economy eyes

As Brad DeLong has noted, Tim Geithner believes it is time for “the economy has now recovered sufficiently for government to begin to make way for private business investment.”

op-ed by Run

“The Messenger Again Wears A Skirt (Mama Tucker on Brooksley Born)”

Taking a page from his former boss and mentor Larry Summers, Geithner behind closed doors has expressed opposition to Dr. Elizabeth Warren heading up the Consumer Financial Protection Bureau as reported by The Huffington Post.

For those of you who may not recall, Larry Summers testified in front of Congress about Brooksley Borns efforts to regulate CDS as:

“casting a shadow of regulatory uncertainty over an otherwise thriving market.”

While one could not predict what Brooksley may have been able to accomplish if given the go-ahead, it is pretty certain the market place as Greenspan describing it as “self-regulating” did little to regulate itself. At least, Larry had more balls than Timothy and Brooksley would have been more proactive than either Larry or Timmy.

Make no mistake, Dr. Elizabeth Warren has asked the pointed questions needing to be asked of Timothy Geithner “Show Me The Money” on You Tube. Joining Timothy Geithner is Senator Dodd, the same as Greenspan, Levitt, and Rubin joined Larry Summers in opposing Brookley Born.

“Well, you probably will always believe there should be laws against fraud, and I don’t think there is any need for a law against fraud,” Alan Greenspan

“I thought it was counterproductive. If you want to move forward . . . you engage with parties in a constructive way,” Rubin told the Washington Post. “My recollection was . . . this was done in a more strident way.”

“characterized as being abrasive.” Arthur Levitt
“Prophet and Loss.” Stanford Magazine, April 2009.

HEALTH CARE thoughts: The Taxpayer Advocate and others are unhappy

National Taxpayer Advocate Nina Olson is reported to be unhappy about the major IRS role in the new health care regime. Olsen believes the IRS is already overworked (she used “overtaxed” in her annual report issued this month, a great pun) and needs more money and time in order to do the job.

“Obamacare” (PPACA) requires the IRS to create an entirely new enforcement and penalty system, while the Service struggles to deal with such programs as the new home buyers credit, not to mention the regular work burying the agency.

Estimates of resource needs vary, and nothing is very concrete yet, but certainly a substantial increase in manpower and infrastructure will be necessary, very soon (and the IRS never moves very fast).

Then it gets worse.

Obamacare includes various add-ons, one of which will require additional Forms 1099 for supplies purchased to be filed by millions of businesses and entities and then sent to hundreds of thousands of businesses and entities and copied to the IRS so everything can be matched. This is supposed to minimize the “tax gap” and cut down tax evasion.

(For example, I will have to send a 1099 every year to Staples.)

Problem is, Congress clearly does not understand how tax evasion really occurs and this will distract the IRS from more important work, and clog the processing capabilities for an eternity.

(I am quite certain Staples is already reporting my purchases.)

In a strange twist, credit card purchases are apparently exempt. This could be because credit cards will be traced via another route (worrisome) but more likely because some bank lobbyists got inside the sausage factory (so I could eliminate the 1099 to Staples by using my credit card).

The story of the health care reform bill is just getting started, and lots of problems are ahead.

Tom aka Rusty Rustbelt

Rdan here…Linda Beale adds a comment I lifted from an e-mail:

Its no secret that the IRS Is overtaxed—its becoming the primary agency for all kinds of jobs—tax collection, sure, but also health, social security, environmental, aging generally…..

and as for the 1099s, yes, that is another paperwork mountain that will go to the IRS. Fine if it is all computerized and matched, but that may be a big if.

The problem with most enforcement, these days, is that it takes quite an effort to do anything to catch up with all the effort that is being put into nonenforcement.

Linda M. Beale

The Economist asks:

Is America facing an increase in structural unemployment?

and invited economists answer here.

UPDATE: Jason Linkins at one of the non-Breast-Enhanced sites of the Huffington Post did a burlesque of which I can only dream on the same piece.

Via Chris Hayes’s Twitter feed (and he got it from David Sirota), the following is from “No more ‘me first’ mentality on entitlements“:

While it does not happen often, our political system is capable of making unpopular decisions that are in our collective best interest. In 2008, during the most severe financial crisis in 80 years, Republican and Democratic leaders in Washington came together to do something deeply unpopular: bail out the financial system via the Troubled Assets Relief Program. These leaders understood the consequence of inaction was economic devastation for Americans. Passing TARP was the right thing to do.

[B]ailing out the financial system went directly against our shared beliefs in free markets and fair play. While the vast majority of Americans did not cause the financial crisis, we all had to sacrifice to stop it. Such a cultural violation has angered people nationwide, which makes cutting entitlements more difficult because it will again betray our sense of fairness.

The challenge of entitlements is more difficult than the financial crisis: First, we must reach consensus to make cuts before the fiscal crisis is upon us….If we wait until the bond market shuns Treasurys, the economic consequences could be dire. Virtually overnight, we could have far less money to spend on priorities such as defense, education and research.

Cutting entitlement spending requires us to think beyond what is in our own immediate self-interest. But it also runs against our sense of fairness: We have, after all, paid for entitlements for earlier generations. Is it now fair to cut my benefits? No, it isn’t. But if we don’t focus on our collective good, all of us will suffer.

I’ve resequenced the above paragraphs a bit, but remained faithful to the argument as presented.

The author: Neel Kashkari, who is described as “a managing director of the investment management firm PIMCO, served as an assistant Treasury secretary during the George W. Bush administration. He led the Office of Financial Stability and ran the Troubled Assets Relief Program until May 2009.”

His sacrifices for the sake of TARP are well known; indeed, documented in the paragraph above. And, gosh, isn’t it nice that he pushes an argument that would make fixed-rate securities—you know, the thing PIMCO is famous for trading—more valuable?

It’s good to know that “Me First” needs to change, and nice to see the Post presenting a prime example of why.

Data 101

US new home sales rebound in June in the Financial Times today and New Home Sales: Worst June on Record at Calculated Risk.

Both headlines are “true”.

Much of the same data sources and figures are used. The differences in information are not as stark as the headlines suggest after reading the articles. CR offers a broader historical context but that context is not left out of the Financial Times. Both appear to offer information for the same purpose, as information (ie. not information from National Realtors Assoc.). Yet I come away with very different feelings about the nature of this news in a casual reading.

by Mike Kimel

Cross posted at the Presimetrics Blog.

A Look at the Current Recession, A Signpost for the Start of Recessions & Some Thoughts on the Likelihood of a Double Dip

These days there’s a lot of talk about whether the recession is going to double dip. And frankly, there’s a lotta yadda yadda, some bad news, and some not-so-bad news. You’ve heard it all before, you don’t need to hear it again from me, and frankly, I’d like to take a different approach. Before launching in, links to all data sources will be provided at the bottom of the post.
Let’s get started with a look at the pace of recoveries from recessions and how the current one compares to others. The graph below shows the percentage change in real GDP per capita each quarter from the end of a recession. Every recession since 1947, the first year for which quarterly data is available, is depicted.

Figure 1

The graph makes a few things apparent. First, it is clear that the double dip or no double dip, the current recovery is pretty feeble. Second, the most recent recoveries have all been pretty feeble.

Things look even worse when one looks at recoveries from deep recessions:

Figure 2

Part of this feebleness is no doubt due to the government’s policies. As I’ve noted before, the data shows that when tax rates were cut during or right after a recession, recoveries were slower and shorter. And both GW and Obama were happily cutting taxes of one sort or another during the latest recession. And of course, the government spending they threw on as a stimulus was in large part ill-conceived, going to benefit primarily some of the parties most responsible for the meltdown, buying toxic assets at inflated prices, and trying to prop up housing prices that should have been allowed to fall.

But what’s there is there. The question du jour is double dips – is the economy going to fall into another recession so quickly after coming out of the previous one, as occurred in 1981, or repeated times in the 1920s?

To answer that question, we need to know what causes recessions. While the academic literature has some complex explanations which depend on all sorts of odd assumptions, I think the answer is simple. The following graph shows the 12 month percentage change in real M1 per capita in the month that a recession begins. M1 is simply the narrowest of the Fed’s measures of the money supply (cash, money in checking accounts, and traveler’s checks), and I’ve adjusted it for inflation and population. Note that the Fed from 1947 to 1958, the Fed doesn’t report M1, but it does report “money stock” which is sufficiently similar to use in its place.

Figure 3

Notice that every recession except one, the one that began in July of ’53, began after the Fed reduced the real M1 per capita by at least 2%. That’s enough to suggest that the change in real money supply per person may well matter; no certainty, but it’s a suggestion.

Assuming for the moment that real M1 per capita does matter, notice that the twelve month change in that variable through June of this year is about 2.8%, which doesn’t make it look an awful lot like a recession about to begin, even if (to repeat the points of Figures 1 and 2) the recovery is crummy.

But the graph also suggests that the theory needs something in order to be complete – it needs to be improved in order to explain July of ’53. What happened then? The big event at about that time was the wind-down from the Korean War. Another way to look at it… real government spending was about to start dropping a lot. Additionally, the very next month, the 12 month change in real M1 per capita went negative, and it stayed negative through the duration of the recession.

Call a drop in real M1 per capita a necessary but not sufficient condition for a recession, at least so far. Now, it is quite possible, pace Rogoff & Reinhart that this time it will be different. I would imagine that the way the Fed has put money into the economy lately, essentially giving freebies to badly run financial institutions, is not quite as useful as its usual M.O. In that case, it might take more than just being on the positive side of the real M1 per capita ledger to make a difference. And check out where that variable is going, anyhow:

Figure 4

It’s down quite a bit… but still it is positive. Can that number go negative in a hurry? Ayup. But the last bit of information we’ve had doesn’t seem to show that.

So what’s the conclusion? I’ve never had much of a problem going out on a limb. Back in March of 2008 I had my first few posts discussing the recession we were in, at a time when the consensus was that we weren’t in one. And check out the comments when I claimed, back in December of ’08 real GDP per that the recession would be over in the first half of the year. (Yes, I know, the post went up in January. And yes, I know the NBER hasn’t called the end of the recession yet but real GDP bottomed out in the second quarter of ’09.) This time, I’m not as comfortable; given where and how the Fed has been putting Money I just don’t see increases in the real money supply as being quite as effective as normal. The money is going to fill in a big hole the financial industry created in its collective balance sheet, and isn’t necessarily leading to a lot of additional spending. Furthermore, with all the talk of austerity, it wouldn’t be surprising if the Federal Government starts cutting back on spending.

So I’m just not sure. But as often as not, when things are bad enough for everyone to see a problem, they’re not as bad as most people think. Given that the weight of the evidence seems almost equally balanced on both sides, this little thing tips it slightly for me: unless and until the Fed starts removing money from the system, I don’t think we’re going into a second dip. But given the Federal Government’s current policies, I don’t expect much more than mediocre growth for the next few quarters either.

—

Data Sources

FRED, the Federal Reserve Database, was the source for most of the data used to compute real M1 per capita: population from 1952 to the present , M1 from 1958 on and M1 from 1958 on.

Quarterly data on real GDP per capita and population. Note – the quarterly population figures were used to extrapolate monthly population for 1947 to 1952.

Finally, money stock figures were substituted in for M1 from 1947 to 1957. Those were copied by hand from this document at the Federal Reserve of St. Louis’ FRASER archives

Mike Kimel

Robert Waldmann

Oh good, Kevin Drum and Matthew Yglesias disagree. This is bound to be interesting.

Drum remembers the good old days when liberals had less respect for the standard results of simple neoclassical economic models.

The specific issue is that firms are using credit scores to decide who to hire. This can trap some people as they can’t improve their credit score without a job and can’t get a job with their current credit score. Kevin Drum thinks the practice should be banned. Matthew Yglesias isn’t sure.

Yglesias wrote

But at the same time I try to adhere to the principle I outlined here and resist the urge to call for regulating the business practices of private firms when the issue isn’t pollution or some other case where the externalities are clear. After all, it seems like either this credit check business is a sound business practice (in which case allowing it is making the economy more efficient and ultimately building a more prosperous tomorrow) or else it’s an unsound business practice (in which case competition should drive it out).

That is actually a pretty radical position. I wonder what clear externality the 64 civil rights act addressed. I’m quite sure Yglesias doesn’t think what he seemed to assert, but I want to figure out what he had in mind.

Drum responds “More important is the fact that we liberals shouldn’t view the relationship between businesses and individuals as solely economic transactions” and gives an example

Here’s an example. Back in 1968, Congress passed the Truth in Lending Act. Among other things, it made credit card companies liable for charges on stolen credit cards over $50. In a purely economic sense, there’s really no excuse for this.

Ah how naïve. There is always an excuse based on economic theory (with the assumption of full rationality) for any policy. I view any assertion to the contrary as a personal challenge. This one is easy. Drum argues that the regulation creates a moral hazard problem as we are more careless with our wallets. I see his moral hazard and raise him an adverse selection (Hint: adverse selection is a great tool for justifying regulations as market outcomes are inefficient if there is adverse selection).

So let’s say everyone is better off with the regulation so the most wallet guarding yet not risk averse person is willing to pay extra to the bank in exchange for this protection. That doesn’t mean that this will be the market outcome. Let’s say a credit card company introduces a new card with the $50 limit. It will attract all the people who can’t keep track of their wallets. It will also attract people who commit a rare kind of fraud giving their card to an accomplice, having the accomplice buy stuff and then reporting it lost. There aren’t many of those, but there are enough that the extra interest (or other fees) that the company would have to charge would drive away everyone but the fraudsters and the most absent minded yet risk averse (I raise my hand). So the new product would enter the adverse selection death spiral.

The only solution is to force everyone to buy the protection which everyone wants if the fee is the actuarially fair fee for 100% coverage. Oh look, that’s the current law. That was easy. No sweat, no equations.

I mean Kevin you consider the health care reform debate and recall how forcing people to buy insurance, whether they want it or not, can be Pareto improving in a standard economic model.

Now on the original topic, I side with Drum. I think there is an externality. If people are rendered unemployable, maybe because of their fecklessness maybe because of their unluckiness there are externalities. For one thing the standard argument for laissez faire assumes we are totally selfish and absolutely needs that assumption to get the result. If desperate unemployable people cause others pain, then there is an externality. Another simpler externality is crime. People who are excluding from employment have little to lose from turning to crime. That’s an externality.

I’m pretty sure Yglesias’s idea is that both of these are arguments for redistribution from rich to poor and that such redistribution is more efficiently obtained by taxing and transferring. First, self esteem can’t be transferred. Good examples for the children can’t be transferred either. More importantly, there is no way that the feckless poor are getting much in the USA. You make policy with the electorate you have not the electorate you want. US voters are very willing to regulate business. They are totally unwilling to transfer money to people who firms don’t want to employ, because they seem to be irresponsible.

Assuming a social planner who taxes and transfers optimally is like assuming regulators can’t be captured or assuming that CO2 doesn’t cause global warming. That’s not the world we live it. I think we have to transfer however we can and that includes hiding information from potential employers. The loss in efficiency is a social loss only if one assumes that income distribution doesn’t matter (or assumes that there are optimal lump sum taxes and transfers which is an oxymoron). The link clicking reader will notice that my arguments are pretty much orthogonal to Drum’s.

The New York Times and The Guardian report on the posting of archival documents by Wikileaks. Reporting appears to be similar so far until they are read and sorted.

by Bruce Webb

Over at Open Left they are revisiting the concept of Conservatism and whether it is a coherent philosophy. And after concluding that Conservatives by and large have failed to come up with their own definition proceeded to advance some of their own, that it is about enabling aristocracy, or institutionalizing suffering, or whatever. What is Conservatism: Conservatives Have No Idea. Well I don’t think we get very far simply dismissing conservatism as a pathology, in particular it doesn’t get us very far in explaining small town and rural conservatism and particularly that of people who are not really in a socio-economic position to oppress anybody, the normal explanations based on race and economic class more or less breaking down in places like North Dakota.

Is it possible to come up with a common denominator of Conservatism, one that doesn’t reduce to institutionalized capitalist racism (which conclusion unfortunately is where too many of us liberals tend to gravitate to)? Well I think so, and probably not surprising anyone who has read my stuff, I locate it in a time and a place far detached from 20th century America. More in extended entry.

The first step is to separate Conservatism from its modern variant Reactionism. Political and Religious Reaction was a general response to the larger movement we associate with the European Enlightenment starting roughly in the late 17th century and a specific response to the historical developments associated with various revolutions from the Dutch, to the American, and most dramatically the French and then to the subsequent Continental/Napoleanic Wars. After the final defeat of Napolean the European Powers very consciously set up a system of institutionalized Reaction where the clear enemies were the interlinked movements of Revolution, Nationalism, Liberty, Democracy, and Socialism. To which you could add Free Thinking and such things as Deism. All of these were threats to a political and social system based on hereditary monarchy and aristocracy. Nor were these threats idle, within a hundred and ten or so years of the Congress of Vienna in 1815 imperial and royal houses whose histories could be traced back up to a thousand years were for the most part in Marx’s Dustbins of History.

While clearly the kind of Authoritarian Reaction that dominated the 19th century, or at least went down fighting, consciously drew to itself the elements of Conservatism and as noted can be seen as a varient should not be identified with it. Because most Conservatives are not Kings and Princes, or even Popes and Priests, and while there are reasons why Conservatism is most comfortable within a econo-political system based on authority and hierarchy they are not I think its motivating force.

The key question for me in tracking down Conservatism is whether it existed in recognizable form prior to the Enlightenment? If so it can hardly be a product of the latter even though it might have been (and in my opinion was) reshaped by it. And I think the answer is clearly yes, as far back as we have evidence of Western Civilization to which might well add Asian Civilization we see some particular shared characteristics that I think are the basis of Conservatism (I don’t know enough about Oceana, Africa, or Pre-Columbian America to even venture a guestimate on this in relation to them. Feel free to fill in in comments.)

So to answer the title of the post, what are Conservatives conserving? I suggest it is the Household, here seen as a socio-economic unit headed by the Householder (in English the ‘hus-bund) ‘with certain authority delegated to the Wife (O.E. ‘hus-wif’). In this context we can’t separate out ‘house’ ‘household’ ‘family’, each has a literal and figurative center or centers and a defined boundary, and defending that boundary figuratively, legally and often physically was the responsibility of the ‘family’ under command of the householder. And of course the concept of ‘hold’ is integral to both ‘householder’ and ‘holding’ as well to the legal terms of ‘possession’ (cognate with ’seize’ itself ultimately identical to English Law-French ’seisen’).

If we had to find a general European translation of ‘household’ we can hardly do better than Latin ‘familia’ which means more than the biological unit, but extends to all human and even animal occupants of the household, all of which are ultimately under control of the head of the household. Now viewed from the outside through our Enlightenment eyeshades all of this looks like a dictatorship, from the inside out that makes no more sense than asking why ships are generally not directed by committee, when the storm hits someone has to be in command.

If we take the European household back to its origins we can see that the authority of the householder extended most definitely to religion, indeed in very ancient times it seems that each householder was his own family priest, each family having its own religion tying it together (‘religio’ possibly deriving from ‘religare’ ‘to bind fast’ cf ‘ligature’). And in such matters precision and continuity were all important, it is characteristic of European religion from its beginnings to the Reformation that change in ritual is not only not welcome, it is potentially disastrous to the household.

Seen from this perspective much that seems primitive in Conservatism is simply natural in context. Patriarchy, emphasis on property rights, rigidity in religious belief, unwillingness to sacrifice the family’s economic interest to outside demands, all can be seen as simple defense of the physical and human boundaries of the family/household.

If we extend our view outside the individual household other aspects of Conservatism come into focus. First no household is a total island, each of necessity is associated with others in a system of mutual defense and with that comes the need for internal conflict resolution (law), military command (kings), and community ritual (priests) all of which are necessary to protect the joint boundary in the same way as the individual householder protects his own boundary. On the other hand this commitment to law, common defense and religion might not necessarily extend to the general welfare. While this will seem heartless from the perspective of universal humanism or the specific tenets of Christianity and other faiths, there is nothing intellectually incoherent about privileging the family and then the larger tribal interest to extra-familial individual interests inside and outside the tribe.

So can Conservatism exist outside Capitalism? Of course, defined as protecting the Household it did so for centuries and millennia. Is Conservatism inherently dependent on racism? Well no, not everything needs to be viewed through the lens of American Exceptionalism and the Peculiar Institution, identifiable Conservatism existed in both European and American contexts where issues of race hardly came into play at all. Or class for that matter. On the other hand Conservatives are by nature suspicious of outsiders, who are by nature a potential threat to the family. Which may leave them very open to classifying the Other negatively by race or religion, after all from this perspective Conservatism is all about drawing and protecting boundaries.

This is by no means meant as a defense of the organized Conservative project as that is seen working its way in the media and Congress, just an appeal to separate out what can properly be seen as a Reactionary attempt to exploit Conservatism to advance an anti-Enlightenment agenda from a Conservatism that was never fundamentally exposed to the Enlightenment at all but instead stuck to a belief system hundreds and perhaps thousands of years old. Some guy wanting to provide for his family and protect what is his may express those beliefs in ways foreign to Liberalism but is not by that token simply open to condescension and disrespect in the ways seen in the linked post from O.L.