economy eyes

Busy week, so just a couple of things of note.

1. Via Dr. Black, my old neighborhood gets a chance to build a better future:
   

   “It’s a great partnership among a number of researchers from academia, the private sector and national laboratories. It’s a great collaboration for a solid project that will help the environment,” said Penn State spokeswoman Annemarie Mountz.

   Foley said the project “will spur real innovation and job growth for Philadelphia, the region and the nation. We have a world class team of universities, corporations, and economic development entities that made this proposal come to life. There is no better place to do this work than in the Philadelphia Navy Yard.”

   My mother would have agreed, but she stopped working there (coincidentally) around the time Tom was born. Indeed, the renovation of the Navy Yard has been an American Success Story (driven by a Norwegian shipbuilding firm and a clothing retailer), and we can almost pretend that the area has “recovered.”

2. Similarly, the results of the Race to the Top came in a couple of days ago. You may have heard that our Superstar Governor was cruelly betrayed by Washington bureaucrats and/or the evil NEA.

   Well, until the actual video was released, after which point yet another Republican decided to prove that people collecting unemployment are Just Lazy (though he does claim not to have lied to Superstar Governor, leaving the question of where the story from the Governor should be sourced).

So the old area is gaining because of Federal government management, and the current area is suffering because of State government mismanagement. It’s almost enough to make me think that there’s a difference when people want to accomplish something.

Op-ed by Rdan

The problem with Simpson’s statement about 300 million tits was not that it was sexist.
The problem with Simpson’s statement was that it was wrong as to the facts and arrogant as to the needs of most people.

The call for his ouster is another example of liberals shooting themselves in the foot by getting all emotional about hurting people’s feelings… even when they leave those feelings on the doorstep where they can be tripped over. So instead of challenging Simpson on the facts, and watching him self destruct in public, they go for the vapors and call for the nasty man to shut up or resign, so the real criminals can go back to pretending they are respectable.

Let’s call for a televised debate with the man before elections, or even after.

by Bruce Webb

I am not going to harp on the sexism or ageism in Simpson’s ‘310 million tits’ comment generally, if you happen to have just gotten back on the Inter-Spatial Shuttle from Alpha Centauri this evening and don’t catch the reference a Google search on that turns up 125,000 hits, and I daresay the first 25,000 of them relevant. I want to examine what it, and some other developments inside and outside the Obama Deficit Commission reveal about a new openness in class warfare.

What Simpson’s comments revealed more broadly was a profound contempt for the lower 98%, those who might end up reliant in whole or even in part on Social Security. Because ‘310 million’ takes in everybody, in Simpson’s world anyone who ever did, is, or will ever rely on Social Security is just a Randite ‘parasite’ or at best ‘dependent farm animal’ and you can bet it is a long time since Simpson read Timothy 1:18: “For the scripture saith, Thou shalt not muzzle the ox that treadeth out the corn. And, The labourer is worthy of his reward.” and clearly he glossed over the even more famous admonition “Honor thy Father and they Mother”. For Simpson workers are suckling pigs and seniors are ‘Greedy Geezers’.

Naturally the Simpson remarks sparked large and heated discussions in the blogosphere including my old, old stomping grounds at dKos including one by commenter bink Time for Obama to Shut Down the SS Commission which sparked a long and ongoing comment thread with some vigorous participation by me. In the course of that conversation some people pushed back in defending Obama by noting that it wasn’t formally just a Social Security Commission, instead it was focused on deficit reduction generally and was formally known as the Fiscal Responsibility and Reform Commission, and that moreover both current commissioners and people around Peter G Peterson, who clearly was the inspiration for applying the BRAC Commission model to deficit reduction, were on record supporting defense cuts and tax increases, meaning that nobody was really in the tank, and that everything was on the table. But how does the Commission seem to be defining ‘defense cuts’ and ‘tax increases’ and how does that relate to Simpson’s open contempt for the ‘lesser people’ sucking away at those ‘310 million tits’. Well some discussion under the fold.

First as to defense cuts. Given the requirement for a 14-4 minimum vote for any recommendation to come out of the Commission major cuts in defense acquisition were never likely to make the cut, the six Republican Congressional members should have been enough to prevent anymore than tinkering on that front. But seemingly to make sure Obama named Republican David Cote, CEO of major defense contractor Honeywell, and he, understanding that nothing could be seen to be a total sacred cow, came up with an ingenious idea to have defense cuts while avoiding cancellation of current and future weapons program cuts: you just stick it to the troops. I’ll let TPM take it up from here: Source: Debt Commission Fights Over Freezing Military Pay, Slashing Benefits

A source familiar with the proceedings of the working group on discretionary spending tells TPM that some commissioners, including one military contractor, would prefer to save money by freezing military pay and scaling back benefits, rather than by eliminating waste in defense contracting.
The source said that different members of the commission come down on different sides of the issue. The discussion group is led by Sen. Tom Coburn (R-OK), whose primary aim is trimming fat on the contractor side, but, according to the source, David Cote, the Honeywell CEO who was appointed to the panel by President Obama, is pushing to find savings elsewhere.

“Coburn raised concerns about all of the cost overruns and redundant weapons system,” the source told TPM. “Cote made excuses for it all.”

According to the source, Cote and other members, including the commission’s co-chair Alan Simpson, are focusing instead on “freezing military pay, making military people pay for their health care.”

So Simpson’s ‘310 million’ was not just a misquote, it not only includes all those working civilians whose retirement will be based on Social Security, it also includes all those military people relying on military retirement. And since retirement pay is formulaically based on final military pay, the Commission can save $100s of billion off the back end, to say nothing of requiring service persons and retirees to kick in more for their health care. And all without taking a penny from the bottom line of Honeywell or Raytheon. But plenty of ’shared sacrifice’ for the lower 98%.

Now as to tax cuts, also alleged to be on the table. Do you think Commission sponsor Peterson is generously offering to have the exemption for ‘carried interest’ for Hedge fund billionaires to be on the table? I don’t think so, his cofounder at Blackstone suggested that any attempt to address that would be the equivalent of Hitler invading Poland. Schwarzman: A ‘Fat Cat’ Speaks Back and I think it is safe to think it is still speaking for his old partner (and obviously still huge investor) Peterson. And Peterson has been on record for a few decades for eliminating the corporate income tax and doesn’t seem to have changed his stripes. In an op-ed last month in the WSJ (where else) Tax Aversion Syndrome and Our Deficit Future: We’ve run out of painless options. Higher taxes and reduced entitlement benefits for the well-off are the only solutions. he spells that out. (And note the clever word play-the ‘higher taxes’ on the left side of the conjunction don’t actually apply to the ‘higher off’ on the right side, only the benefit reduction)

Some have tax aversion syndrome—they have never met a tax increase they didn’t do everything in their power to block. While I believe that spending cuts must play a lead role in any solution to our long-term structural deficits, the sheer magnitude of the imbalances requires revenue increases.

Ideally, the country should raise as much government revenue as possible from a progressive consumption tax. Such a tax can be designed so that it won’t overly burden lower-income families but will raise significant revenues and increase our savings rate.

However, given political realities, it is not likely that we could enact a progressive consumption tax that would raise sufficient revenues to meet our needs. Therefore, I would initiate such a tax in conjunction with a simplified income tax (that would have far fewer corporate and individual credits and deductions)—thereby allowing for lower individual and corporate income tax rates.

Meaning that for Peterson ’shared sacrifice’ means retaining current reduced rates on capital gains, means testing the middle class for Social Security, slapping on a broad ‘progressive’ consumption tax on everyone. And you can bet ‘progressive’ doesn’t mean a huge luxury tax on yachts.

So the translation of “Everything is on the Table” seems to be: across the board benefit cuts to Social Security, additional means testing on the middle class, cutting military pay and shifting more of the cost of medical care to soldiers and retirees, and ‘progressive’ consumption tax. Meanwhile I guess the top 2% and even more the top 0.001% just keep producing along supporting us 310 million sucking parasites. (0.001% of the population is roughly 3100 individuals and maybe 1000 households and should handily include all those with 9 digit (multi-multi millionaire) and 10 digit (billionaire) net worth and 310 million – 0.001% still equals 310 million, Simpson was not indicting everyone, just you me and everyone we know).

We can couple this with troubling statements out of the Obama Administration touting the success of TARP, the stimulus bill, and HAMP even though TARP hasn’t led to a loosening in credit to small business, the stimulus is turning around profits while not actaully reducing unemployment, and HAMP only seems to have allowed some extra months of mortgage payment extraction from homeowners who are now in large numbers re-entering default. But it is all good for the banks and the bonuses of the top 2%.

Somebody is playing a dangerous game here, surely they can’t be so far in the bubble that they want to add active unrest among the left to the ongoing tea party anger emanating from the right. If the Obama Administration allows the Catfood Commission to define ’shared sacrifice’ in he way this post suggests they are preparing to, that nice smooth road to re-election in 2012 may shape up to be a lot rockier than they intended. Even Reagan didn’t run explicitly on a platform of “Screw the Middle Class” and nobody back then dared openly come out and admit that in practice ‘Trickle Down’ meant ‘Golden Shower’. Why the Democratic Party is attempting a merger with the Plutocratic Party is beyond me.

Robert Waldmann

Saul Alinsky sure has a lot of followers. Obama is a fan. Hillary Clinton wrote her senior thesis about Alinsky. However the people who follow him to the letter are Republican’s who want to privatize social security.

Rule 13 (slightly edited)

13. Pick the target … personalize it,…

The latest follower of Alinsky is Club of Growth radical Pat Toomey who claims he never advocated privatizing social security. Laura Vecsey notes the clear Alinsky influence

The key to understanding this semantic subterfuge is, well, semantics. The word Toomey uses is “personalized” Social Security

So far rule 13 hasn’t worked, so I guess they will have to back uo to rule 13

12. “The price of a successful attack is a constructive alternative.”

Nah not gonna happen.

Full rule 13

13. Pick the target, freeze it, personalize it, and polarize it.

I am kidding on the square. Check the rules. Republicans have been following them since 1992 at the latest.

It has been hard for them to stick to their followers areas of expertise, since there aren’t any.

Robert Waldmann

Andrew Harless argues that there was no housing bubble ?!?

Apparently it is now generally accepted that the rise in house prices was an aberrant bubble, justified only in the minds of irrational buyers who ignored the fundamentals and expected house prices to keep rising simply because they were already rising.

But what were the fundamentals? Certainly, if one had foreseen today’s circumstances, it would have been clear that housing was not a good investment. If one had been able to say, “In a few years, the unemployment rate will rise to 10%

Go read the whole post. I can’t choose the key quote but basically he argues that high asset prices were required to achieve a normal unemployment rate and therefore they weren’t aberrant. He argues that it must be possible to achieve normal unemployment without a bubble. He then sure seems to argue that since some asset price could have been sustainably high, clearly US houses were those assets.

More after the jump

This time I’m not convinced. You don’t define bubble and don’t respond to the alleged evidence that there was a housing bubble. Why was the relative price of housing in the 21st century so much higher than in the 20th (during which it was quite stable) ? Why was the ratio of price to rent so high ? Neither is easy to explain assuming 4% unemployment.

In effect you claim that, if policy makers agressively countered the recession and we were at full employment now then housing would have been a fine investment. So why did everyone with a brain and an open mind assert back in 2006 that there was a housing bubble (that is housing was a very bad long term investment) ?

I think an important issue is that you note a worldwide problem and assume that the US economy can solve it.

If you were writing about the alleged housing bubble in Ireland (I am sure there was such a bubble I only use “alleged” in an attempt to be polite) such a claim would sound silly. I think it is also silly for the USA. The US can’t keep running huge current account deficits forever. The global savings glut requires increased final demand in other countries

Transunion reports:

TransUnion’s quarterly analysis of trends in the credit card industry revealed that the national credit card delinquency rate (the ratio of bankcard borrowers 90 days or more delinquent on one or more of their credit cards) decreased to 0.92 percent in the second quarter of 2010, down 17.1 percent over the previous quarter. Year over year, credit card delinquencies fell by 21.3 percent.
…
Average credit card borrower debt (defined as the aggregate balance on all bank-issued credit cards for an individual bankcard borrower) again drifted downward for the fifth consecutive quarter nationally by 4.1 percent to $4,951 from the previous quarter’s $5,165, and down 13.4 percent compared to the second quarter of 2009 ($5,719). This represented the first period credit card debt was below $5,000 since the first quarter of 2002.
…
On a year-over-year basis, national credit card originations dropped almost 6.5 percent.

There was no mention of how writedowns of bad debt may have affected the numbers as part of savings. State by state and city and not city areas varied widely in numbers, as well as regions of the US.

by Linda Beale
crossposted with Ataxingmatter

Dealing with the Sunset of the Bush Tax Cuts (Part IV in a series)–the Tax Relief Coalition

The Tax Relief Coalition–another of the myriad anti-tax groups comprised of Grover Norquist’s group and those of similar ideology–is at it again with a letter to Congress (available on BNA) urging the passage of new legislation to pass tax cuts to extend the temporary cuts enacted under the Bush administration. The group is spending millions lobby for its interests with the dubious claim that discontinuing tax cuts for the wealthiest Americans will hit small businesses the hardest. See, e.g., Jensen & Salant, Leader on Bush Tax Cuts Wins Allies to Keep Provisions in Place, Bloomberg.com (Aug. 20, 2010) (noting that the coalition groups have spent $3.8 million since Jan. 1, 2009 on candidates and advertising, and that the Chamber of Commerce plans to spend $75 million influencing elections in its favor).

Note that the coalition–formed of “trade associations, advocacy groups, and corporations”–calls itself favoring “pro-growth tax policies”. But what it means is favoring tax cuts. It is arguable that tax cuts support economic growth–at best they are a second-rate stimulus compared to direct government spending on public and human infrastructure that provides long-term support for economic stability– such as public transportation, public communication networks, development of alternative energy sources, education (K1-university), and basic research.

These claims that the tax cuts help small businesses are at best dubious. (See, e.g., yesterday’s post outlining various reasons why the capital gains preference has very little to do with stimulating entreprenuership or helping small businesses.) The coalition tries to cast the Bush tax cuts in terms of job creation. But the fact is, the Bush regime had a lousy record for job creation, and the tax cuts that were especially favorable to corporations probably did almost nothing to contribute to job creation. The “American Job Creation Act of 2004″ for example, mainly acted as a tax cut for multinational corporations that used the very low taxation of repatriated money to pay big dividends to shareholders even while they were laying off thousands of workers. Similarly, expensing provisions and other tax cut provisions (especially for oil and gas industry and other targeted industrial provisions) mainly gave more money to managers and owners, not workers. Real wages of workers have fallen, while corporations sit on big kitties of cash–keeping the productivity gains for managers and owners and not sharing them with workers and certainly not creating new jobs for new workers.

What about the small company owners that the National Federal of Independent Business brings in to calim that any tax increase is a job killer? See Bloomberg article, above. That’s a superficially self-serving claim that is probably in truth a case of blind greed keeping business owners from admitting that federal dollars spent for unemployment, infrastructure, education and other important programs will actually create a more sustainable economy that will be better for their businesses. A little bit more in taxes now will have positive impact, not negative, on the economy. And those arguments also leave out a few of the details–like the fact that the proposed tax increase on joint returns with $250,000 or more impacts very, very few small businesses.

The hypocrisy is also evident, as coalition members refuse to limit extension of the tax breaks to the lower income group, even while they complain about deficits. The deficit argument is essentially brought out to create fear in average voters and to provide a salient objection to any additional spending that does not directly go to the benefit of business managers and owners, but it isn’t a real concern since it doesn’t enter into the discussion of whether or not to extend tax breaks to the wealthy who don’t need them.

Regretably, the Democrats don’t have much backbone on this issue. Senators Conrad and Bayh, for example, have accepted the idea that it is problematic to raise taxes on anybody during an economic slowdown. That their position doesn’t make sense–a little bit more in taxes on the wealthiest Americans won’t really affect either consumption or investment in new businesses–doesn’t seem to matter.

I have no words for this e-mail to OWL by Alan Simpson on Social Security:

I’ve made some plenty smart cracks about people on Social Security who milk it to the last degree. You know ‘em too. It’s the same with any system in America. We’ve reached a point now where it’s like a milk cow with 310 million tits! Call when you get honest work!
Al

There are plenty who have weighed in, some of them major organized voting groups such as AARP. Alan Simpson also has other views regarding “the federal deficit” not worth exploring except he still is co-chair on the Deficit Commission.

Robert Waldmann

Minneapolis Fed President and famous economist Narayan Kocherlakota made my jaw drop with this argument

Long-run monetary neutrality is an uncontroversial, simple, but nonetheless profound proposition. In particular, it implies that if the FOMC maintains the fed funds rate at its current level of 0-25 basis points for too long, both anticipated and actual inflation have to become negative. Why? It’s simple arithmetic. Let’s say that the real rate of return on safe investments is 1 percent and we need to add an amount of anticipated inflation that will result in a fed funds rate of 0.25 percent. The only way to get that is to add a negative number—in this case, –0.75 percent.

Kocherlakota asserts that expansionary monetary policy will eventually cause deflation. This is very odd. My honest opinion is that he wants to argue for a higher target federal funds rate and he’s decided to present every argument that supports that proposal even if it is half baked, unbaked or negabaked (frozen ?). However, I can’t resist trying to make sense of the argument (after the jump I try and fail).

First, as noted by Andy Harless, Kocherlakota is asserting super-neutrality – not just that the level of the money supply doesn’t affect real variables in the long run but also that the rate of growth of money doesn’t affect real variables in the long run. Kocherlakota is right that this claim is not controversial – it is uncontroversially false as argued in, say, much of Kocherlakota’s academic work. Weird.

Second, Kocherlakota does not say anything about economic agents and their objectives. For there to be deflation firms must lower prices. Kocherlakota does not discuss why firms might do that. This is very strange coming from an economist who was, until recently, chairman of the Minnesota economics department.

update: This is not as unoriginal and pointless as the rest of the post.

Immediately above the quoted passage Kocherlakota wrote

As I said, the FOMC meets eight times a year. Its decisions are always influenced by fairly recent economic data. But, at the same time, its decision-making has to be shaped by long-run considerations. In that vein, let me close by offering some thoughts about long-run inflation—or really, long-run deflation. I mentioned earlier that inflation has been near 1 percent recently. These data have led some observers to worry about the possibility of a multiyear period of falling prices—that is, persistent deflation. I don’t see this possibility as likely. It would require the FOMC to make the surprising mistake of ignoring the long run in its desire to fix the short run.

He notes that there is a long run equilibrium in which the Fed funds rate is very low and inflation is negative. He strongly suggests that this would be a bad thing. In Kocherlakota’s academic work, he asserts that optimal policy implies an euqilibrium with deflation and a very low nominal interest rate (optimally 0). This is called the Friedman rule. So why would reaching such an equilibrium require a mistake. The argument about the equilibrium real interest rate is an argument about the real interest rate which corresponds to unemployment equal to the natural rate. The problem with deflation is that it can cause real interest rates to be higher than that rate. Kockerlakota assumes that there is no problem caused by deflation in his warning that loose money might lead to deflation.

[intemperate outburst deleted]

end of update.

Further up in the speech, Kocherlakota notes that it makes no sense to consider a policy of keeping the federal funds rate at 0.25 percent from now until T= infinity, since the question at hand is the target rate for the next month and a half. He then just says this doesn’t matter (1.5 is approximately equal to infinity). I think that to the man in the street, this is stranger than deciding micro foundations are optimal and that neutrality implies super neutrality.

However, I find it comprehensible. When one attempts to deal with difficult mathematical models, the temptation to consider steady states is almost irresistible. Furthermore Fresh water economists have been saying “that may be true in the short fun but not in the long run” for decades. In fact, economists have been dodging questions by talking only about the long run since before Keynes wrote “in the long run we’ll all be dead” to respond to exactly that invalid argument.

Another key point is the immense power of “if.” Kocherlakota discusses the irrelevant question of sticking to 0.25% target forever (he doesn’t consider sticking to it for a mere million years). He thus implicitly assumes that the Fed can keep the Fed funds rate at 0.25 from now to infinity without interruption. I think that is impossible and it certainly won’t happen if the Fed follows the policy opposed by Kocherlakota.

The Fed has been keeping the Fed funds rate that low via open market operations in which it issues high powered money in exchange for other assets. Such an approach might fail to achieve the target because it leads to inflation. It is easy to see how a policy of trying to keep the federal funds rate below the equilibrium real interest rate would cause high inflation until the Fed would lose its ability to drive short term interest rates down because the real value of new high powered money issued would be too small – that is the amount of money they create doesn’t matter if no one wants it.

I not sure that it’s even possible to write down a model in which such a policy succeeds in keeping the Fed funds rate 0.25% for the long run and leads to an equilibrium with deflation. Certainly no such model currently exists.

The Fed could achieve 0.25% starting in around 2020 and lasting forever by reducing and reducing the money supply, however that would imply very high nominal interest rates in the near future (this isn’t theory it is an empirical observation) and it is not the proposal which Kockerlakota opposes.

I guess I have wasted your time. I started with no clue about Kocherlakota’s mental processes and and I still have no clue.