices needed to cover high labor costs. Such breakthroughs rarely come from solitary geniuses. ...

Cities have long enabled economic creativity. ... The urban edge in engendering innovation explains why globalization and technology have made cities more, not less, important. The returns to being smart have increased, and humans get smart by being around smart people in cities. ...

For decades, the American dream has meant white picket fences and endless suburbs. But the ideas created in dense metropolitan areas power American productivity. We should reduce the pro-homeownership bias of housing policies, such as the home mortgage interest deduction, which subsidize suburban sprawl and penalize cities. We should rethink infrastructure policies that encourage Americans to move to lower-density environments. Most importantly, we should invest and innovate more in education, because human capital is the ultimate source of both urban and national strength.

As we grope towards a brighter future, we must embrace our cities, and invest in the skills that are central to their success.

See also Daniel Little: Thinking Cities Darkly:

...Cities capture much of what we mean by "modern," and have done so since Walter Benjamin's writings on Paris (link). But unlike the eighteenth or nineteenth centuries, much of our imagining of cities since the early twentieth century has been dark and foreboding. A recent volume edited by Gyan Prakash, Noir Urbanisms: Dystopic Images of the Modern City, offers a collection of recent work in cultural studies that attempts to decode some of this dark imagery. ...

Prakash's excellent introduction begins with these observations:

As the world becomes increasingly urban, dire predictions of an impending crisis have reached a feverish pitch. Alarming statistics on the huge and unsustainable gap between the rates of urbanization and economic growth in the global South is seen to spell disaster. The unprecedented agglomeration of the poor produces the specter of an unremittingly bleak "planet of slums." Monstrous megacities do not promise the pleasures of urbanity but the misery and strife of the Hobbesian jungle. The medieval maxim that the city air makes you free appears quaint in view of the visions of an approaching urban anarchy. Urbanists write about fortified "privatopias" erected by the privileged tow all themselves off from the imagined resentment and violence of the multitude. Instead of freedom, the unprecedented urbanization of poverty seems to promise only division and conflict. The image of the modern city as a distinct and bounded entity lies shattered as market-led globalization and media saturation dissolve boundaries between town and countryside, center and periphery. From the ruins of the old ideal of the city as a space of urban citizens there emerges, sphinx-like, a "Generic City" of urban consumers.

As important as it is to assess the substance of these readings of contemporary trends in urbanization, it is equally necessary to examine their dark form as a mode of urban representation. This form is not new. Since the turn of the twentieth century, dystopic images have figured prominently in literary, cinematic, and sociological representations of the modern city. In these portrayals, the city often appears as dark, insurgent (or forced into total obedience), dysfunctional (or forced into machine-like functioning), engulfed by ecological and social crises, seduced by capitalist consumption, paralyzed by crime, wars, class, gender, and racial conflicts, and subjected to excessive technological and technocratic control What characterizes such representations is not just their bleak mood but also their mode of interpretation, which ratchets up a critical reading of specific historical conditions to diagnose crisis and catastrophe.

All the essays are interesting and insightful...

links for 2010-12-29

• A good green vs. green spat - Environmental Economics
• Getting Corruption Right - Jagdish Bhagwati
• Gary Burtless on the stimulus - Ezra Klein
• What’s So Good about America’s Tax Package? - Martin Feldstein
• Dodd-Frank Regulatory Reform Rules - FRB St. Louis
• Top House Republicans More Cautious About Fannie, Freddie - WSJ.com
• The notorious lump-of-labor fallacy-fallacy (II)- Ecological Headstand
• Looking back at the Great Recession - Econbrowser
• Conspicuous Production - Frances Woolley
• Euroskeptics - Paul Krugman
• Who Benefits from Long-Term Unemployment? - NYTimes.com

Fannie, Freddie, and the Pain Caucus

The members of the Pain Caucus see things differently when they will be the ones blamed for the pain (which tells us something about how all those calls for deficit reduction from the GOP are likely to turn out). House Republicans, who now have responsibility for the oversight of Fannie and Freddie, have decided that dismantling Fannie Mae and Freddie Mac isn't so urgent after all:

Suddenly, some members of the GOP realize they actually will be part of the government, by Richard Green: Alan Zibel writes in the Wall Street Journal:

Earlier this year, leading House Republicans proposed to privatize mortgage giants Fannie Mae and Freddie Mac or place them in receivership starting in two years.

Now, as Republicans prepare to assume control of the House next week, they aren't in as big a rush, cautioning that withdrawing government support in the housing market should be gradual.

"We recognize that some things can be done overnight and other things can't be," said Rep. Scott Garrett (R., N.J.), incoming chairman of the House Financial Services subcommittee, which oversees Fannie and Freddie. "You have to recognize what the impact would be on the fragile housing market as it stands right now."

I actually don't think the mortgage market will ever be truly a private sector enterprise. Suppose Fannie and Freddie were to go away: the most likely entities to step into the residential finance market would be banks. Would this be privatization? Not really. Banks receive explicit guarantees (FDIC) and, as we know from recent events, implicit guarantees as well (TARP was nothing if not the execution of an implicit Federal guarantee).

The conservative complaint about Fannie and Freddie is that they privatized profit while socializing risk. This is doubtless true. I just don't see how it is any less true for banks.

DeLong: A Time to Spend

Brad DeLong argues that "the first principle of macroeconomic policy is that because only the government can create the investment-grade financial assets that are in short supply in a depression, it is the government’s task to do so." He then asks, "How well have the world’s governments performed this task over the past three years?":

A Time to Spend, by J. Bradford DeLong, Commentary, Project Syndicate: The central insight of macroeconomics is a fact that was known to John Stuart Mill in the first third of the nineteenth century: there can be a large gap between supply and demand for pretty much all currently produced goods and services and types of labor if there is an equally large excess demand for financial assets. And this fundamental fact is a source of big trouble.

A normal gap between supply and demand for some subset of currently produced commodities is not a serious problem, because it is balanced by excess demand for other currently produced commodities. ... The economy rapidly rebalances itself... By contrast, a gap between supply and demand when the corresponding excess demand is for financial assets is a recipe for economic meltdown. ... Thus, because only the government can create the investment-grade financial assets that are in short supply in a depression, it is the government’s task to do so. ...

How well have the world’s governments performed this task over the past three years?  In East Asia (minus Japan), governments appear to have been doing rather well. ... In North America, governments appear to have muddled through. They have not provided enough bank guarantees, forced enough mortgage renegotiations, increased spending enough ... to ... and facilitate a rapid return to full employment. But unemployment has not climbed far above 10%, either.

The most serious problems right now are in Europe. Uncertainty about how, exactly, the liabilities of highly leveraged banks and over-leveraged peripheral governments are to be guaranteed is shrinking the supply of safe savings vehicles at a time when macroeconomic rebalancing calls for it to be rising. And the rapid reductions in budget deficits that European governments are now pledged to undertake can only increase the likelihood of a full double-dip recession.

The broad pattern is clear: the more that governments have worried about enabling future moral hazard by excessive bailouts and sought to stem the rise in public debt, the worse their countries’ economies have performed. The more that they have focused on policies to put people back to work in the short run, the better their economies have done. ...

Fed Watch: Curiously Weak Consumer Confidence

Tim Duy:

Curiously Weak Consumer Confidence, by Tim Duy: There was a bit of angst regarding yesterday's Conference Board consumer confidence report. See, for example, Mark Thoma and Brad DeLong. The report appears to contradict the generally positive Univ. of Michigan report - still weak compared to pre-recession, but at least moving in the right direction. More interestingly, it is at odds with recent consumer spending reports, not just early reports of the best Christmas season (in terms of year-over-year gains) since 2005, but also the most recent trends in personal consumption expenditures.

Something is off-kilter, and has been since mid-year. Consumer confidence appears too low relative to actual consumption. Either confidence should be moving higher, as the Univ. of Michigan survey suggests, or consumption needs to slow dramatically. Place your bets.

Consider the recent trends in real consumer spending (percentage change are log difference approximations):

To be sure, the trend since the recovery began is decidedly lower than the pre-recession trend. But this trend hides a recent acceleration. Average monthly growth for 2010 to date is 0.2%, but for the most recent three months (Sept.-Nov.), the rate accelerates to 0.35%, well above the pre-recession trend and, dare I say it, something much more like the kind of "catch-up" we would be hoping to see - or would have been hoping to see earlier in the recovery. The pessimist in me, however, tends to think this acceleration is not entirely sustainable. Pessimism aside, this kind of growth has driven a nontrivial acceleration in the year-over-year figures:

Now, compare year-over-year consumption growth with consumer confidence (UMich., because I have those charts on hand):

Note the divergence beginning in July of last year - confidence tumbles, and stays low despite growing real consumption. To be sure, this is a noisy relationship, but it appears the last five readings are anomalous. Consider a scatterplot and simple linear regression:

Now isolate the five most recent observations:

They are all consistently above the fitted regression line, and the one-sided nature of the error is sufficient to slightly lift the R-squared of the regression. Also note that the most recent reading, with UMich. confidence rising to 71.6, is a movement in the "right" direction, toward the fitted line.

But here comes the hard part - a movement in the "right" direction could also occur if consumption growth slowed, pushing the year-over-year figures to the 0.5-1.0 percent range. The expected policy path will obviously depend on which "right" move occurs. If confidence rises to match spending, expect the Fed to draw large scale asset purchases to a close when the current program expires. Also expect that the Administration will feel more confident to give the go-ahead to spending consolidation. Expect the opposite if spending growth falls to match confidence.

The reasons to expect more tempered spending growth in the months ahead are well known at this point. Weak job growth, need to rebuild wealth and/or the flip side of need to reduce debt loads, the related weak housing market (also angst over the Case-Shiller numbers yesterday, but I will try to address that tomorrow night), impending retirement needs, threat of zombie apocalypse, etc.). A seemingly endless list of pessimism, to be sure. And well justified pessimism at that. Still, all of these factors have been in play for the past year, yet consumer spending accelerates as if households are in blissful ignorance. Perhaps they are.

Ignorance aside, I think the acceleration needs an explanation of some sorts. Throwing out some ideas, first note that household balance sheets are in a better position, at least measured by the debt servicing costs:

Also, saving rates are well above pre-recession lows:

Consumption can be supported by taking savings rates back down to zero, or close to it. To be sure, you can respond angrily that consumers desperately need to rebuild their asset base, that policies such as ZIRP that encourage spending simply kick the can down the road, etc. And these things might be true. But, in the near term, one cannot deny the potential for consumer spending support via a falling saving rate. This is especially important given occasional concerns about rising oil prices. When the last oil shock hit in 2006-7, saving rates were hovering around 2%, not much cushion to absorb the shock. At least at 5.3% consumers have a little more wiggle room.

Finally, real income less transfer payments are on the rise:

Yes, yes, yes, well below pre-recession peaks and trends. But the direction is decidedly positive, and provides support for accelerated spending. And it provides some cushion as the 99er's fall off the insurance rolls.

Bottom line: Consumer confidence figures appear inconsistent with actual spending patterns. That inconsistency will be resolved by either confidence rising or falling spending growth, with more or less obvious policy implications. There will be a tendency to assume the resolution will come from decelerating spending growth. To be sure, the recent trend appears unsustainable. But I also think it is worth paying attention to the more positive household spending data.

links for 2010-12-28

• Recession Creates Spike in Multifamily Households - NYTimes.com
• Assessing 2010’s Economy and Looking Ahead - David Leonhardt
• Impacts of Proposed Changes in the Fed’s Mandate - John Taylor
• The Fallacy of a Pain-Free Path to a Healthy Housing Market - FRB Dallas
• Can Social Science Combat Climate Change? - Scientific American
• Yes, Virginia, this is a Recovery - The Bonddad Blog
• Partisan centrism - Crooked Timber
• Mike Pence and the Charm of Having it Both Ways - Underbelly
• U.S.-China Current Account Imbalance Could Disappear - Real Time Economics
• Nobody Believes in Supply and Demand - Paul Krugman
• Thinking cities darkly - Daniel Little
• Expanding Variety of Goods for Competitive Advantage - FRB Dallas
• 2010: The Year of IMF Reform - The IMF Blog
• How 'Citizens United' Ruling Screws the Free Market - Democratic Strategist
• Is raising inflation expectations a good idea? - Rogue Economist Rants
• Behind the Population Shift - Edward L. Glaeser
• Labor Dept Changes the Employment Report - Real Time Economics
• Case-Shiller: Home Prices Weaken Further in October - Calculated Risk
• Defense of the Dodd-Frank Resolution Authority - Economics of Contempt

Reich: The Tea Party Strategy

Robert Reich has a prediction:

New Years Prediction (I): The Tea Party Conservative Strategy for 2011, by Robert Reich: Next week starts the new Congress, and with it the Tea Party conservatives. What’s their strategy? What will they rally around?  

They’ll grouse endlessly about government spending but I don’t think they’ll use any particular spending bill to mobilize and energize their grass roots. The big bucks are in Social Security, Medicare, and defense, which are too popular. And their support for a permanent extension of the Bush tax cuts will make a mockery of any argument about  taming the deficit.  

Nor will they focus on the debt ceiling. Their opposition to raising it will generate a one-day story... Most Americans aren’t particularly interested in the debt ceiling, don’t know what it means, and don’t feel affected by it.

Instead, I expect their rallying cry will be about the mandatory purchase of health care built into the new healthcare law. The mandate is the least popular, and least understood, aspect of that law. Yet it’s the lynchpin. Without it, much of the rest of the law falls apart: It’s impossible to cover all high-risk Americans, including those with pre-existing conditions, unless those at far lower risk are required to buy insurance.

Knowing they don’t stand a chance of getting a direct repeal of the mandate..., they’ll try to strip the federal budget appropriation of money needed to put the mandate into effect. This could lead to a standoff with the White House over government funding in general, and a possible government shutdown.

My betting is Tea Party conservatives wouldn’t mind a government shutdown over the healthcare mandate. Unlike Bill Clinton’s showdown with Newt Gingrich, which hurt the conservative cause, Tea Partiers believe this one could be helpful. ...

Advice to Obama White House: Get ready.

My worry, or one of them anyway, is that despite Reich's assurances to the contrary, the big story will be Social Security.

[See also: Why We Need an Individual Mandate for Health Insurance.]

How Fast Will the Economy Recover?

[I just posted this at CBS MoneyWatch:]

I have been pretty pessimistic about the speed of the recovery. The worry is not about a double dip -- I think the probability of that happening is pretty low. But I have been worried about an "agonizingly slow recovery," particularly for employment, one that is measured in years rather than months.

However, recent news such as the rise in long-term interest rates, which appears to be due to the expectation of a better economy ahead, along with better than expected Christmas sales, changes in the yield curve, falling jobless claims, increased consumer spending, and other signs of an improving economy had me thinking that I may need to reassess my pessimism. Perhaps the recovery will still be drawn out, but not quite as slow as expected. That would be good news.

But two pieces of data released today have me moving back toward the more pessimistic outlook. Consumer confidence is down, and house prices are still falling. The fact that the fall in consumer confidence seems to be related to a fall in job market prospects adds to the worries. Overall, recent data has been mixed with some encouraging signs coupled with signs that we still face significant hurdles.

So where does that leave us? I can't help but hope that despite today's data and other negative signs the economy will do better than I expect. But policymakers must recognize that we do not yet have the all clear sign, the economy will likely still need help to recover. Thus, although further stimulus is off the table after the tax deal, policymakers must resist the temptation to ignore negative data and to focus instead on the data pointing to a faster recovery than expected as an excuse to cut the deficit (and hence the stimulus) before the economy is ready to stand on its own. As I said recently in response to a question at The Economist, cutting the deficit too soon could cause big problems:

... If Congress had credibility, there would be no need to worry about the trade-off between helping the economy escape the recession and reducing the deficit. Congress could do what is needed to help the economy now, and promise—credibly with specific plans—to reduce the deficit once the economy has recovered. That would give us the best of both worlds.

But, unfortunately, that's not the Congress we have, credibility is not its strong suit, and legislators seem determined to demonstrate their intent with actions now rather than a commitment to take this up when the economy is stronger. This will place additional drag on an already slow recovery...

So let's hope we can at least realize the promise of gridlock and maintain the status quo until the economy is on better footing. ...

Will talk of deficit reduction turn to action before the economy is ready for it? Unfortunately, I don't think we can rule that out, but the worry may not be as large as one might presume from media reports on the GOP's deficit fighting intentions. As the CBPP reports, House Republican Rule Changes Pave the Way For Major Deficit-Increasing Tax Cuts, Despite Anti-Deficit Rhetoric. So it appears that the deficit reduction rhetoric may be an excuse to cut spending on programs the GOP does not like, e.g. cuts to social insurance programs, rather than an actual intent to cut the deficit. However, we need more spending on social programs not less -- insecurity is growing in our increasingly global economy -- and tax cuts accompanied by cuts to social services would be going in the wrong direction.

"Keynes on the 'Psychology of Society'"

Richard Green:

Keynes on the "Psychology of Society," by Richard Green: ...The ... Economic Consequences of the Peace ... has a section early on that really struck me:

Europe was so organized socially and economically as to secure the maximum accumulation of capital.  While there were some continuous improvements in the daily conditions of life of the mass of the population, Society was so framed to throw a great part of the increased income into the control of the class least likely to consume it.  The new rich of the 19th century were not brought up to large expenditures, and preferred the power which investment gave them to the pleasures of immediate consumption.  In fact, it was precisely the inequality of the distribution of wealth which made possible those vast accumulations of fixed wealth and of capital improvements which distinguished that age from all others.  Herein lay, in fact, the main justification of the Capitalist System.  If the rich had spent their new wealth on their own enjoyments, the world long ago would have found such a regime intolerable.  But like bees they saved and accumulated, not less to the advantage of the whole community because they themselves held narrower ends in prospect.

The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war [WWI], could never have come about in a Society where wealth was divided equitably.  The railways of the world, which that age built as a monument to posterity, were, not less than the Pyramids of Eqypt, the work of labor which was not free to consume in immediate enjoyment the full equivalent of its efforts.

Thus this remarkable system depended for its growth on a double bluff or deception.  On the one hand the laboring classes accepted from ignorance or powerlessness, or were compelled, perusade or cajoled by custom, convention, authority, and the well-established order of Society into accepting a situation in which they could call their own very little of the cake that they and Nature and the capitalists were co-operating to produce.  And on the other hand the capitalist classes were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice.

links for 2010-12-27

• Paul Krugman and Robin Wells Are Really Unhappy... - Brad Delong
• Can cash rewards get the economy moving again? - Annie Lowrey
• The FCC Net Neutrality Order - Cheap Talk
• Petroleum Prices and the International Dimension - Econbrowser
• An Economist’s Christmas Carol - The Leisure of the Theory Class
• Irrational exuberance over the balanced budget multiplier - MacroMania
• Commodity Prices and Inflation - Paul Krugman
• Does Unemployment Lead to Less Healthy Diets? - Real Time Economics
• The military failure machine - Crooked Timber
• Robert Samuelson's Social Security Demagoguery - Beat the Press
• Resisting Bankers' Rules - Nancy Folbre