Month: June 2014

Jared Bernstein: Is the Macro-Economy Really That Much of a Muddle?: “I come away from Bin Appelbaum’s (fine) piece in today’s NYT…

… scratching the old head…. It has been five years since the official end of that severe economic downturn. The nation’s total annual output has moved substantially above the prerecession peak, but economic growth has averaged only about 2 percent a year, well below its historical average…. Here’s a typology of the different views expressed in the piece, as I understand them: –The economy’s potential growth rate has been slowing down for a while.  Stuff happens…. –Bunk.  We’ll be fine…. –Sorry, but the fact is we’re going to be growing slower post-great-recession. But that’s because of the recession, or, more precisely, because of the policy mistakes we made that kept us down for so long that we’ve bent the trend. –Well, yeah… but if you can bend the trend you can mend the trend.  Aggressive policy to close gaps in output and jobs could at least partially reverse the damage. No one knows which of these is right, of course.  But would not a shave with Occam’s razor lead you to the last one?… So where’s the big, freakin’ puzzle here?  Investing in public infrastructure, helping the long-term unemployed with extended benefits or direct job creation, targeting the trade deficit to help our manufacturers, pressing on the fiscal and monetary accelerators–I know there are those who will disagree, but these are well-established and well-understood responses, or at least they used to be, to demand contractions, including the one that persists as we speak…. Of course, the constraints are political and I’ll immediately grant you that the politicians are more confused than the economists.  But granting the not-that-interesting truth that the future is uncertain, I simply don’t understand the apparent confusion about the present, including the necessary prescription to get back on track… even if we don’t know the precise measurements of that particular track.

Barry Eichengreen: Monetary Policy Should Not Be the First Line of Defense Against Bubbles: “There is a clear victor in the “lean versus clean” debate…

…Central banks cannot concentrate only on cleaning up after crises; the costs of financial instability are too high. Rather, as recent events have amply shown, the monetary authority must lean against excesses as they develop…. [In the 1920s] George Harrison of the Federal Reserve Bank of New York… worried about the impact on the broader economy and preferred to use other instruments to address financial imbalances. Harrison’s alternative was “direct pressure”… using the Fed’s regulatory powers and moral suasion to persuade member banks to curtail their lending…. Central banks should focus on developing more effective macro-prudential instruments…. They should adjust monetary policy to address potential financial risks as a last resort, not as their first line of defense.

Robert Waldmann: Thoughts on Brad’s Thoughts on Economic Theology: “So why is the Keynes-Friedman-Samuelson position unstable?…

…I definitely do not believe in the neoclassical synthesis…. I don’t think that, even given full employment, markets are efficient. I tend to advocate leaving the market alone except for 1) redistribution from rich to poor 2) mandatory insurance is market insurance is prevented by the adverse selection death spiral 3) Pigouvian taxes to internalize externalities 4) aggregate demand management 5) Anti discrimination legislation and 6) I’m sure there are lots of other exceptions which don’t come to mind…. The market is the worst possible way to organize economic interactions except for all of the others that have ever been invented. My inclination to leave markets along (except for 1-6) is based on mistrust of the state, not trust in markets… meddling will lead to interest-group gridlock, advantages for the well-connected (that is rich) captured regulators and so forth and so on…

Dani Rodrik: Root Causes of Political Malaise in Advanced and Developing Countries: “Today’s democratic governments perform poorly…

…In the advanced countries, dissatisfaction with government stems from its inability to deliver effective economic policies for growth and inclusion. In the newer democracies of the developing world, failure to safeguard civil liberties and political freedom is an additional source of discontent. A true democracy… combines majority rule with respect for minority rights [and] requires… institutions of representation… to elicit popular preferences and turn them into policy action… [and] institutions of restraint, such as an independent judiciary and media, to uphold fundamental rights…. Economic globalization has blunted the instruments of national economic policy and weakened the traditional mechanisms of transfers and redistribution that strengthened social inclusion…. In developing countries, it is more often the institutions of restraint that are failing…. When democracy fails to deliver economically or politically, perhaps it is to be expected that some people will look for authoritarian solutions…. If democracy is to have a future, it will need to be rethought.

Should-Reads:

1. Andrew Sullivan: Our Cold Civil War Intensifies: “I spent last night again watching Fox News…. The president is a lawless dictator, abetting America’s Islamist foes around the world, releasing Taliban prisoners to aid in his own jihad on America, fomenting a new caliphate in Iraq, and encouraging children to rush the Mexican border to up his vote-count, while effectively leaving those borders open to achieve his ‘fundamental transformation of America.’… Megyn Kelly… regarded as more centrist than Sean Hannity… Brent Bozell, far right veteran, and Andy McCarthy, pro-torture activist touting his book calling for Obama’s impeachment. The only pushback Kelly provided to a relentless stream of hysteria was to ask whether the president sincerely wanted another terror attack on America–since it would hurt his approval ratings…. The ‘chaos’ at the border and the emerging caliphate in Iraq may have been merely the unintended consequences of fecklessness rather than a deliberate attempt to destroy everything valuable in the United States…”

2. Mark Thoma: “As someone who had a series called ‘Market Failures in Everything’ when this blog first started over nine years ago, and as someone who believes market failures remain important even when the economy is operating at full capacity, I’m glad to see views evolving. Market failures and business cycles form the basis for my calls for government intervention, though as I have written many times, I am coming around to the idea the intervention may also be needed to redistribute income as an offset for those who reap where they never sowed…. Markets have had 40 years to solve the inequality problem…. A ‘hands off’ policy when the economy is operating at full capacity, a capacity that can be limited by market failures, is not helpful in this regard…”

3. Paul Krugman (2010): “It’s possible to be both a conservative and a Keynesian; after all, Keynes himself described his work as ‘moderately conservative’…. But in practice, conservatives have always tended to view the assertion that government has any useful role in the economy as the thin edge of a socialist wedge…. William Buckley[‘s]… key complaint… was that the Yale faculty taught–horrors!–Keynesian economics. I’ve always considered monetarism to be, in effect, an attempt to assuage conservative political prejudices without denying macroeconomic realities…. Friedman was saying… we need policy to stabilize the economy–but we can make that policy technical and largely mechanical…. When monetarism failed… it was replaced by the cult of the independent central bank…. And this worked for a while… in part because the political insulation of central banks also gave them more than a bit of intellectual insulation, too. If we’re living in a Dark Age of macroeconomics, central banks have been its monasteries, hoarding and studying the ancient texts lost to the rest of the world. Even as the real business cycle people took over the professional journals, to the point where it became very hard to publish models in which monetary policy, let alone fiscal policy, matters, the research departments of the Fed system continued to study counter-cyclical policy in a relatively realistic way…”

• Arvind Subramanian: Readings to Understand Economic Development
• Adam L. Silverman: “The Islamic State in Iraq and the Levant (ISIL)… is… capitalizing on Sunni discontent and disenfranchisement… settling scores. It is true that the Sunnis are outnumbered and I have had conversations with informed observers who argue the Iraqi Sunnis know they cannot win, unfortunately no one seems to have told the Iraqi Sunnis that!…”
• Bill Black: “Friedrich von Hayek is so popular among libertarians because of his denial of the legitimacy of democratic government and his claims that it is inherently monstrous and murderous to its own citizens…”
• Warren Rojas: Cantor Staff Self Medicates, Spending $6,500 at Tune Inn
• Maximilian Auffhammer

And:

1. Martin Hackmann et al: What are the Welfare Gains of the Individual Mandate: Evidence from MA | owenzidar: “We develop a model of selection that incorporates a key element of recent health reforms: an individual mandate. Using data from Massachusetts, we estimate the parameters of the model. In the individual market for health insurance, we find that premiums and average costs decreased significantly in response to the individual mandate. We find an annual welfare gain of 4.1% per person or $51.1 million annually in Massachusetts as a result of the reduction in adverse selection. We also find smaller post-reform markups.”

2. Ramesh Ponnuru: John Goodman Knows Wehbycare Won’t Work: “John Goodman, until recently the president of the National Center for Policy Analysis, has a post at Forbes attempting to defend Dr. Monica Wehby’s proposed ‘fixes’ to Obamacare from my charge that her plan won’t work… what he’s really saying is that… he agrees with me that as presented it won’t…. One last peculiarity of Goodman’s post…. Here’s where Wehby has stood on replace vs. fix, in chronological order: On the campaign website it outlined a plan of ‘fixes’… the campaign manager then said that Wehby was for replacement; and now the campaign is approvingly tweeting an article that commends her for not wanting a replacement. The tweet itself describes her plan as ‘reforming Obamacare’. All clear?… NCPA[‘s]… board had unanimously voted to dismiss Goodman because of ‘serious’ misconduct…. Goodman [says]… ‘I’m afraid the NCPA is engaged in serious misconduct… a legal struggle…. Pete duPont and I are leaving…. There was a fight on the board, we had board members threatening to sue each other, board members threatening to sue me, it’s been a whirlwind. These things happen.’… Goodman called back again to say, first, that the organization is now being run by a board that does not know how think tanks work and, second, that the underlying dispute involves illegal activities by NCPA ‘which I don’t want to get into right now’. So it sounds like the lawyers will be busy…”

3. Charlie Stross: “I’ll be voting ‘yes’ for an independence Scotland in September. Not with great enthusiasm (as I noted earlier, if Devo Max was on the ballot I’d be voting for that) but because everything I see around me suggests that there is some very bad craziness in the near future of England, and I don’t want the little country I live in to be dragged down the rabbit hole by the same dark forces of reaction that are cropping up across Europe, from Hungary to Greece. The failure modes of democracy, it seems to me, are less damaging the smaller the democracy…”

Already-Noted Must-Reads:

1. Victor Fleischer: How Obama Can Increase Taxes on Carried Interest: “President Obama could change the tax treatment of carried interest with a phone call to the Treasury Department. But the White House will need a precise understanding of the regulatory landscape to make a change that is fair, easy to administer, and will hold up in court…. Managers of private equity, venture capital and other private investment funds receive a share of the profits, known as carried interest, in exchange for the services they provide. Under current law, the income they earn is often taxed at the long-term capital gains rate of 20 percent…. less than half the rate most would pay if their income were taxed as ordinary income…. Every year, the Obama administration proposes a budget that would close the loophole; every year, Congress fails to act…. Fund managers… put in just 1 percent of the financial capital and reap 20 percent of the profits…. So one may reasonably question whether the fund manager really ought to be taxed as a partner and not as a service provider. § 707(a)(2)(A)… directs the Treasury Department to write regulations addressing this kind of compensatory arrangement…. The Treasury has broad discretion to recharacterize transactions where the partner is not acting in one’s capacity as a partner but, rather, as a service provider. Remarkably, the Treasury has never issued these regulations in… 30 years…. If the administration should follow this path, fund managers would pay tax at ordinary rates, just like lawyers, accountants, bankers and other service providers…”

2. Malcolm Gladwell: Black Like Them: “Things changed when I left for Toronto…. The infamous Jane-Finch projects… were considered the Jamaican projects. The drug trade then taking off was said to be the Jamaican drug trade. In the popular imagination, Jamaicans were–and are–welfare queens and gun-toting gangsters and dissolute youths…. After I had moved to the United States, I puzzled over this seeming contradiction–how West Indians celebrated in New York for their industry and drive could represent, just five hundred miles northwest, crime and dissipation. Didn’t Torontonians see what was special and different in West Indian culture? But that was a naïve question. The West Indians were the first significant brush with blackness that white, smug, comfortable Torontonians had ever had. They had no bad blacks to contrast with the newcomers, no African-Americans to serve as a safety valve for their prejudices, no way to perform America’s crude racial triage. Not long ago, I sat in a coffee shop with someone I knew vaguely from college…. He began to speak of the threat that he felt Toronto now faced. It was the Jamaicans, he said. They were a bad seed… he launched into a long explanation of how, in slave times, Jamaica was the island where all the most troublesome and obstreperous slaves were sent, and how that accounted for their particularly nasty disposition today. I have told that story many times since, usually as a joke, because it was funny in an appalling way–particularly when I informed him much, much later that my mother was Jamaican. I tell the story that way because otherwise it is too painful. There must be people in Toronto just like Rosie and Noel, with the same attitudes and aspirations, who want to live in a neighborhood as nice as Argyle Avenue, who want to build a new garage and renovate their basement and set up their own business downstairs. But it is not completely up to them, is it? What has happened to Jamaicans in Toronto is proof that what has happened to Jamaicans here is not the end of racism, or even the beginning of the end of racism, but an accident of history and geography. In America, there is someone else to despise. In Canada, there is not. In the new racism, as in the old, somebody always has to be the nigger…”

3. Billmon: The Syria/Iraq Situation: Not Only Stranger Than We Imagine…: “Tangle of enemies & allies notwithstanding, decision 4 Obama is actually simple: Should US provide air cover for Iranian Quds Force in Iraq? Which is kind of mind-blowing to contemplate, but if ISIS & Co. are going to be stopped, Iranian ground forces will have to be the core.”

4. Mark Thoma: Why income redistribution doesn’t hurt growth: “Until recently, most economists believed there’s a trade-off between equity and efficiency and that the redistribution of income would lower economic growth…. The main reason is that taking income away from the wealthy reduces the incentive to implement innovative ideas. In its most extreme form, where redistribution is used to ensure that everyone has the same income, why bother to work hard, or work at all? But… Ostry [et al.]… there are also reasons to believe the redistribution of income can enhance economic growth…. Their paper’s main finding is that ‘redistribution appears generally benign in terms of its impact on growth; only in extreme cases is there some evidence that it may have direct negative effects’… ‘the combined direct and indirect effects… are on average pro-growth’…. Economics does not tell us what the distribution of income ought to be. That involves a value judgment, and individuals will differ on what is fair and equitable. But economics can tell us about the consequences of redistribution, and the best evidence we have suggests that modest redistribution, if anything, enhances growth.”

Mark Thoma: Why income redistribution doesn’t hurt growth: “Until recently, most economists believed there’s a trade-off between equity and efficiency…

…and that the redistribution of income would lower economic growth…. The main reason is that taking income away from the wealthy reduces the incentive to implement innovative ideas. In its most extreme form, where redistribution is used to ensure that everyone has the same income, why bother to work hard, or work at all? But… Ostry [et al.]… there are also reasons to believe the redistribution of income can enhance economic growth…. Their paper’s main finding is that ‘redistribution appears generally benign in terms of its impact on growth; only in extreme cases is there some evidence that it may have direct negative effects’… ‘the combined direct and indirect effects… are on average pro-growth’…. Economics does not tell us what the distribution of income ought to be. That involves a value judgment, and individuals will differ on what is fair and equitable. But economics can tell us about the consequences of redistribution, and the best evidence we have suggests that modest redistribution, if anything, enhances growth.

Victor Fleischer: How Obama Can Increase Taxes on Carried Interest: “President Obama could change the tax treatment of carried interest…

…with a phone call to the Treasury Department. But the White House will need a precise understanding of the regulatory landscape to make a change that is fair, easy to administer, and will hold up in court…. Managers of private equity, venture capital and other private investment funds receive a share of the profits, known as carried interest, in exchange for the services they provide. Under current law, the income they earn is often taxed at the long-term capital gains rate of 20 percent…. less than half the rate most would pay if their income were taxed as ordinary income…. Every year, the Obama administration proposes a budget that would close the loophole; every year, Congress fails to act…. Fund managers… put in just 1 percent of the financial capital and reap 20 percent of the profits…. So one may reasonably question whether the fund manager really ought to be taxed as a partner and not as a service provider. § 707(a)(2)(A)… directs the Treasury Department to write regulations addressing this kind of compensatory arrangement…. The Treasury has broad discretion to recharacterize transactions where the partner is not acting in one’s capacity as a partner but, rather, as a service provider. Remarkably, the Treasury has never issued these regulations in… 30 years…. If the administration should follow this path, fund managers would pay tax at ordinary rates, just like lawyers, accountants, bankers and other service providers…

Billmon: The Syria/Iraq Situation: Not Only Stranger Than We Imagine…: “Tangle of enemies & allies notwithstanding…

decision 4 Obama is actually simple: Should US provide air cover for Iranian Quds Force in Iraq? Which is kind of mind-blowing to contemplate, but if ISIS & Co. are going to be stopped, Iranian ground forces will have to be the core.

David Dayen: The Biggest Policy Mistake of the Great Recession: “The popular conception of the Great Recession explains that…

…it stemmed from a financial shock. Housing prices stopped going up, and then Lehman Brothers fell, triggering paralysis in the credit markets. This spilled onto Main Street, and the effects still linger in terms of elevated unemployment and sluggish economic growth. But this history of the recession can’t be right, say… Amir Sufi… and Atif Mian…. Consumer purchases dropped sharply well before the September 2008 Lehman bankruptcy, and most deeply in places where home prices fell the most…. Steeper declines in net worth… led to far sharper reductions in consumer spending, and bigger job losses. But even those with no debt suffer when fire-sale foreclosures drop home prices, and lower overall demand spreads out across the country…. The normal channels of fiscal and monetary policy have difficulty dealing with highly leveraged household balance sheets. House of Debt correlates these features of recessions, and really targets debt as the core problem, arguing that it needs to be restructured during crises and prevented during better times….

“When we pitched the book, one publisher said, this is the intellectual justification for Occupy Wall Street,” said Professor Sufi in an interview. “We didn’t set out with that agenda. But one of the points we make is that the position we’re taking is not that radical if you look at history.” Indeed, Sufi and Mian emphasize that the Great Recession response to debt forgiveness was a historic outlier. During the Panic of 1819, when falling commodity prices squeezed indebted farmers, state governments immediately put a moratorium on foreclosures, and Congress easily passed a debt-forgiveness law for farmers who had credit with the federal government. In the Depression, the Home Owners Loan Corporation bought up failing mortgages and restructured them so borrowers could make cheaper payments. Even the code of Hammurabi, with its eye-for-an-eye view of justice, decrees that in lean times, a debtor can “wash his debt-tablet” and pay nothing for a year. This actually helps debtors and creditors, mainly because it brings back the economy faster and reduces the vicious cycle of foreclosures lowering housing prices further….

It is, as Amir, Sufi, and Dayan say, obvious. Debt restructuring is one of the four things that you can do and should do to boost aggregate demand after a financial crisis–the other three are: expansionary monetary policy, expansionary fiscal policy, and I bank recapitalization.

So David asks the very obvious question:

Why did the Bush and Obama administrations break with this tradition, steering aid to insolvent banks over indebted households? Sufi and Mian pinpoint the growing belief, which has taken hold among economists and policymakers that saving the banks equals saving the economy…. A cultural bias against debt has crept into these debates too, blaming homeowners as “deadbeats” who bought “too much home” and ignored the risks…. But while a 40 percent drop in home prices spares nobody, responsible or otherwise, this perspective also ignores a simple fact: There are two sides to a debt contract. “We blame the homeowner because they paid the price, but the only way that can happen is if a lender lends to the borrower,” Sufi said. “There is responsibility on both sides of the contract.”… Mian and Sufi have been drawn into a debate with Timothy Geithner, whose memoir Stress Test… came out at the same time…

It is indeed a great mystery. In my view, the obvious thing to do–once the U.S. government had nationalized FNMA and FHLMC in the summer of 2008–was for the federal government to offer every homeowner in the country a conforming-loan-rate refi, with an equity kicker attached to the deal for those Americans whose homes would not pass the 20% appraisal margin test.

But next to nothing was done–and Obama’s commitment to spend between $50 billion and $100 billion on mortgage relief was simply not kept.

Perhaps the most annoying and misleading thing in Timothy Geithner’s Stress Test is this evasion of responsibility:

We also tried to push the Federal Housing Finance Agency to pursue a similarly targeted program for loans backed by Fannie and Freddie. But acting FHFA director Edward DeMarco, a competent but cautious civil servant who did not want to inflame our Republican critics, refused to allow any principal reductions, even though FHFA’s own analysis showed they would save the government money in about half a million cases. It was amazing how little actual authority we had over Fannie and Freddie, considering they were entirely dependent on Treasury’s cash to stay alive.

Some liberals later blamed the President for their failure to provide relief, since he could have fired DeMarco at any time. But we couldn’t just appoint a new director on our own. The President did nominate well-respected North Carolina Banking Commissioner Joe Smith to replace DeMarco, but Senator Shelby blocked him, claiming he would be an administration “lapdog,” even after North Carolina Senator Richard Burr, a Republican who actually knew Smith, endorsed him as “the best nominee” and “a perfect choice.” After that experience, we had a hard time finding any willing candidates…

This was frustrating, but I don’t think a more compliant FHFA would have produced a dramatically different result. And while our numerous expansions of housing programs helped many Americans, they were still modest relative to the size of the problem. They certainly didn’t change the widespread perception that after embracing a strategy of dramatic force and creativity to save greedy financiers, we left innocent victims of the crisis adrift, vulnerable to the predations of the very banks and investors who had benefited most from our largesse. I once played a prank on Gene Sperling, pretending I had told a reporter he was the secret architect of HAMP—not just the substance, but the communications and messaging strategy. My press secretary got so worried that Gene would have a heart attack that she called to spill the beans; that’s how universally reviled HAMP was. HAMP would end up permanently modifying about 1.3 million mortgages…

I remember having conversations in 2008 with a rather large number of people–some of whom were later to work in the Obama White House–about how (a) at some point in the future it might well be in the public interest to use FHFA as an aggressive tool of macroeconomic policy, (b) the likely interim director Ed DeMarco was much too cautious to be good in this role, (c) opinions as to DeMarco’s competence and his degree of capture by those he was supposed to regulate differed widely, and (d) given FHFA’s effective independence, vetting and then managing the confirmation of a first-class director who understood the policy dilemmas and the administration’s objectives was one of the most important tasks of the U.S. Treasury. If Tim Geithner really was “amazed” to find out how little authority Treasury had over FHFA, he was the only one: the rest of us had known this from the moment of FHFA’s creation,

In that context, Geithner’s paragraphs about FHFA and DeMarco should have begun with: “My and Barack Obama’s failure to even nominate a director for FHFA before the political defeats of the 2010 election was an extraordinary act of political malpractice: we dropped the ball bigtime.”

That’s not what we get: we get evasion–a very careful tiptoeing around how this was a very big deal–distraction–no hint that getting people confirmed by the Senate was much easier in late 2009 than in 2011–and deception–“I don’t think a more compliant FHFA would have produced a dramatically different result” and “HAMP would end up permanently modifying about 1.3 million mortgages…”