Spent the past few minutes reading Alea. jck notes that, over the past five years, the Pound has grown in importance at the expense of the yen and that the Euro has done the same against the dollar.

If this goes against your memory, you're not part of the IMF.

Even better is when jck gets his funny on. For those screaming about PIIGS, he presents the evidence:

Note: Banks and government debt rollovers amount to €210 bln for 2011, €15 bln lower than in 2010, you would never guess that reading the funny (pink) papers.

Somewhere, an FT editor is reading that and cheering that they're on holiday until the 4th.

by Bruce Webb

There has been a recent mini-surge of op-eds claiming that the 'assets' of the Trust Funds, all $2.6 trillion, are simply mythical. The most recent Scrooge to argue this line may have been Thomas McClanahan of the KC Star in this piece from Christmas: More mythbusting on Social Security ‘money’" in which he informs us how mistaken we are:

Many people believe the trust fund contains securities that have real economic value. So, a few days ago, I wrote an editorial titled “The myth of the trust fund.”

and

To turn trust fund bonds into real money, the government must do what it would have to do if the trust fund did not exist: borrow, cut spending somewhere else, or raise taxes. The trust fund bonds may be assets from the point of view of Social Security, but they’re a liability for the government as a whole, and for us as taxpayers

Well the argument is at base nonsense on historical, political, legal and economic grounds, but it also suffers a logical hole big enough to run a Prison Bus through. Because if it is true in 2010 it was equally true in 1993 when the Trust Funds first got back to actuarial balance (per McClanahan another myth presumedly) and more to the point in 1983 when Reagan agreed to the tax increase via the Greenspan Commission. Which would logically make Dutch and the Maestro Greenspan pre-meditated thieves and liars.

And more to the point you would have to add almost everyone in the political, media and academic establishment who didn't raise this seeming clear objection back in 1993, there being no logical point of separation whereby real assets suddenly turned into mythical ones. True some people have been arguing one version or another of phony IOU for years, but somehow that never got translated into proposals to cut FICA on wage earners, instead they happily collected the money while apparently per Mr. McClanahan never intending to pay it back, the Treasuries never being real to start with.

Sorry this argument cannot be made in good faith, not unless this guy had a Road to Damascus/Could Have Had a V-8 moment in the very recent past. A polite term for this is special pleading, though Conspiracy to Commit a few million Counts of Larceny fits pretty well.

Do the assets in the Trust Fund have economic value? Well since 2006 the DI Trust Fund has been taking first interest and starting last year principle in cash. And the 'checks' are clearing, what more proof do you need that Special Treasuries have exchange value beyond the fact they are exchanged for value every workday of the year? Now there are arguments that would plausibly suggest that the strain of this redemption will create a problem at some future date, but those arguments should come with numbers and dates and percentages of GDP attached and not just be advanced via 'Shazam! Its a Myth! Oh Foolish One!' No it is a proposal by liars to promote theft. (Which probably blows my opportunity for a party invitation Chez McClanahan).

Lee Arnold has a series of visual presentations at a high school level that might be useful to introduce different topics to friends and family that do not follow econoblogs. Here is the introduction to the series, which Lee tells me is for dissemination. (The visuals are copyrighted to help prevent voice overs and other pirating.)



Lee Arnold

As usual Yves is well articulated and clear.

by Mike Kimel

Top Marginal Income Tax Rates & Real Economic Growth, a Bar Chart
Cross posted at the Presimetrics blog.

The chart below shows tax rates on one axis and the growth rates in real GDP that accompanied those tax rates on the other:



I broke the tax ranges into 5 percentage point increments centered around intuitive numbers (30%, 35%, etc.). Growth rates are the median observed for each range. For ranges which did not occur in the real world, growth rates are left blank.

Top marginal tax rates come from the IRS' Statistics of Income Historical Table 23, and are available going back to 1913. Real GDP can be obtained from the BEA's National Income and Product Accounts Table 1.1.6, and dates back to 1929. Thus, the graph uses data starting in 1929.

Consider this post a quick follow up to my previous post on optimal tax rates that appeared at the Presimetrics blog and Angry Bear blogs. There will be a lot more follow-ups, but it occurs to me that a look a the data might be useful before going on.

Video of Robert Reich is here discussing unemployment and (updated) uses the lump of labor fallacy description:

Transcript:
>>and when we're at a time when there's so many people in their 50s who are unemployed and may not be able to get back into the job -- the job market, I mean, it's unlikely to happen, but wouldn't it be a good idea to actually lower the eligibility for social security retirement?

>>It might be, Sam. In fact, a lot of people right now are saying that the eligibility age for social security retirement given the depth of our continuing jobs recession -- and this jobs recession does continue -- maybe should be lowered so that you create openings for younger people coming into the job market who right now don't have a chance because there are so many older people clogging up the pipes, as it were.

by Tom Walker
(Sandwichman at Ecological Headstand)

Facts or Fallacies? Part II: In which Paul Krugman takes his lumps and eats them too while Jamie Galbraith runs afoul of the notorious lump-of-labor fallacy-fallacy

In comments in response to Part I at Angry Bear, it was suggested that Paul Krugman has also made the lump of labor fallacy claim and that perhaps I should be talking about his arguments (or those of Paul Samuelson) instead of those of conservative think-tankers. Both of those liberal Keynesian economists have indeed advanced the fallacy claim. I would love to discuss the matter with Professor Krugman and sent him an invitation.

Meanwhile, indulge me while I rehearse my debating points on some archival material. I'd also like to bring in a few big names on my side: James K. Galbraith, Dean Baker and… Paul Krugman! Just to even things out, the pre-recession Krugman gets Bruce Bartlett and Larry Summers on his tag team.

(Update: Crooked timber picks up the lump theme.

More below the fold...

Facts or Fallacies? Part I: BLS Data v. the Zombie Lump-of-Labor Fallacy-Fallacy

by Tom Walker (Sandwichman at Ecological Headstand)

In the third quarter of 2010 real GDP in the U.S. was 21 percent higher than it had been in the fourth quarter of 1999. Labor force participation grew during the same period by 9 percent, an increase of nearly 14 million people. However, between December 1999 and September 2010, total non-farm employment fell by just over 200,000.

Here is what Bill McBride at Calculated Risk ("Older Workers and the Lump of Labor Fallacy") thinks is supposed to happen:

The number of jobs in the economy is not fixed, and people staying in the work force just means the economy will be larger.

True enough, the economy did get larger ñ by 21 percent. But the number of jobs wasn't just "fixed"; it actually fell by a fraction of a percent, even though labor force participation also grew. According to McBride, the result would be a classic lump of labor fallacy if it was a fear or assumption that people held about the effects of immigration or seniors staying on the job past retirement age.

This is a common error people make with immigration - that immigrants displace other workers, when in fact immigration increases the size of the economy. I suspect we will see more and more of this age related "lump of labor" fallacy.

So, you see, people make a common error when their ideas about how the economy works agree with the facts. (edited by Rdan) Let's explore this further.

(Rdan here...I want to clear up a point of intent...Bill is not being included in the Mises or AEI camp of philosophy. Krugman and Samuelson talk of the lump of labor fallacy in a similar manner to Calculated Risk. Krugman also chastises the use of )

More below the fold...

by Mike Kimel


Cross posted at the Presimetrics blog.

To maximize real economic growth in the United States, the top marginal income tax rate should be about 65%, give or take about ten percent. Preposterous, right? Well, it turns out that’s what the data tells us, or would, if we had the ears to listen.

This post will be a bit more complicated than my usual “let’s graph some data” approach, but not by much, and I think the added complexity will be worth it. So here’s what I’m going to do – I’m going to use a statistical tool called “regression analysis” to find the relationship between the growth in real GDP and the top marginal tax rate. If you’re familiar with regressions you can skip ahead a few paragraphs.

Regression analysis (or “running regressions”) is a fairly straightforward and simple technique that is used on a daily basis by economists who work with data, not to mention people in many other professions from financiers to biologists. Because it is so simple and straightforward, a popular form of regression analysis (“ordinary least squares” or “OLS”) regression is even built into popular spreadsheets like Excel.

More below the fold...

by Bruce Webb

Digby points us to the following NYT piece: At $106.5 Million, a Picasso Sets an Auction Record with what is in one sense an understandable bitter comment "Hey, dead artists need work too." And as a comment on the odd priorities of our plutocracy a reasonable moral judgement, but as an economic evaluation? Maybe not. And perhaps some of the real economists can fill me in here.

Per the story the last time this work changed hands it was for $19,800. Which should mean that someone is exposed to capital gains on pretty much the full amount of the sales price. Even at 15% that is a reasonable chunk of change. Plus the seller has to put the net dollars SOMEWHERE, even if that is just buying more fine art. Now nothing guarantees that the proceeds will get spent/invested in the U.S., but unless the seller spends it all on tons of Bolivian blow it all gets injected somewhere in the world economy. Meanwhile the buyer had to free up capital from somewhere in order to pay for the painting, and while it is possible this was done by selling assets for a loss, or in the course of a tax-free exchange, chances are good that this ended up with another taxable event and/or unlocked previously unproductive capital. Plus the buyer had to come up with a substantial commission, another taxable event (to the dealer) and one likely to inject some spending of its own. Plus someone is going to receive a good sized insurance premium payment, and who knows the proximate result might be some blue collar jobs going to armed guards.

Now not every instance of conspicuous consumption has benign effects, huge money spent on diamonds, or ivory, or furs from endangered species means dollars ending up in the hands of organized crime or to the extent that there is a difference in the hands of kleptocratic dictators, but the transfer of existing pieces of fine art is on balance pretty benign (as opposed to true antiquities).

Obviously circumstances alter cases, there are a bazillion possible variables that might make this deal actually economically pernicious, but on balance aren't the odds much better than even that this injection of $120 million (including commission and costs) into the economy has a net Keynesian effect? I am not saying that the path to economic nirvana runs along the road of the worlds top 400 billionaires deciding to spend $150,000,000 each on fine art, or collectible stamps or coin, particularly if they are just selling things back and forth within the same pool, but at a minimum some dollars are shaken free in the form of tax, commissions or wages at each transaction. And it is not like they are crowding most of us out of that particular market, I will never be bidding on a Picasso anything.

We want to thank our readers for their participation and sharing.

Happy Holidays and Merry Christmas from all the Bears

With a hat tip to Rebecca's post below, normalized borrowing growth in several sectors over the past 25 years. (Source: FRB Flow of Funds data)

Yes, there are three very similar (shades of blue) lines—but they are all household and non-profit data. (The growth in "credit market instruments" is, presumably, primarily driven by the non-profit sector.)

Note also—as Rusty would certainly tell you if I didn't—that borrowing in the non-financial sector (the red line) has the flatest line of all (it's at the top through the early 1990s and near the bottom as of last year.

Compare this with Mike Konczal's graphic of corporate profit shares over the same period (h/t Brad DeLong) and there is a fairly clear case that accusations from bankers that consumers are suffering because of their foolish, excessive borrowing is a case of a very grimy pot talking to a copper kettle.

Update: The term corporate savings below refers to excess saving, gross saving over gross domestic investment, as a percentage of GDP. This is the defined 3-sector financial balance model (referred to below).

The Federal Reserve Flow of Funds showed a third quarter shift in the financial sector balances: the corporate saving rate declined 0,25% to 2,7% of GDP; the household saving rate fell 0,13% to 3,8% of GDP; the current account fell 0,11% to 3,5% of GDP; and the government increased its saving rate 0,27% to -10,0% of GDP.

Basically, the government was able to increase saving slightly, even as foreigners increased surpluses against the US, at the cost of reduced household and firm saving.


The chart above illustrates the 3-sector financial balances approach, which is the identity that the private sector and public sector saving rates must equal that of the foreign sector (the current account). The private sector is broken into the household and corproate sectors. For a discussion of the 3-sector financial balances, see Scott Fullwiler, Rob Parenteau; and I've written on this as well.

(Note: I am in Deutschland, where the keyboard and number system are slightly different from that in the US - so for this post, I can write ß whenever I want to, but I won't, and all numbers with "," represent an American decimal point, ".". Funny thing is, when I use the Blogger spellcheck here, everything is highlighted yellow, so I plead "in Deutschland" for any misspellings :))

Some people may see the large government deficit, still -10% of GDP, as the 'problem child' of the sectoral financial balances. Me, I see the government deficit as a red herring of the corporate saving rate, which remains stickily in the 2-3% range. Until the corporate saving rate falls markedly, let's say to zero or below, the unemployment rate is to remain high, and the household deleveraging process slower than would otherwise be if wages and disposable incomes were growing more quickly.

More below the fold...

With the release of the November data on real personal consumption expenditures it looks like real PCE growth in the fourth quarter will be over 4% (SAAR) as compared to growth rates of 0.9%, 1.9%,2.2% and 2.8% over the last four quarters, respectively.

October real PCE increased 0.5% and November was up 0.3%. So if December is only up only o.1% the fourth quarter real PCE growth rate would be 4.1%.

This would be the strongest growth in real PCE since the first quarter of 2006.

You can make your own guesses about the other component of real GDP but it now looks like fourth quarter growth will exceed almost everyone's expectations.

May everyone have a Merry Christmas.

More below the fold...

I'm late to seeing this, and Bruce has probably already covered it, but Doug Elmendorg at the CBO inadvertently gives away the game on the Administration's approach to—let alone opinion of—the Social Security "Trust Fund":

The balances in trust funds have accrued because income associated with those programs has exceeded the expenses; when that happens, the surplus cash flow is used to finance the government’s ongoing activities, and the trust fund is credited with a corresponding amount of Treasury securities. Although trust funds have an important legal meaning, in that they may constrain the amount a program can spend, they are essentially an accounting mechanism and have little relevance in an economic or budgetary sense. The value of Treasury securities held by trust funds and other government accounts measures only some of the commitments the government has made, and it includes some amounts that may not represent future obligations at all. [emphases mine]

Pay particular attention to that last; it's the closest you'll find to an acknowledgement from a government official that There is No Crisis.

As Bruce has noted, only by distorting the worst-case and median cases does the Administration produce scenarios under which the Social Security Trust Fund—if credited with its accruals as the Greenspan Commission intended (see "Off-Budget" Again-"; h/t PGL here)—does not have the funds to pay its obligations in perpetuity. (As Dean Baker once observed, if you take those scenarios and apply them to the equity markets, the case for privatization disappears even more quickly.)

Doug Elmendorf's admission that there may well be a perpetual Social Security surplus, even if it is phrased as "some amounts that may not represent future obligations, stands in stark relief of the most notable "unforced error" of the Obama Administration.

by Tom aka Rusty Rustbelt

Health Care: Regulatory Inconsistency

When an elderly patient is in the hospital suffering from dementia, depression or schizophrenia, the hospital nurses may administer any psychoactive or anti-psychotic drug ordered by the physician within normal protocols and practices.

When the patient becomes a nursing home resident a few days later, the resident will often be denied the medication (even possibly anti-seizure meds) because the medication is assumed to be a "chemical restraint," and the facility needs time to clear the regulatory hurdles.

(The federal government assumes nurses drug residents into stupors so the nurses don't have to work as hard, ignoring that nurses cannot administer a vitamin without a physician's order.)

This pharna roller coaster hurts the patients, but it is the law of the land.

Tom aka Rusty Rustbelt

Had a long day of Social Security related blogginess so will just put up this to spark some discussion:

In Part One of this post I discussed the danger that the 2% 'temporary' payroll tax cut might be a Trojan Horse destined never to expire in full or at all only to have any continuing backfill from the General Fund (by then surely to be described as a 'subsidy') subject to an ongoing series of 'compromises' that gradually phase in benefit cuts rather than take the whole thing at one gulp.

In Part Two I want to discuss a quite different threat. In this scenario the employee share of the payroll tax is allowed to reset to it 6.2% but as a seeming sweetener taxpayers will be allowed or perhaps required to divert it into a Personal Savings Account with the explanation that it really wasn't a tax increase at all! Nope the money is still 'yours', just tucked away for your own future use rather than being co-mingled in the Trust Funds where you don't have an ownership interest at all, why the Supreme Court said so in Flemming .v. Nestor. Well a visit to the link shows that this doesn't mean what opponents often take it to mean, but the idea that the PRAs would be in any fundamental sense different is illusory, but before getting to that I want to point out a curious coincidence (or not). The 2% payroll tax holiday is the same amount of diversion proposed in most straight PRA proposals out there. Cynical people might suggest that this number was not just plucked out of the air, or back computed to approximate the typical effect of the expiring Make Work Pay tax credit which it is replacing, but instead to put in place elements of say Obama advisor Jeff Liebman's Liebman-MacGuineas-Samwick Non-Partisan Social Security Reform Plan or even the more recent Galston-MacGuineas Plan which has a mandatory diversion of exactly this amount.

As I have said in other contexts, I don't much believe in coincidences. This 2% cut is somewhat under-motivated in policy terms, there were other, simpler, and more targetted ways of putting dollars in workers' pockets. But as part of a co-ordinated plan to sell some sort of PRA carve out as part of a larger Social Security 'reform' it makes all too much sense.

The readers of the Fiscal Times learn what everyone looking at the alphabet-soup of back-door taxpayer theft (or, as Ben Bernanke calls them, facilities) knows:

There are many ways policy could have been improved; providing more help for state and local governments is high on the list, but I’ll focus on another way: using fiscal policy to help households make up for losses from the recession. This is an important, but too often ignored aspect of recovering from what are known as “balance sheet recessions.”...

The effect on bank balance sheets also varies with the type of recession, and a financial collapse brought about by bad loans is particularly severe. The present recession is an example of this, and policy has done a good job of preventing even worse problems from developing by rebuilding financial sector balance sheets through the bank bailout and other means.

But household balance sheets have not received as much attention. We could have helped households rebuild their balance sheets, and this would have helped banks by lowering the default rate on loans. Instead, we left households to mostly solve their problems on their own, and then helped banks when households could not repay what they owed. [emphasis mine; link his]

At his own blog, Professor Thoma ends—as one should—with one of his better jokes, with a perfect Steven Wright delivery:

[W]e can still learn something and improve policy the next time a balance sheet recession hits the economy.

Policy created and maintained as badly as it has been for the past three years must view that summary as a feature, not a bug.

UPDATE: I see RDan mentioned this earlier today. Is the term "balance sheet recession" not so common as I believe it is?

by Tom Bozzo, cross-posted from Marginal Utility

Competition in (increasing) service quality doesn’t reduce costs:

Dane County’s two hospitals that deliver babies are each spending close to $40 million to spruce up maternity units and related facilities for a simple reason: Young women are key health care consumers, often deciding where their families will seek medical services for decades.

“If you don’t cater to women, you lose your market share,” said Kathy Kostrivas, Meriter’s assistant vice president of women’s health.

Many pregnant women tour both hospitals before choosing where to give birth, some bringing birth plans for each step of labor and delivery, said Holly Halberslaben, director of St. Mary’s family care suites.

“They really do their homework,” Halberslaben said. “It can be their first time in a hospital. You want to retain them.”

The somewhat buried exculpatory case for these investments is that the facilities have been operating near capacity, and the Madison area is the fastest-growing part of Wisconsin apart from some areas in the Twin Cities’ exurban fringe. Nevertheless, the hospitals fairly evenly split a market of just over 7,000 annual births, so $80 million is not an insubstantial cost to recover.

I wonder how many expecting moms really are cross-shopping the facilities for compatibility with birth “plans.”[*] Many if not most of the births sort into the two hospitals on the basis of affiliations that send participants in several of the major local health insurance plans to one hospital or the other. So even a modest amount of gold-plating can represent a large cost per birth on the contestable margin. Granted, in addition to some Cadillac plan participants, the uninsured population has (Hobson’s?) choice as to where to give birth. Though it’s messed up in a whole different way if the hospitals’ business plans would seek to recover a significant share of costs incurred to attract well-to-do moms to these facilities from the uninsured.

[*] When John was born, the plan was to have a healthy baby, which turned out to be the plan that was robust to complications that would have mooted any other plans.

Mark Thoma in The Fiscal Times takes a stab at explaining this recession and policy:

As this year comes to a close, and as we finally begin the recovery stage of the recession, it’s a good time to look back and ask how policymakers could have improved their response to the downturn. What can we learn from this recession? How can we do better the next time a large financial shock hits the economy?

There are many ways policy could have been improved; providing more help for state and local governments is high on the list, but I’ll focus on another way: using fiscal policy to help households make up for losses from the recession. This is an important, but too often ignored aspect of recovering from what are known as “balance sheet recessions.”

The 2010 Census is out now....lots of data.

The NYT makes note of the US chamber of Commerce and litigation:

The chamber now files briefs in most major business cases. The side it supported in the last term won 13 of 16 cases. Six of those were decided with a majority vote of five justices, and five of those decisions favored the chamber’s side. One of the them was Citizens United, in which the chamber successfully urged the court to guarantee what it called “free corporate speech” by lifting restrictions on campaign spending.

More below the fold...

(Dan here: I am traveling right now and am posting things late or maybe not as tidy as I would like. But posts are coming.)

by Linda Beale
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 passes
crossposted with Ataxingmatter

No big surprise here.  The House on December 16 passed the Senate-approved TRA by a vote of 277-148, clearing it for the President's signature.  The bill extends the Bush tax cuts for two years and reduces the number of estates subject to the estate tax, and the rate of tax when they are taxed, even below the number subject to the tax in 2009.  It includes the usual "patch" for the AMT for two years, and various tax breaks for businesses--especially expensing provisions that will likely merely result in more pay to managers and more payouts to mostly wealthy shareholders.

Those most vulnerable get the relief from the lower rates (not many dollars for them, of course), the 2% cut in the payroll taxes, and the extension of unemployment compensation.

Those at the top of the wealth and income heap who have garnered almost all the benefits of productivity gains in the economy over the last few decades get most of the benefit of the bill--tens of thousands of dollars of tax relief for the top 20% of the income distribution, substantial estate tax reductions, and none of the burden-sharing that progressives had advocated (such as the carried interest treatment as ordinary income).  The bill even provides what amounts to an interest-free loan to the wealthy who convert regular IRAs to Roth IRAs--the "deal of the century" according to one CPA who services the wealthy.  See Leondis, Tax Measure Gives Deal to Wealthy Roth IRA Converters, Bloomberg.com, Dec. 17, 2010.  And of course, the bill also lets the wealthy transfer up to $100,000 from regular IRAs to charities without paying the income tax they should have to pay on the appreciation.

All in all, the wealthy made out like bandits in the tax bill.  And in many ways, that is the appropriate way to view them--they have stolen the sustainable livelihood of the middle and lower classes for two decades and are rapidly moving into position to become a ruling oligarchy.  The bill was a big win for corporatism and the wealthy on the right.

Tom Walker
(aka Sandwichman at Ecological Headstand)

Modeling Sunshine and Shadows: Inequality, long hours and crisis

Alex Harrowell at A Fistful of Euros sees sunshine beaming from the IMF in a working paper by Michael Kumhof and Romain Rancière that identifies income inequality as a potential source of financial crisis. No shit, Sherlock! Outside of the formal modeling, the proposition hardly sounds remarkable.

As goldilocksisableachblonde noted on Mark Thoma's site, "This finding is consistent with intuition and common sense , meaning - according to mainstream economic theory backed by models and more models - it's gotta be wrong." Kumhof and Rancière themselves note that "the link between income inequality, household indebtedness and crises has been recently discussed..." but they object that the authors "do not make a formally consistent case for that argument." What they mean by not "formally consistent" is presumably not using a dynamic stochastic general equilibrium (DSGE) model such as they employ. I would like to see K&R try that argument in court.

"Your honor, sir, I object, the videotape of my client breaking open the ATM with a sledgehammer is not a DSGE model and thus is not formally consistent as evidence."

"Objection overruled."

But it is well that K&R build their formally consistent model to demonstrate that possibility of something happening, which the rest of us can observe with our naked eyes. This will keep other formally-consistent DSGE model builders busy tinkering with assumptions until they can explain the findings away. I betcha Lee Ohanian could come up with a doozy -- and it would get more media!

Anyway, where there is sunshine, there are bound to be shadows and the Sandwichman couldn't resist the temptation of scouring the working paper for some shade. And here it is:

More below the fold...

Update: Brad DeLong appears to confirm that Obama's inner circle would be best served by being placed in a circular firing squad, given live ammo, and being told to "do what is right."

The plethora of disingenuous claims that Barack Obama "won" with the McConnell-Obama "compromise" are legend. See, for instance, the idiocy of Andrew Sullivan (of which Andrew Samwick is too generous when he describes it as "poor political tactics"; see also Brad DeLong), and the Administration's disingenuous "what 'we' won" chart.

The big question was how this is supposed to stimulate the economy. Those of us who argued that it would do damage noted that it was the first move.

Obama has so far played (as I noted earlier): 1 g4 e5

Now, Mark Thoma discovers that he really does intend 2 f3 and then will wait for the Republican's next move:

The second part, now being teed up by the White House and key Senate Democrats, is a scheme for the president to embrace much of the Bowles-Simpson plan — including cuts in Social Security. This is to be unveiled, according to well-placed sources, in the president’s State of the Union address.

followed soon by what may be the stupidest serious paragraph ever written by someone who isn't Donald Luskin:

White House strategists believe this can also give Obama “credit” for getting serious about deficit reduction — now more urgent with the nearly $900 billion increase in the deficit via the tax cut deal.

We have always heard that the first Black President would be subject to an increased threat of assassination. Only now do we discover that he intends to commit seppuku.

The optimistic version of his chances for re-election now appears to be the case presented by "Norman" in comments to my previous post (slightly edited for clarity):

If "O" continues his so called compromise—giving in to whatever the right wants—doesn't pull a LBJ and gets the nod in 2012, the Repubs nominate Sarah [Palin], then it's quite possible he could win again. Only this time, the Republicans would be a deciding factor in the win. Why? Because they know he will cave on just about everything they ask for.

The only quibble there may be the "just about."

by Bruce Webb (cross posted at new dedicated (and partially funded) blog Social Security Defender)

As part of the Tax Cut deal Obama cut with Republicans there was included a one-year cut of 2% of payroll out of the 6.2% employee share of the overall 12.4% of payroll sent to Social Security. This cut was ostensibly designed in a way that held harmless the Trust Funds, the dollars not being sent from paychecks instead being replaced by transfers from the General Fund. Plus the diversion is on paper only temporary. But in reality this deal not only should have raised red flags, it also should have blown reveille and set off the disaster warning klaxons. This deal represents a terrible danger to Social Security in at least two ways and is terrible policy besides. More below the fold.

More below the fold...

by Mike Kimel

A Simple Explanation for a Strange Paradox: Why the US Economy Grew Faster When Tax Rates Were High, and Grew Slower When Tax Rates Were Low
Cross posted at the Presimetrics blog.

If you are familiar with my writing, you know that for years I have been covering the proverbial non-barking dog: the textbook relationship between taxes and economic growth, namely that higher marginal rates make the economy grow more slowly, is not borne out in real world US data.

Sure, there are a whole raft of academic studies that claim to show just that, but all of them, without fail, rely on rather heroic assumptions, and most of them throw in cherry picked data sets to boot. Leaving out those simple assumptions tends to produce empirical results that fail to abide by the most basic economic theory. This is true for data at the national level and at the state and local level.

Making matters more uncomfortable (and thus explaining all the heroic assumptions and cherry picking of data in the academic literature) is that the correlations between tax rates and economic growth are actually positive. That is to say, it isn't only that we do not observe any relationship between tax rates and economic growth, in general it turns out that faster economic growth accompanies higher tax rates, not lower ones, and doesn't take fancy footwork to show that. A few simple graphs and that's that.

Now, obviously I sound like a lunatic writing this because it goes so far against the grain, but a) I've been happy to make my spreadsheets available to any and all comers, and b) others have gotten the same results on their own. Being right in ways that are easily checkable mitigates my being crazy (or a liar, for that matter), but it doesn't change the uncomfortable fact that data requires a lot of torture before conforming to theory. And yet, that's the road most economists seem to take, which explains why economics today is as useless as it is. It also speaks poorly of economists. The better approach is come up with theory that fits the facts rather than the other way around.

I've tried a few times to explain the relationship that I've pointed out so many times, but I never came up with anything that felt quite right. I think I have it now, and it’s very, very simple. Here goes.

Assumptions:
1. Economic actors react to incentives more or less rationally. (Feel free to assume “rational expectations” if you have some attachment to the current state of affairs in macro, but it won’t change results much.)
2. There is a government that collects taxes on income. (Note – In a nod to the libertarian folks, we don’t even have to assume anything about what the government does with the taxes. Whether the government burns the money it collects in a bonfire, or uses it to fund road building and control epidemics more efficiently than the private sector can won’t change the basic conclusions of the model.)
3. People want to maximize their more or less smoothed lifetime consumption of stuff plus holdings of wealth. More or less smoothed lifetime consumption means that if given the choice between more lifetime consumption occurring, with the proviso that it happens all at once, or a bit less lifetime consumption that occurs a bit more smoothly over time, they will generally prefer the latter. Stuff means physical and intangible items. People also like holding wealth at any given time, even if they don't plan to ever spend that wealth, because wealth provides safety, security, and prestige, and for some, the possibility of passing on some bequest.

(If the first two look familiar, they were among 8 assumptions I used last week in an attempt to get where I'm going this time around. Note that I added two words to the second assumption. More on last week's post later.)

Due to assumptions 1 and 3, people will want to minimize their tax burden at any given time subject provided it doesn't decrease their lifetime consumption of stuff plus holdings of wealth. Put another way - all else being equal, peoples' incentive to avoid/evade taxes is higher when tax rates are higher, and that incentive decreases when tax rates go down. Additionally, most people's behavior, frankly, is not affected by "normal" changes to tax rates; raise or lower the tax rates of someone getting a W-2 and they can't exactly change the amount of work they do as a result. However, there are some people, most of whom have high actual or potential incomes and/or a relatively large amount of wealth, for whom things are different. For these people, some not insignificant amount of their income in any year comes from "investments" or from the sort of activities for which paychecks can be dialed up or down relatively easily. (I assume none of this is controversial.)

Now, consider the plight of a person who makes a not insignificant amount of their income in any year comes from "investments" or from the sort of activities for which paychecks can be dialed up or down relatively easily, and who wants to reduce their tax burden this year in a way that won't reduce their total more or less smoothed lifetime consumption of stuff and holdings of wealth. How do they do that? Well, a good accountant can come up with a myriad of ways, but in the end, there’s really one method that reigns supreme, and that is reinvesting the proceeds of one’s income-generating activities back into those income-generating activities. (i.e., reinvest in the business.) But ceteris paribus, reinvesting in the business… generates more income in the future, which is to say, it leads to faster economic growth.

To restate, higher tax rates increase in the incentives to reduce one’s taxable income by investing more in future growth.

---

A couple acknowledgements if I may. First, I would like to thank the commenters on my last post at the Presimetrics and Angry Bear blogs, as well as Steve Roth for their insights as they really helped me frame this in my mind.

Also, I cannot believe it took me this long to realize this. My wife and I are certainly not subject to the highest tax rate, and yet this is a strategy we follow. At the moment, we are able to live comfortably on my income. As a result, proceeds from the business my wife runs get plowed back into the business. This reduces our tax burden, and not incidentally, increases our expected future income.

What are the channels for QE2? In a recent post, David Beckworth outlines his frustration:

"It has been frustrating to watch Fed officials explain QE2. The standard Fed story centers around the QE2 driving down long-term interest rates and stimulating more borrowing."

On the tip of my tongue, I can think of three direct channels: (1) the interest rate channel, which is the source of his frustration, (2) the wealth effect channel, and (3) the weak-dollar channel.

1. The interest rate channel: the Fed lowers current and expected real borrowing costs to firms and households, thereby stimulating domestic demand via increased consumption and investment. Clearly, this is the most clogged channel, as it requires increased bank lending and leverage build.
   
   
2. The wealth effect channel: the Fed drives up the price of riskless assets (bonds), forcing substitution toward risky assets (equities, corporate bonds, etc.), which raises household wealth (via asset price appreciation) and current consumption demand. This channel was highlighted publicly in October by Brian Sack at the 2010 CFA Fixed Income Management Conference:"Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be." In my view (see chart below), this has been the strongest channel through which Fed policy has worked.
   
   
3. The weak-dollar channel: the Fed prints money, thereby debasing the currency relative to global trading partners. The technicalities of a weak dollar policy prevent the Fed's actions as directly being a weak-dollar policy; however, the short-term effect on the dollar was quite strong. In the end, though, we see that the Fed's policy has had no accumulated impact on the dollar to date (see chart below). This policy still has some time to work through, since the Fed only recently initiated its quantitative easing program again. Furthermore, it's unclear to me how the dollar will play out in 2011 (perhaps another post), since it's really a relative game: Fed QE versus the European debt crisis, EM inflation expectations rising, or the like.
   

The chart below proxies the three channels using the 5y-5yr forward TIPS rate (1), the S&P 500 equity index (2), and the dollar spot index (3). The value of each channel is indexed to the September FOMC meeting for comparability.

The interest rate channel has been negative, as expected real yields increased 35% since the FOMC meeting, driving up expected borrowing costs. The wealth channel has been strong and positive. The S&P 500 gained 9% since the September FOMC meeting date, but the gains really started earlier, as speculators front-ran the Fed decision. Finally, the dollar channel fizzled out, as the dollar index (against major trading partners) is pretty much flat over the period.

I'd like to hear your input regarding other potential channels for Fed policy. But the data has, objectively, been surprising to the upside. Thus the growth outlook has improved. The chart below illustrates the Citigroup economic news surprise index (compared to Bloomberg consensus), which turned to the positive at the outset of November.

Many moving parts.

Rebecca Wilder

Jesus Is a Liberal Democrat

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
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by Linda Beale

Derivatives: greater transparency is needed
crossposted with Ataxingmatter

The big banks got into considerable trouble doing derivatives trades--especially the credit default swaps where AIG was the major counterparty and the taxpayers ended up bailing out the Big Banks like Goldman Sachs.

So surely one of the results of "financial reform" in the wake of the casino banking financial crisis would be utter and complete transparency about derivatives, correct?  One would think so.  But it may not be so.

For a detailed picture of the way the Big Banks have controlled derivatives trading in order to make it a lucrative noncompetitive market for them and a costly market for derivatives endusers, read the article in the Saturday New York times:  Louise Story, A Secretive Banking Elite Rules Trading in Derivatives, New York Times, Dec. 11, 2010.

As Story notes, there is an exclusive group of bankers that has a great deal of say about derivatives trading.  The theoretical purpose is to "safeguard the integrity" of the derivatives market.  The real purposes is to "defend[] the dominance of the big banks" which the banksters do by thwarting efforts to create transparent markets where end users get real information on prices and fees and comparable trades.

More below the fold...

MSNBC reports Obama signs tax cut bill into law :

The Senate vote was 65-31. The House had passed an identical version of the bill, 250-175, on Wednesday.

Link to S4023 as passed by the Senate today.

Obama was expected to sign it next week, although the change wouldn't take immediate effect. The legislation says the president and his top military advisers must certify that lifting the ban won't hurt troops' fighting ability. After that, there's a 60-day waiting period for the military.

Chinese Confusions
by Paul Krugman

These days, China seems to play the same role in much of our discourse that Japan did two decades ago. We look at our own follies — which are immense — and then look at the Chinese, and ascribe to them all the virtues of foresight and determination we lack.

But just like the Japanese, the Chinese are human, and their policy makers are subject to the same kinds of confusion and inability to make hard choices that are part of the human condition. And Chinese macroeconomic policy is in the process of becoming a cautionary tale.

Basic economics says that by deciding to keep the renminbi undervalued, the Chinese put themselves under inflationary pressure; and sure enough, inflation is rapidly becoming a serious problem.

But political considerations seem to be ruling out all the reasonable responses. They won’t revalue, because that would hurt politically influential exporters. They’re reluctant to raise interest rates, because that would hurt politically influential real estate developers. They’re trying to impose quantitative limits on credit, but are finding that borrowers have enough influence to circumvent the limits. And now they’re trying price controls — which will inevitably come apart at the seams unless they do something about the underlying pressures.

It’s an edifying spectacle.

Now, schadenfreude should not lead to any complaceny on our part; China may be corrupt and unable to make sensible short-run choices, but in terms of fundamental inability to deal with long-term problems, we still have them beat hands down. Still, it’s worth remembering that all giants have feet of clay.

by Tom aka Rusty

Health Care: Hysterical Reporting

Fox News ran a screaming intro and a scary bottom summary line on a story on some survey of physicians, claiming a majority of physician will quit, retire or work part-time.

Link via Yahoo: http://news.yahoo.com/video/health-15749655/23362511

This is further proof that Fox News does not do journalism. The conversation eventually winds around and the expert really contradicts the story headline.

I have been spending a lot of time talking to people at the national level, and the one trend that is certain is the merger/sale of physician groups to hospitals and integrated networks, effectively making the physicians employees of a larger entity. The ownership of a private practice will fade like Marcus Welby MD (some of you may be too young to understand this popular culture reference).

PS: if you leave the link open you will see a story about Miley Cyrus puffing on a bong. Oh the horror.

Tom aka Rusty Rustbelt

by Tom aka Rusty Rustbelt

Opportunities in Detroit?

Detroit has lost about 60% of its population since the 1950s peak of about 2 million.

About 50 square miles of Detroit is so thinly populated that the Mayor wants to pay for people to move to more densely populated neighborhoods so the area can be abandoned for municipal services. No trash pick up, no police patrols. The first and second ring of suburbs are facing much of the same plight, and some may be headed for bankruptcy..

One idea for reclamation is urban farming, but that assumes people will not move into Detroit any time soon.

So does the 50 square miles provide us with an opportunity? New neighborhoods? New types of communities? A special immigration zone? Homesteading by young people? Entrepreneurial zones? If so, where do we get the money (Detroit and Michigan both being in various stages of broke)? Who leads the charge?

This is a country full of smart people. We should be able to think of something creative here.

Tom aka Rusty Rustbelt

Update: Brad DeLong looks at the data and suggests that the problem may be that the current President is as innumerate as the previous one.

Mark Thoma quotes James Kwak:

So no, I don’t think Obama is abandoning his principles for political advantage; I think these are his principles. And while I’m upset at him, I’m upset at him for being wrong on the policy level, not for abandoning anything or selling out...I always thought Obama was a moderate who looked like a progressive.

I'm with Kwak on that; it's one of the reasons I supported the relatively-more-progressive Hillary through the primaries.*

Where I'm less sanguine is the base from which Mark let him start:

Obama is certainly in a decent position politically, and I would bet on him to be reelected comfortably in 2012.

In 1996, Bill Clinton had the advantage of Bob Dole—the 1996 equivalent of Newt Gingrich—being his opponent. Dole had been a known quantity to voters for over a decade ("Do you want Grits and Fritz or a Ford Dole?") who supported Clarence Thomas, talked about Hideo Nomo of the Brooklyn Dodgers, and fell off the front of a stage—and still garnered more than 40% of the vote, losing the popular vote by only slightly more votes than Ross Perot won. And that was after the advantage of a virtually-uncontested primary, which Mr. Obama may not enjoy.**

Kwak later backtracks a bit:

I think two years would be enough time for labor markets to recover if we could expect policy supporting employment along the way. But we are likely to get just the opposite, deficit cutting measures and other policies that work against employment and hence work against electoral success for the Democrats. Toss in a compromise on Social Security that angers the Democratic base, a possibility that cannot be dismissed as Obama follows up on what appears to be a successful move to the center, and the future does not look as bright. Obama may think he is playing the game well now, but the game is far from over.

This is at least far more accurate than the declaration that Obama won when his opening g4 was followed by the Republican's e5. And Thoma follows up with his expectation of Obama's next move being f3:

That would put an end to any stimulus due to the tax compromise. Stimulating the economy was never the intent of the GOP when they agreed to the tax compromise, it was all about the estate tax and tax cuts for the wealthy. They will do what they can to decrease government spending over the next two years, starting in January, and if they are successful it will reverse any benefit the economy might have received from the compromise.

Given that we all agree on the likely next two years, it would be nice to see an economic model from either Mark or James Kwak that justifies the expectation that Obama is in a position "to be reelected comfortably in 2012."

At the very least, I want to offer to bet with Mr. Kwak, at even odds, with proceeds to go to the charity of the winner's choice. Here's my choice.

*The other being that she would know from the start that she was hated, and be ready for bear at the outset. (As an aside: sorry, Scott, but hiring Mark Penn, while a mistake, is not a revelation of policy preferences. Or, if you want to argue it is, tell us what replacing Howard Dean and the 50-State Strategy with Tim Kaine and Suborning Democrats such as Sibelius and Napolitano into the Administration is.)

**I say this not only because I would like to see him challenged—his doing a Specter in 2011 is about the only hope for my grandchildren—but also because it makes sense to prepare the field for 2016 and beyond. It would be dumber of the Democrats not to have someone challenge him in the primary, leaving only HRC and Joe Biden as probably 2016 candidates, than it would be to unite behind him in the hope that Republicans nominate someone who is unelectable a la Dole in 1996.

I have no idea what the advanced Google reader filter actually does. Yves has fun with it as do readers in comments. Here is ours.

Baseline Scenario links to Simon Johnson's thoughts on current practice of politics. Well worth the time to read and comment.

Delusions Of Fiscal Grandeur
by Simon Johnson

If you honestly believe that investors will happily buy up any amount of US government debt (at low interest rates) for the indefinite future, then relax.  The tax deal passed yesterday should make you happy.

But if you fear that the US will soon be tested by financial markets – just as the eurozone is being tested today – then please read my column,”Voodoo Economics Revisited“, which is now on the Project Syndicate website.  There is a well-established tradition in the Republican Party of thinking that tax cuts cure all ills; many in the Democratic leadership have apparently now fallen into line.  We need to think hard about what our fiscal crisis will look like – and who will end up being hurt the most.

Another link to the column: http://www.project-syndicate.org/commentary/johnson15/English

by Tom aka Rusty

Economics and Corruption

Detroit and the Detroit metro area are a pathetic, decaying mess. The reasons are many, ranging from the decline of the Big 3 auto companies to rampant corruption.

For almost 40 years corruption has been well known and wide spread. In recent years, the administration of former Mayor Kwame Kilpatrick made corruption so visible the feds have moved. Monica Conyers, wife of veteran Rep. John Conyers is in prisons for taking bribes while on City Council, as are many others. The Detroit Public Schools are in receivership and numerous former officials are under investigation or indictment.

The Bush and Obama Justice Departments have been indicting and convicting numerous people with ties to the local government, and yesterday dropped the bomb, a massive racketerring indictment of Kilpatrick, his father and several political operatives.

In a city where infrastructure is literally collapsing in front of peoples' eyes the crooks were using city construction contracts to extort money to selected cronies who then funneled money to Kilpatrick.

Kilpatrick is already in jail for perjury for a scandal involving wild sexual escapades, misuse of government funds, misuse of police security officers, and there is an on-going investigation of the murder of a stripper who may have been beaten by the Mayor's wife when she came home to one of Kwame's parties in the mayoral mansion (the investigation also focuses on possible official obstruction of the murder investigation).

Corruption is nothing new, but this corruption was on a scale that was astounding, just based on the convictions thus far.

People have been fleeing Detroit due to bad infrastructure, bad schools and rampant crime. The money that could have fixed some of those problems has been misdirected as best and outright stolen at worst.

Why did it take so long to bring justice to Detroit? Could it have been a political correctness issue? Did politicians offer cover for political reasons?

Many, many have suffered, and will continue to suffer.

Tom aka Rusty Rustbelt

Sorry for the odd behavior of comments today. The Wed. report for instance says 13 comments but I can access only five. Igor, the head engineer, says there were several different kinds of problems, and maintenance and upgrade to servers. Apologies.

The Washingtington Post notes:

The World Trade Organization has upheld the stiff duties that President Obama imposed on car tires imported from China last year, an important victory released on the eve of trade talks between the two countries.

A panel at the Geneva-based trade group on Monday said it agreed that the United States was justified in slapping a 35 percent tax on Chinese tires under WTO provisions that let countries protect local industries and workers from sharp increases in Chinese imports.

The provision was part of the agreement under which China joined the WTO a decade ago. Chinese tire imports to the United States tripled between 2004 and 2008, to 46 million tires worth an estimated $1.7 billion.

Update: Ken Houghton reminds me of Tom Bozzo's September, 2009 post Travels of a cheap tire in global economy covering part of the issue.

Update two: WTO panel report on the tires dispute linked.

Commentary: Subprime Thinking

from Wednesday morning
re-posted with permission from the author

When I started this blog in January 2005, one of my goals was to alert people to the housing bubble, and to discuss the possible consequences of the then approaching housing bust. Residential investment has historical been one of the best leading indicators for the economy, and I was deeply concerned a major housing bust - both in terms of activity and house prices - would take the economy into recession.
There were others sounding the alarm - Robert Shiller, Tom Lawler, Dean Baker, Doris "Tanta" Dungey, and others. There was discussion of loose lending standards (including, but not limited to subprime), lack of regulatory supervision, agency problems with the originate-to-distribute model, and more. And although we might have disagreed on the exact causes of the bubble, as far as I know none of the people who are commonly credited with identifying the bubble, and predicted the bust, blamed it primarily on Fannie and Freddie or the Community Reinvestment Act (CRA).
When the Financial Crisis Inquiry Commission was announced, I was skeptical if they'd be willing to address the willful lack of regulatory supervision, and the role of Wall Street in the crisis. This morning, Shahien Nasiripour at the HuffPo wrote: Financial Crisis Panel In Turmoil As Republicans Defect; Plan To Blame Government For Crisis

The Republicans, led by the commission's vice chairman, former congressman and chair of the House Ways and Means Committee Bill Thomas, will likely focus their report on the explosive growth of subprime mortgages and the heavy role played by the federal government in pushing mortgage giants Fannie Mae and Freddie Mac to purchase and insure them. They'll also likely focus on the Community Reinvestment Act, a 1977 law that encourages banks to lend to underserved communities, these people said.
...
During a private commission meeting last week, all four Republicans voted in favor of banning the phrases "Wall Street" and "shadow banking" and the words "interconnection" and "deregulation" from the panel's final report, according to a person familiar with the matter and confirmed by Brooksley E. Born, one of the six commissioners who voted against the proposal.

How depressing.
If Nasiripour story is correct, the explanations offered by these four individuals are blatantly false. Lets name names: Bill Thomas, Peter Wallison, Keith Hennessey and Douglas Holtz-Eakin. These are all subprime thinkers.

The NYT reports on the Financial Crisis Inquiry Commission.

"The Republican members of the commission appointed by Congress to investigate the causes of the financial crisis plan to release on Wednesday a document that assigns government housing policies substantial blame for the origins of the 2008 financial crisis. "

Update from MG: Here is the Republicans' primer on the commission report which we will not see until next year. They don't call it a report.

http://keithhennessey.com/wp-content/uploads/2010/12/Financial-Crisis-Primer.pdf

Also in the NYT is an Dept. of Energy report on the rare earth situation:

“The United States is too reliant on China for minerals crucial to new clean energy technologies, making the American economy vulnerable to shortages of materials needed for a range of green products” reports the NYT.

So warns a detailed report released on Wednesday morning by the United States Energy Department.

Arnold Kling is taking up the case that less government is better than more government.

Since I have been banned at his site I will respond here.

From 1850 to 1950 US trend per capita real GDP growth was 1.4%.

Since 1950 US trend per capita real GDP growth has been 2.1%.

From 1850 to 1950 modern capitalism dominated by the limited liability corporation dominated the economy and the only big difference in the two eras is the existence of big government since 1950. Yes, the data was less reliable in the earlier era, but I know of no reputable economic historian that disagree with the statement that real per capita GDP growth has been significantly faster since 1950 than in the previous century. Moreover, if you only calcualte the trned to the late 1920s you still only get the 1.4% trend. the depression and WW II do not distort this trend.

I would argue strongly that this factual evidence strongly contradicts the libertarian case and it is up to them to disprove or contradict this factual evidence.

Some libertarians argue that rapid emigration from 1850 to 1950 significantly dampened US growth. I seriously doubt this and have seen no evidence to support this argument and considerable evidence to contradict the argument. For example migration in the earlier era was heavily concentrated in the northeastern cities and real per capita income in these cities was much, much greater than in other parts of the country where the dominant economic activity was small scale agriculture. Do you have any evidence that a new Irish emigrant in Boston was poorer than a tenant farmer in Mississippi in the 1870-80s ? Second I am using per capita data and this would include small children that even in the 1800s did not contribute to real GDP. Among native born Americans such children would have accounted for a much larger share of the population than among recent emigrants.

So again, what is actual factual evidence that rapid emigration significantly dampened the growth of per capita real GDP in the earlier evidence?

More below the fold...

One thing there is almost universal agreement on is that the US economy has very large excess capacity and that capacity constraints are unlikely to be a significant factor for the foreseeable future.


But is it. In November capacity utilization in manufacturing rose to 75.2%. But this does not mean that the manufacturing sector has 25% of its capacity sitting idle waiting for demand to appear. If you look at the chart of capacity utilization it shows a downward trend of generally lower highs and lower lows across time. For example in the last cycle
capacity utilization peaked at 81.7% in April, 2007 before plunging to a low of 68.2% in May, 2009. The average from the last peak to trough was 75.0% so with capacity utilization now at 75.2% the system is already over half way back to its previous peak.



If you do a trend of the lower lows and lower highs the current trend is at 77.5%, so capacity utilization is only slightly below the long term trend at 97.0% of trend. This 97% figure is clearly a much more realistic measure of how much excess manufacturing capacity exist than the 75% observation being commonly cited.


It is interesting to look at one of the most important components of capacity utilization, that of semiconductors. Semis are often though of as industrial production on steroids as semi output moves in lock step with overall industrial production. This is logical since semis may be the ultimate intermediate product. Each of you probably owns dozens of semis in your cars, computers, phones, TVs and other appliances. But I bet virtually none of you have ever gone into your local Radio Shack and actually bought one. Over the past year total industrial production rose 5.4% while semiconductor output rose 11%. But by historic norms this is very weak as the historic average growth rate for semis output growth is about ten times the growth rate of total industrial production.


As the chart show, with semi output expandingonly some 11% it is so weak that capacity utilization in the semiconductor industry is actually falling. It is now at 65.4% as compared to its recent peak of 70.7% in April, 2010.

Moreover, the growth in semiconductor capacity is slowing significantly. I do not know if this is due to foreign competition or industry executives expectations of weak demand growth. But neither alternative is bullish. Note that back in the 1990s boom the capacity to build semis was doubling almost every year as compared to only a 10% growth rate this year.

More below the fold...

In honor of his finally being inducted into the Rock and Roll Hall of Fame:

And his co-inductee, who now does wait for no one:

Time to lighten-up, even if some of the most recent news is better.


And I could not find one of my all time favorites that the economy is so bad that the mob in Rhode Island had to lay-off six judges.

More below the fold...

JS-kit has been doing weird things to comments the last few days...multiples of one post, disappear/reappear, listing 5 comments but showing only three etc.. Just so people know.

by Noni Mausa

The trace elements of a nation

from her blog Tunnel Under Snow

A long discussion over on Angry Bear dealt with how economic choices, rational in the short term or in the service of one economic actor, can cumulatively cripple the societies in which these choices are made. Well worth hopping over to read the full conversation, and also taking another hop to read the 1994 address of Sir James Goldstein to the US Congress.
I added to the conversation, and was pleased enough with that comment that I lifted it for here.

More below the fold...

by Linda Beale

Friday Animations--Estate Tax
crossposted with Ataxingmatter
[now updated to provide the animation feature--thanks to Steve Cook, at the Cook law firm, available here and Ataxingmatter]

Well, not exactly an animation, but Estate tax attorney Douglas A. Cook has a chart on the Federal Estate Tax 2001-2011 (linked from the Wills, Trusts & Estates Prof Blog) and also as an animation (see below). Certainly a picture worth a thousand words in terms of showing that ordinary Americans are essentially not taxable under any version of the estate tax. So what the Obama -GOP deal amounts to is a giveway to those few millionaires who had enough assets in the wrong category that they would actually have to pay some amount of tax--only about 5,500 estates under the 2009 version of the bill, about 145,000 in 2011 if the current laws (enacted under GW Bush) remain without any action by today's Congress to change them, but even fewer than 5500 under the Obama deal for a $5 million exemption and a mere 35% top rate.

by Mike Kimel

An Economic Theory That Uses Micro Forces to Explain Macro Outcomes: Why the Economy Stubbornly Insists on Growing More Slowly When Taxes are Lower

Cross-posted at the Presimetrics blog.

I've been writing for years about the fact that a basic piece of economic theory does not apply to real world US data: unless one engages in the sort of assumptions that can justify eating ceramic plates as a cure for leprosy, there is simply no evidence that lower taxes lead to the good stuff we've been led to believe over non-cherry picked data sets. Recent examples include this look at the effect top federal marginal rates on various measures of growth, this look at the effect of top federal marginal rates on tax revenues, a different look at federal marginal rates and growth, and this look using state tax levels. I've also shown that effective tax rates also have fail to cooperate with theory when looking over the length of presidential administrations - examples include myriad posts and Presimetrics, the book I wrote with Michael Kanell.

I think the reason a lot of people have trouble accepting this is that they see some sort of conflict between this macro fact and and what seems to be a self-evident micro truth - if tax rates get high enough, people will work less. Now, such micro-macro conflicts have existed in the past, and are certainly aren't unique to economics. One obvious example we all live with is that to each of us, from where we're standing, the Earth does a pretty good job of appearing to be flat, and yet we know that its actually round(ish). For most applications, from running a marathon to building a house to making toast, assuming that the earth is flat doesn't hurt, and even simplifies matters. That is to say, for most applications facing critters roughly our physical size, a flat earth is a good model. On the other hand, we'd be much impoverished by sticking to that model at all times, as we'd lose out on satellites, our understanding of weather and geology, a great deal of transoceanic shipping, and Australia.

The same thing is true when it comes to the economy - failing to understand and account for the dichotomy between micro and macro truths is harmful. It has cost us, all 6.8 billion of us, economic growth and wealth, which is to say, it has cost us in quality and length of life. But nobody is trying to explain that dichotomy, in part because so few people see it. There is a profession that should be trying to explain this dichotomy, and that is the economic theorists. However, they seem to be pretending the data isn't there, so waiting around them to explain it means more loss of quality and length of life. So let me take a crack at it.

More below the fold...

Marty Hart-Landsberg in Monthly Review states the issue of trade policy has a larger context than national economies. Reader juan adds his commentary to Marty Hart-Landsberg quotes (lifted from comments and slightly editied for readability):

Most importantly, foreign capital now plays a leading role in the Chinese economy, especially in manufacturing.7 Its activity has transformed China into an export-driven economy: the ratio of exports to GDP climbed from 16 percent in 1990 to over 40 percent in 2006, with the share of foreign produced exports growing from 2 percent in 1985 to 58 percent in 2005 (and 88 percent for high-tech exports).8 Equally noteworthy, the share of total exports being produced by 100 percent foreign-owned firms has also soared.

This restructuring cannot be understood simply through a nation-state lens. Rather, as China’s reforms proceeded over the 1990s, Chinese accumulation dynamics became increasingly dependent on transnational corporate investment and export activity. As a consequence, the Chinese economy became more and more enmeshed in a broader process of East Asian restructuring---one that was driven by the establishment and intensification of transnational, corporate controlled, cross-border production networks, which linked and collectively reshaped all the economies involved. In other words, the Chinese experience, and in particular, its export drive, can only be understood in the context of broader capitalist dynamics.

Chinese exports are really Chinese only in the sense that they were assembled in China. This point is reinforced by the fact that China’s increased share of the U.S. deficit was matched by a decline in the share accounted for by the rest of East Asia.

Juan re-states: It is not so much a question of the US. v China but government that are in dependent partnerships with 'no-longer-national' capital -- which ultimately boils down to labor v capital, and this capital must control or be the state.

Given decades of class war from above, it is at least slightly more obvious what must be done.