Some catching up on health care reform progress makes sense as we keep in mind these posts from Beat the Press Dean Baker writes:

Second, the story of massive huge future budget deficits has little to do with aging. It is a story of a broken private health care system. If the United States paid the same amount per person for health care as any other wealthy country we would be looking at huge budget surpluses, not deficits. Of course we can't lower our costs because of the enormous power of the health care industry.

The big deal in national planning and in recent MA statements by planners, Gov. Patrick, and others is the 'global payment method' (of which there are many proposals of programs) to replace fee for service billing. Somehow a global payment system determined by a standard treatment sequence will cut an estimated amount of duplication and excess testing among a list of things. Estimates range from 4% to 14% 'savings' through a mechanism jointly approved by the Blue Cross insurers and hospital association is to accomplish this in MA, but no proposals are very concrete from my survey of MA articles. Michael Halasy will hopefully write more on this topic from the inside.

More below the fold...

By Noni Mausa

Wiggle Room

In a claustrophobic economy where the lions share of the fruit of citizens’ efforts is funneled to a small number of beneficiaries, where institutions intended to intervene on their behalf have been rejigged to work backwards, what can the little guy do to gain some wiggle room?

The poorest Americans have many strategies that provide small amounts of wiggle room, like working off-the-books, juggling several bank accounts or using payday lenders, locking kids in a closet so they can go to work, and stiffing landlords and various debtors when and as they can. Some are chosen strategies, some are just the result of not having enough tokens to satisfy all the turnstiles.

And these skills are ancient. Being dirt poor is a venerable world sport, and the tactics have been practiced since before written records.

But in the past century we seem to have entered a new situation, where the great majority of people are in a closed system with very little wiggle room, and most wiggle choices leading to less, not greater freedom and prosperity.

More below the fold...

First I would like to stress again that I have great respect of Janet Yellen. I try to only critize people whom I respect (my posts show just how respectful I am in general).

So this comment on her use of event studies is really a comment on event studies and not on Yellen in particular. I mainly objected to "Event studies can therefore be helpful." That is not a strong claim and I don't really disagree, but I would add "but not very helpful, because announcements can be declared non events on the grounds that they were anticipated, so conclusions based on event studies depend on judgment -- something which they have in common with conclusions which aren't based on data at all."

More highly respectful verbal abuse* after the jump.

* that was meant as a joke.

I have the 7 year nominal treasury rate, the 7 year TIPS rate and the difference in this Fred graph which I don't know how to embed. I see current rates are similar to those before the first announcement (August 2010). Looking at daily data, I think I see rates going up at the November announcement (that would correspond to investors thinking QE matters and there being less than expected). I don't see much of any change pre-August to post November. The graph sure doesn't look like a response to a larger open market operation than any in the 20th century. I think that money and 7 year notes are close substitutes now.

More below the fold...

Peter Dorman at Econospeak, who is smarter and nicer than I am,* boils down the question:

[D]o you believe that managers normally make the right decisions over how to run organizations?

If you believe that premise, please explain:

1. Why all those great managers of the late 1940s through the mid-1970s ran defined benefit contribution plans, but their successors—who supposedly are more capable—are only capable of offering defined contribution?
   
2. That "underfunded pension benefits" are evil, but "overunded" pensions led to the LBO (now "Private Equity") movement of the 1980s.
   
3. That, in the 1980s, GM being $1B underfunded caused Congress to pass a bill allowing pensions to become fully funded over 20 years—and that most of those targets were missed?

If bosses are so good at managing "ongoing concerns," why do they take their payments upfront? What does—and should—this tell us about discount rates?




*This is a fairly low standard, outside of people who work in finance.

by Mike Kimel

Another Look at Keynesianism and the Great Stagnation

Cross-posted at the Presimetrics blog

Last week I had a post noting that the US government followed more or less naive Keynesian policies (whether on purpose or not I cannot say) from the early 1930s to the late 1960s. The post also notes that what Tyler Cowen calls The Great Stagnation, a period of relatively slow economic growth, began just about when the government moved from naive Keynesian policies to a regime that could mostly be described as "all deficits all the time."

In this post, I'd like to present a couple of graphs that are pretty self-explanatory. The data in the graphs comes from the BEA's NIPA Table 1.1.5 The black line runs from 1929 to 1967, and the gray line from 1968 to the present.

Figure 1

Figure 2

I'll be coming back to this topic in future posts, but I'd like to make a few quick comments:

1. The Great Stagnation Tyler Cowen comments on seems to, at a minimum, coincide very strongly with the period where the government quit Keynesian policy, where the private sector's share of the economy stopped shrinking and began growing, and where the government's role in the economy stopped growing and started shrinking.

2.  Even if you assume the growth of the private sector or the shrinking of the government isn't causing or contributing to the Great Stagnation, the data still leaves libertarian and conservative economic views at a loss.  After all - shouldn't growth increase as the private sector becomes more important and the government shrinks in size? 

3.  Bear in mind that marginal tax rates - reduced in 1964 and then reduced again multiple times since then - were lower during the Great Stagnation period than they had been since the 1930s.  Needless to say, this is yet another fact that makes the data inconsistent with libertarian and conservative economic theory.

4.  As always, if you want my spreadsheet, drop me a line. I’m at my first name (mike) period my last name (one m only in my last name!!!) at gmail period com. And don’t forget which post your writing about.

Madison Wisconsin anti Scott Walker sign of the day



via www.first-draft.com

When is an event ?

Yesterday Janet Yellen said

Event studies can therefore be helpful in gauging the financial market effects of such communications. [skip]

Last August, the FOMC announced that it would begin reinvesting principal payments on agency MBS and agency debt into longer-term Treasury securities, and over the subsequent couple of months or so, the public remarks of Federal Reserve officials made note of the possibility of a further expansion of the portfolio. Consequently, when the Committee announced in early November that it intended to purchase an additional $600 billion in longer-term Treasury securities, that decision was largely anticipated by financial market participants, and it occasioned only minimal market response.

So it seems that the event took place over months from August through November. If Yellen is using the words "Event" and "communications" consistently, she must be asserting that the FOMC just kept talking about it for four months and the message gradually sunk in.

More generally, if one is willing to argue that announcements are anticipated and, so, there is no event even though there is a communication, then one must conclude that event studies are not useful. A methodological approach in which one can decide ex poste which communications are events is one in which one can reach any conclusion one wishes based on any data.

Yellen notes two communications related to quantitative Easing II -- an announcement in August and an announcement in November. The responses of asset prices to both announcements provide minimal support for her conclusion. So she decides that she can reinterpret the timing of the event as she pleases.

If this sort of argument is treated with respect, then there is no point in looking at data at all.

Yellen's argument is reduced to the assumption that if the first $ Trillion and change had an effect, then the next $ 500 billion must have an effect on the same order -- that something is roughly linear over a genuinely huge range. She must also assume that market conditions are similar in November 2010 and in 2008 and 2009 -- that willingness to bear risk and demand for liquid assets was fairly normal at the height of the crisis. Finally, she must assume that RMBS are about like Treasury notes.

I'd say that the facts are that there was a small then a tiny response to the announcement of gigantic purchases.

If Yellen remains convinced that non standard monetary policy has an important role to play, what evidence could possible confince her that it doesn't ?

Do my eyes deceive me ? Is this the Washington Post ? Is Ezra Klein writing under the double pseudonym "Neil Irwin and Michael A. Fletcher" ?

Irwin and Fletcher warn of two threats to the US economy -- high oil prices and tea partiers (call it the Texas tea party menace).

U.S. economic recovery threatened by events in Midwest, Middle East

The standoff over benefits for public employees in Wisconsin, pitting Gov. Scott Walker (R) against unions and their Democratic allies, presages battles in many state capitals that could lead to hundreds of thousands of public jobs being cut nationwide. And in Washington, congressional Republicans are demanding steep, immediate budget cuts that economic forecasters estimate would slow the pace of economic growth in 2011.

Obviously true, yet I couldn't guess what two threats they had in mind. I knew that I consider cutting public spending when in a liquidity trap to be a threat to the economy, but I didn't know that reporters were allowed to write that.

If this isn't proof that the Washington Post works for Goldman Sachs, what could be that proof.

Today the German Federal Statistics Office reported that the February Consumer Price Index is expected to mark a 2.0% (2.047% by my calculations, which is very close to a rounded 2.1%) annual pace in February 2011.

This is simply a 'flash' print, and the Statistics Office was very careful to discount the fact that inflation continues to be driven by energy. But the harmonised index of German consumer prices (HICP) increased a greater than expected 2.2% over the year, suggesting upward pressure to the headline Eurozone rate remains in play. Market participants are expecting ECB rate hikes this year - there are currently at least 2 hikes priced in through this year - based on an elevated Eurozone inflation rate, currently estimated at 2.4% in January.

The ECB is a devout inflation targeter (see first chart of this post); it's a central bank that raised rates late in 2008 only to see Eurozone inflation plummet as the economy dropped into recession (see chart below). But I think that the ECB will be less hawkish than expected next week, because I'm noticing an interesting correlation between German-based inflation (supposedly not relevant, per se, to ECB policy), Eurozone HICP inflation (the ECB's target rate of inflation), and the refi rate.

(Note that the ECB targets a weighted composite of harmonised index of consumer price inflation (HICP), rather than a composite of the domestic price indices. You can read about the measurement differences between domestic CPI and Eurostat's Harmonised CPI here.)

The chart illustrates the German CPI, the German harmonised measure of the CPI (HICP), Eurozone HICP inflation, and the ECB's policy rate. There are three things that jump out at me as relevant for ECB policy expectations: (read more after the jump!)

More below the fold...

House spending cuts hurt U.S growth -Goldman Sachs

By Richard Cowan

WASHINGTON | Wed Feb 23, 2011 4:50pm EST

[fair use skip]

"Under the House passed spending bill, the drag on GDP growth from federal fiscal policy would increase by 1.5pp (percentage points) to 2pp in Q2 and Q3 compared with current law," according to Alec Phillips, who signed the analysis that is dated Tuesday.

Various intelligent bloggers have expressed doubt that the effect could be so large (no links). I think they are not just puzzled but Posnered, that they have made a factor of 16 error in their informal calculations. They seem to think that Phillips is assuming a huge gigantic multiplier since 2% of GDP is many times 61.5 billion.
Yes Phllips talks about quarter growth of quarterly GDP but don't the two factors of four cancel ? No they multiply.

In forecaster speak 1.5% less growth for two quarters means growth at an annualized rate which is 1.5% lower for two quarters, that is GDP which is 0.75% lower in the second of the two quarters. Growth "in" a quarter doesn't mean growth during that quarter but that quarter's level compared to the previous quarter's level (GDP is measured over a quarter). So Phillips is saying that GDP in the third quarter of 2009 will be 0.75% lower if the Republicans get their way than it would be if Obama gets his way.

That is 0.75% of quarterly GDP not of annual GDP so third quarter GDP will be lower by less than $ 30 billion. If the spending cuts were evenly spread over the 7 remaining months of fiscal 2011, then 3rd quarter public spending would be lower by more than $26 billion. The simple static multiplier (effect on GDP_t)/(change of G_t) is around one, which is not absurdly high. By the same assumption on spending, the multiplier for the second quarter would be about 0.5.

In fact it is hard to cut planned spending quickly, so if Phillips's model were static (which it isn't) then the multipliers would both be less than one.

Of course Phillips is using a dynamic model in which there is a hump shaped response to a demand shock with GDP gradually rising, peaking and returning to roughly where it would be (only roughly because of possible crowding out or hysteresis or whatnot but usually assumed to be exactly when modelling). The multiplier isn't a relationship between Government consumption in a quarter and GDP that quarter -- it is a dynamic effect which grows and dies out. But the implied summary multiplier is perfectly standard among Keynesians and "Everyone hoping to make money selling economic analysis"

By the way, Speaker Boehner's office has made a wonderfully boneheaded assertion for the second day in a row.

A spokesman for House Speaker John A. Boehner of Ohio said the Goldman Sachs report represented "the same outdated Washington mind-set," comparing it to the thinking behind the 2009 Recovery Act

Someone better gently remind that spokesman that Goldman Sachs is based in New York not Washington. Oh and if they're so dumb, why are they rich ? Finally aren't Republicans supposed to trust the private sector ?

Both Gary and Rebecca cited Marc Lynch recommending "intervening" in Libya:

The appropriate comparison is Bosnia or Kosovo, or even Rwanda where a massacre is unfolding on live television and the world is challenged to act. It is time for the United States, NATO, the United Nations and the Arab League to act forcefully to try to prevent the already bloody situation from degenerating into something much worse.

I petulantly asked whether Mark Lynch had ever seen an intervention he didn't like.

The answer, of course, is yes, which a moment's thought about pseudonyms would have made clear. My social radar remains a perfect contraindicator.

But that leaves several questions, not the least of which is "with what Army"? Certainly not the U.S. one, which is overextended in battles of—let us be polite&dubious optimal cost.

NATO and The United Nations suffer similar issues, along with "institutional inertia" (unlike the U.S., they do not jump into wars without a strategy, a purpose, and a plan).

More below the fold...

by Beverly Mann

Washington Post writer R. Jeffrey Smith posted a comment to my post yesterday, providing a link to an article by him published in the paper about a letter that a large ad hoc group of law professors sent to the House and Senate Judiciary committees yesterday recommending legislation that would extend to the Supreme Court justices the code of ethics that applies to federal appellate and trial-court judges. The code prohibits certain conduct and requires recusal (nonparticipation by the judge in deciding a particular case or set of cases).

I’m grateful for the law professors’ letter, for the link to the article, and for Mr. Smith’s reportage, which gives extensive background and some details that I didn’t know, especially the financial contributions that the Koch brothers gave in 2007 and 2008 to the Federalist Society, the rightwing bar group that paid the expenses of justices Thomas and Scalia, and Thomas’s wife, for their four-day stays those years at a luxury resort where the Kochs were sponsoring a seminar at which these justices spoke.

More below the fold...

With the recent surge in oil prices I thought it would be useful to look at the potential impact with one set of data I watch. It is energy as a share of personal consumption expenditures or consumer spending. In the 1970s energy consumption rose from about 6% to 9% of spending, or about 50%. In the early 2000s energy rose from about 4% to 7% of consumer spending before it collapsed. As of December energy's share of consumer spending was already back to 6% of spending, about the level it peaked at in the last cycle before the financial panic generated a drop in other consumer spending. If you look at energy consumption this way it appears that oil consumption was already at the point where futher oil price increases would rapidly impact consumer spending on other items.



One area where higher oil prices clearly impacts consumer spending is autos, as consumer spending on new and used autos and energy have a very strong negative correlation. If rising oil prices generate a drop in real income or standard of living one of the easiest way to compensate is to delay buying a new,or used car. What would have been new monthly auto payments can be used to sustain consumption of other items. In this chart you can clearly see that this happened in both the 1970s and the 2000s. You can also see that spending on energy and autos accounted for about 10% of consumer spending in the 1990s and 2000s.

More below the fold...

An opinion piece in the NYT points us to new docs on former President Eisenhower:

LAST week the National Archives released a trove of drafts and notes that shed new light on President Dwight D. Eisenhower’s farewell address, in which he warned America about the “military-industrial complex.”

More can be found here.

On Oct. 31, 1960, another speechwriter, Ralph E. Williams, warned of a “permanent war-based industry” run by former military officials.

Also see a post from Econospeak

More below the fold...

by Mike Kimel

Cross posted at the Presimetrics blog.

I just came upon The Pentagon Labyrinth Its a very readable, very informative collection of essays about national defense in the United States.  The essays are written by ex-defense personnel (some of whom were very influential) and journalists who cover the military, and to top it off, its free!!!!

From the book's blurbage:

The Pentagon Labyrinth aims to help both newcomers and seasoned observers learn how to grapple with the problems of national defense. Intended for readers who are frustrated with the superficial nature of the debate on national security, this handbook takes advantage of the insights of ten unique professionals, each with decades of experience in the armed services, the Pentagon bureaucracy, Congress, the intelligence community, military history, journalism and other disciplines. The short but provocative essays will help you to:

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Just in case anyone didn't see this, or overlooked it the first time, at Maxine Udall, Girl Economist:

A memorial service and celebration of her life will be held for Alison at 1:00 pm on March 5, 2011 at the Unitarian Universalist Church, 145 West Rose Tree Road, Media PA, 19063.


We invite you all to attend. We welcome your thoughts and memories of Alison as we remember her, so please feel free to come prepared share them if you wish.

Please let us know if you plan to come. Email frostys91@hotmail.com

For those who would like to make a gift in Alison's memory to please consider giving to the FaithTrust Institute or the Alison Snow Jones Memorial Fund at Drexel University. If giving online to Drexel University, please be sure to add "Alison Snow Jones Memorial Fund" in the special instructions field. Call Ray Slater, the director of development at the School of Public Health, at (215) 762-8437 for more information.

-David Pinney, Meredith Frost

by Linda Beale

More on the Mortgage Mess

As our banking giants engaged more and more in speculation, and as the shadow banking system saw a way to make money off of people's bad financial decisions by betting against subprime loans, the financial crisis took off.  So redressing the problems that caused the crisis shouldn't overlook mortgages.

The Treasury has now come out with a "plan" for addressing the government sponsored enterprises Fannie and Freddie, which played a role in the crisis though were not the drivers of the subprime origination mess.  The plan, Reforming America's Housing Finance Market: A Report to Congress (Treasury and Housing and Urban Development, Feb. 2011), claims that it will "reform America's housing finance market to better serve families and function more safely in a world that has changed dramatically."  It also claims that it is intended to limit the government's primary role to "robust oversight and consumer protection, targeted assistance for low-and moderate-income homeowners and renters, and carefully designed support for market stability and crisis response."

More below the fold...

I sent this Salon article on the Supreme Court justice Clarence Thomas The bigger Clarence Thomas scandal by Ben Adler to Beverly Mann asking her what she thought of the article. The article discusses the possible conflict of interest regarding Judge Thomas's ruling on Citizen's United and his failure to disclose his wife's earnings:

Experts on legal ethics don't all agree on whether Thomas should have recused himself in Citizens United and whether he will be honor bound to do so for healthcare reform. But they are unanimous in their condemnation of Thomas' dishonest filings on his disclosure forms. "Since it went on for six years [2003-2007 and 2009] it's especially troublesome," says Stephen Gillers, a prominent expert on legal ethics at NYU law school. "It's impossible to claim it's an oversight."

The article makes clear that the rules such as the Code of Judicial Conduct do not apply to Supreme Court Justices, and suggests we take take a look at the matter.

Beberly Mann responds to my query on what she thought of the article:

What a terrific article. Thanks for pointing it out to me.

One thing that jumped out at me was that the expenses for Thomas’s trip to Palm Springs to attend a conference sponsored by the Koch brothers, and which Thomas reported as being paid by the Federalist Society, might have come from Koch Industries instead. I knew that there was a discrepancy between one of Thomas’s versions of events (that he only popped into the conference for a few minutes) and a more recent version (that he attended all four days of the conference. The latter version was given after there were questions raised about the propriety of Thomas’s accepting airfare and four days’ hotel costs from the Federalist Society if he only popped into the conference for a few minutes.

More below the fold...

Bond markets are pricing in rate hikes this year by the ECB and the BoE. Both are inflation targeters, so which one should react first to a possible spike in oil prices? What's your answer?

(1) Neither. As FX appreciation and fiscal austerity pass through to domestic prices, the core will drag down the headline. If they hike, stagflation will result.

(2) The ECB, because it is the most hawkish of all central banks, in my view. The ECB mandates a rigid targeting scheme compared to that of the BoE. Since the January 2005, the BoE has successfully targeted inflation slightly under 2% just 27% of the time, while ECB has done so 61% of the time.

(3) The UK. The January 2011 UK inflation rate was 4% Y/Y (3.2% in November on a harmonized basis) and near-double that in the Eurozone, 2.4% according to the flash estimate.

Furthermore, the UK story is not one of just energy and food. The chart below illustrates the diffusion of price inflation across the components of the harmonized HICP (data at Eurostat), and the legend lists the period average for each economy. Diffusion levels above 50 indicate that a larger share of component prices are growing at an annual rate above 2% that below 2%. The diffusion a measure of the breadth of price pressures...

...and is UK inflation broad-based! In contrast, inflation in the Eurozone is focused in the commodity and energy space. Now, I'm not suggesting that the BoE hike - in fact I would recommend the opposite, or at least stay on hold - but I'm sure that the BoE has its vision acutely focused on developments in the Middle East.

If I had to choose an economy that would be derailed by the price spikes in the commodity space, it would be the UK. But I choose (1).

Rebecca Wilder

by Michael Halasy

Medical Malpractice Reform: Truth in Advertising Needed (Part Two of Three)

So in the first article, we discussed the historical implications of tort reform by examining Texas. The take home message being that tort reform failed to curb health care spending, and/or control costs (outside of malpractice premiums which did fall). Proponents of tort reform claim that by enacting aggressive tort reform measures, so called defensive medicine practices could be reigned in. Estimates about the costs of defensive medicine vary, and I have seen estimates in the literature as low as 4%, and as high as 14% of total health care spending. As with most things, the truth is probably somewhere in the middle, with a realistic estimate of 8-9% likely being the real integer. Recently, several studies have attempted to assess two of the most important questions about this topic:

A: Does a reduction in defensive medicine practices occur with the implementation of tort reform measures?

And

B: If it does cause a reduction in defensive medicine practices, will this affect patient outcomes or mortality?

More below the fold...

Last year many economists argued that the economy needed more quantitative easing which would drive down real interest rates (whether by driving down long maturity nominal rates or by driving up expected inflation). The counter argument is that quantitative easing is not effective if there is a liquidity trap.

Well we now have QE2 (since early November 2010) and real interest rates actually increased (very slightly). The 8 year real interest rate (TIPS rate on notes due January 15 2019 increased. I think that this is the real rate which was most likely to decline when the Fed bought 7 year (ordinary nominal) Treasury notes.

http://research.stlouisfed.org/fred2/series/TP10J19

That didn't do anything for the recovery and it is a response to an open market operation many times larger than the largest pre-Bernanke open market operation (I mean as a percent of high powered money outstanding -- one has to be specific since Bernanke had earlier more than doubled Fed liabilities).

By Daniel Becker

Now that the story is getting out that Governor Walke et al's bill is about more than just busting unions, a little bell went off in the back of my head. Yes, I read Shock Doctrine. Yes, I understand the true concept of fascism. I read What would Jefferson do. I read C & L, AB, Hullabaloo, Glen Greenwald, watch Rachel, Ed, Cspan, etc, etc, etc. And, there are some people pointing out the connections between some of all these perspectives. However, Wisconsin's current event just seemed too familiar. Deja vue familiar. More familiar than all the reading and listening would allow. It is experiencingly familiar and I don't mean Egypt.

I mean, we can all see (or at least a majority are now seeing) the thread of connection to all the seemingly disjointed liberal/progressive commentary about what has been happening in America since around 1981. We even are accepting that Clinton et al's governing time was part of the thread. It's economic. It's societal structure, it's civil rights, it's power (always is since the constitutional convention).

But, where's the beef. Show me the money. Where is the materialization most recently that it all came together as to the implementation of the play book that Governor Walker et al are using such that I know this is real...this is really and honestly currently America...American?

Folks...I give you Iraq: 10/10/2010

More below the fold...

by run 75441

Are Wisconsin Public Employees Over-Compensated?

Conclusion: Wisconsin public employees are not overpaid: The earnings equation estimates indicate that state and local government employees in Wisconsin are not overpaid. Rather, local and state public employees are undercompensated. When we make comparisons controlling for education, experience, hours of work, organizational size, gender, race, ethnicity, citizenship, and disability, both state and local public employees earn lower wages and receive less in compensation (including all benefits) than comparable private sector employees.

A standard earnings equation produces what some may consider a surprising result: full-time state and local employees are undercompensated by 8.2%. We observed, however, that public employees work fewer hours, particularly employees with bachelor’s, master’s, and professional degrees. An earnings equation controlling for work hours of full-time employees demonstrates that Wisconsin public employees earn 4.8% less than comparable private sector workers working comparable annual hours. EPI

More below the fold...

by Mike Kimel

Going Galt in 2011 – I Guess Atlas Shrugs Was Right
crossposted at the Presimetrics blog

A couple years ago, there was a small spate of commentary of folks by conservatives and libertarians about how, if the Bush tax cuts weren’t renewed, we’d see a bunch of highly productive people going Galt. In other words, a whole bunch of people on whom society depends, seeing the parasites started sucking even more of their lifeblood, would simply withdraw from society… and the rest of us would suffer.

It turns out that those who gave us these warnings were partly right. It seems there are a lot of people – schoolteachers, firefighters, police officers and the like – threatening to go Galt in Wisconsin these days. Its just that the rest of the story isn’t playing quite the way the promoters of going Galt predicted. Nevertheless, I’m sure they must be absolutely ecstatic that some people have finally stood up to the government and said: “enough is enough.”

Uwe Reinhardt's post the other day, "How Convincing is the Case for Free Trade?", helped to kick-start a fair bit of discussion recently about the impact of international trade on the US economy. Mark Thoma and William Polley have shared their thoughts about the importance of compensating the losers from trade, while others (e.g. Tim Worstall) have questioned that need.

I'd like to add 3 points to this discusssion.

1. International trade is not substantially different from trade between two people within the same country. Both types of trade are voluntary agreements between the two parties to the transaction. And both types of trade may negatively impact other people in the economy who had nothing to do with the transaction. The main difference is simply that with international trade, the transaction happens to cross an international boundary.

2. Just because trade leads to an efficient outcome, that doesn't mean it's a good outcome. I think that a parable about a punch in the nose helps make that point. But even very bright economists often confuse "efficient" with "good".

3. I see the problem of adequately compensating the losers from international trade as just a part of the larger question of how we treat people in our society who, through no fault of their own, have fallen on hard times. International trade is just one of the many enormous, inexorable forces that constantly reshape our economy. Technological change, demographic change, or the fluctuations of the macroeconomic business cycle may devastate millions of families each year just as surely as international trade. An important measure (to me) of the type of society we live in is how we treat those individuals who are on the losing end of those impersonal economic forces that, in the long run, often help to make the world a more prosperous place.

Have you heard about 16.896?
"...with or without solicitation of bids, for any amount that the department determines to be in the best interest of the state." Who knew behind the scenes it was also power plants? From rortybomb at the link above:

The fight in Wisconsin is over Governor Walker’s 144-page Budget Repair Bill. The parts everyone is focusing on have to do with the right to collectively bargain being stripped from public sector unions (except for the unions that supported Walker running for Governor). Focusing on this misses a large part of what the bill would do. Check out this language, from the same bill (my bold):

16.896 Sale or contractual operation of state−owned heating, cooling, and power plants. (1) Notwithstanding ss. 13.48 (14) (am) and 16.705 (1), the department may sell any state−owned heating, cooling, and power plant or may contract with a private entity for the operation of any such plant, with or without solicitation of bids, for any amount that the department determines to be in the best interest of the state. Notwithstanding ss. 196.49 and 196.80, no approval or certification of the public service commission is necessary for a public utility to purchase, or contract for the operation of, such a plant, and any such purchase is considered to be in the public interest and to comply with the criteria for certification of a project under s. 196.49 (3) (b).

(Update: Dan here...see also Linda Beale's post on the same issue via Mark Thoma. Yves Smith adds her comments.)

More below the fold...

Crossposted at The Street Light.

David Wessel shows us the federal fiscal issue in one chart. The chart depicts an estimate of what the Obama administration's budget proposal would mean for spending in each major category over the next five years. "The bottom line: Spending on interest, Medicare and Medicaid and Social Security go up – a lot. Spending on nearly everything else goes down."

I prefer looking at it slightly differently. I think that when trying to understand the federal government's fiscal situation, at least on the spending side, it is more informative to see how we got to where we are.

We now have an on-budget (i.e. excluding the Social Security program, which continued to run a surplus in 2010) deficit of about 9% of GDP. In the early 2000s, the budget deficit was about 4-5% of GDP. That's deterioration in the on-budget deficit of about 4-5% of GDP between 2003 and 2010.

More below the fold...

by Linda Beale

Corporate Taxes from the AEI perspective--the AEI report gets an F
crossposted with Ataxingmatter

[edited to correct typos and add link to CTJ and Leonhardt articles 2/19pm]

Kevin Hassett, an economic grunt at the American Enterprise Institute and frequent contributor to the Wall Street Journal op-ed pages, prepared a report for the institute on corporate taxation. Guess what--it claims that the US overtaxes its corporations and that is the reason that we are losing jobs.

There are all sorts of things wrong with this report.

1) it disregards the impact of globalization on corporate decisions to move enterprises, and the fungibility of operations if jurisidictions left don't make the exit a highly taxing moment. It also disregards the lack of protection for US workers--yes, US workers are better paid than workers in undeveloped countries, and if multinational enterprises (MNEs) can merely substitute the one for the other, they will.

2) It first spends a lot of ink on the US statutory rate, complaining that it is higher than that of most other OECD countries. That is true, but really meaningless in itself. You can't have a decent understanding of a country's tax policies without looking at both tax rates and the base against which they are assessed. Since the corporate tax base in the US has more holes than Swiss cheese, looking at the rate tells you almost nothing about the corporate burden.

More below the fold...

Health care thought for a cold day:

If members of Congress feel so strongly about not doing anything about health care costs, perhaps we should stop providing them with health insurance. Let’s credit their pay for the amount that has been paid by the taxpayers, and let them try to buy health insurance in the individual market. (My bet is that they all would be denied).

Update: The link did not register... NYT opinion here

Peter Dorman writes at Econospeak about economics insulated from the harsh light of day and evaluation of usefulness:

The Embarrassment Known as the Value of a Statistical Life

Some economic ideas thrive only in the darkness: they are simply too weird and half-baked to withstand public scrutiny. Perhaps no concept better exemplifies this than the value of a statistical life, the sum of money that supposedly measures the value of a life saved or sacrificed by a government program...

More over at Econospeak.

by Linda Beale

GOP deficit-reduction hype used in ideological "values" war?
crossposted with Ataxingmatter

There is concerted effort to portray Social Security as ruining the country by being a significant cause of the current deficit , and this is not accidental.  Social Security has been funded by payroll taxes that are supposed to be dedicated to the payouts.  But the GOP since Reagan has worked to cut income taxes and increase military funding (especially with the Bush "pre-emptive" wars of choice that Stiglitz now says will cost us a minimum of FIVE TRILLION), and has borrowed from those Social Security pension funds to pay for those tax cuts and military excesses. It's the tax cuts and runaway military spending that are choking this country's economy, not Social Security.  That fact gets lost unless Social Security's income and outflows are portrayed fully.  It's a fact that the GOP wants to be lost, I think, along with the overall amount of military and related spending in our budget.

More below the fold...

by Mike Kimel

A Critique of Tyler Cowen's The Great Stagnation, by way of Alex Tabarrok's Criticism of Keynesian Politics

Cross posted at the Presimetrics blog

Alex Tabarrok and Tyler Cowen are libertarian professors from George Mason University who post at the very popular Marginal Revolution blog. I often don't agree with what they write, but its usually well reasoned and grounded in reality.  (Unlike, say, what comes up in a number of other libertarian blogs.)

Cowen recently wrote an e-book called The Great Stagnation&lt I haven't read it - I'm swamped these days.  However, there have been many reviews (and comments by Cowen himself, so I think I can provide a brief summary.  Essentially, Cowen notes that in the last few decades (since about the early '70s), real economic growth in the US has slowed.  (That won't be a surprise if you read Presimetrics.)  His thesis is that this has to do with technological development - we've eaten the low hanging fruit, and further technological progress (and hence real economic growth) will be slow until we get off the plateau we're on. 

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Nevada Seeks to Cut Funds for Treating Gambling Addiction Snark? No it is too sad for that, somehow we have gotten to Reagan's promised Land, Government is the Problem. Always. Still. But welcome to Vegas!

This letter via Counterpunch to the Deficit Commission makes a clear statement on broad issues of accountability for the DoD, our contracting system, and the huge drain on our resources. Reading the whole letter points to examples of problems, and how the current system has reached and will reach unsustainable levels of spending.

We are writing to you and other members of the President's National Commission on Fiscal Responsibility and Reform as individuals who have worked in national security affairs for decades for the Department of Defense, in the Armed Forces and for Democrats and Republicans in Congress. Our concern is the defense budget.

Similar to what your "Co-Chairs' Proposal" said last week regarding Social Security and other issues, we do not believe that defense spending should be reduced to a bargaining chip in budget negotiations at the Deficit Commission. On the other hand, we do believe that the defense budget is dangerously bloated, giving rise to serious decay in our armed forces.

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Re-posted with the permission of the author Mark Thoma at Maximum Utility.

The Budget Deficit Debate: Avoiding the Real Problem

I’ve been asked several times how I feel about the president’s proposed budget, and I find it hard to answer. For me, it all comes down to the following diagram:

[Source: CBO]

The main problem, as this graph from the CBO clearly shows, is rising health care costs. However, few politicians are talking about the real problem, let alone trying to find ways to solve it. So all of the budget debate we are seeing is really just tinkering around the edges of the long-run debt problem. For example, as the graph shows Social Security has little to do with our long-run budget problem, and the imbalance in this program can be fixed relatively easily. So whatever we do here it will still leave the big problem — rising health care costs — unaddressed.

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From the Capitol Times op-ed (hat tip juan):

In fact, like just about every other state in the country, Wisconsin is managing in a weak economy. The difference is that Wisconsin is managing better -- or at least it had been managing better until Walker took over. Despite shortfalls in revenue following the economic downturn that hit its peak with the Bush-era stock market collapse, the state has balanced budgets, maintained basic services and high-quality schools, and kept employment and business development steadier than the rest of the country. It has managed so well, in fact, that the nonpartisan Legislative Fiscal Bureau recently released a memo detailing how the state will end the 2009-2011 budget biennium with a budget surplus.

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Mark Thoma begins with a hilarious typo, but eventually gets to the Quote of the Decade (if not century) from Alan Blinder:

If we economists stubbornly insist on chanting 'free trade is good for you' to people who know that it is not, we will quickly become irrelevant to the public debate.

As Rusty can (and will, at length) tell you, the thing that is wrong with that sentence is the tense. We have had free trade agreements for decades, China has had MFN status since the 1990s, and permanently since 2000. The pieces of the former Soviet Union, including the current oligarchy that is called Russia, have had that status since 1992. NAFTA, including its abhorrent Chapter 11, has been in force since 1994.

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By: Daniel Becker
HT: Digby

More people need to hear this perspective regarding the economy and the budget debate if only to remind them that there is another perspective...if only to hear what it sounds like when a congress person is actually fighting and working for you. You, the one without enough money to influence congress.

From the transcript:

JUDY WOODRUFF: Well, the president has talked about corporate -- corporate tax reform. And he said, in two years, in -- for 2012, he's going to propose letting all those tax cuts expire that were allowed to continue in December.

You spent, what, eight-and-a-half-hours on the floor of the Senate in December in a -- in a protest against that. Are you confident the president is going to let the tax cuts expire?

SEN. BERNIE SANDERS: No, of course I'm not. I mean, that's what the president said when he ran for president. And yet, when the Republicans stood up to him and said, we want to give more tax breaks, extend the Bush tax breaks, essentially, the president gave in.

When the Republicans said that, we want to lower the estate tax, Judy, which appeals -- which only applies to the top three-tenths of 1 percent -- these are not rich folks -- these the very richest people in America -- the president gave into that.

So, the president may tell us that he has this in mind, but I think the record is that he has not fought for those principles. The American people want him to fight for those principles.

And I think what this whole budget debate is about is do we stand up and say, no, we're not going to cut programs for those who need it?

The other issue that I think we have to talk about is, in the president's budget, he talks about Social Security. And he makes me a little bit nervous, because I think, as many of our listeners know, the Social Security trust fund today has a $2.6 trillion surplus.

Social Security can pay out every benefit owed to every eligible American for the next 27 years. Social Security, because it is funded by the payroll tax, hasn't contributed one nickel to the deficit.

See, there is another voice, and some are finally experiencing the results of ignoring it. Remember this! Remember what a congress person sounds like when they are for real about working and fight for you. No more excuses you did not know. This is what you will sound like once you decide to influence congress.

Brendan Fischer via PR Watch writes on the budget process in Wisconsin, with links here: Where is the Budget Crisis?.

Wisconsin Governor Scott Walker alleges that dismantling public sector collective bargaining rights is made necessary by a $3.6 billion deficit in the next budget, and a $137 million shortfall this year. Setting aside the fact that the ability to negotiate shifts, seniority, benefits and conditions of employment would have a negligible impact on the deficit, and looking beyond Walker’s deceptive claim that the alternative to union-busting is to kick 200,000 children off Medicaid (called “false” by Politifact), how deep is the state’s economic crisis?

Representative Mark Pocan (D- Madison) has looked more closely at the numbers and writes that the $3.6 billion deficit is bogus. The alleged deficit is based on $3.9 billion in new agency requests for the 2011-2013 budget, a 7.2% spending increase. However, these are merely requests, not dollars actually allocated or spent, and Pocan writes that the legislature never votes to grant 100% of agency requests: “I don’t think there is a member in the legislature that would vote for [the requested budget increase]. In fact, I asked [Legislative Fiscal Bureau] Director [Robert] Lang when was the last time we gave agencies exactly what they requested and was told he couldn’t think of one and he’s been here decades.”

For example, the state’s non-partisan Legislative Fiscal Bureau reports ...

The Best of State Tax Expenditure Disclosure is worth some comment:

While the federal government offers no insight into where an estimated $1 trillion in tax breaks go every year, some states are beginning to provide information about which corporations benefit from local tax spending programs. None of the state websites are perfect, but their strong suits could be combined to create tools for disclosing federal corporate tax expenditures.

Ex-food and energy, inflation is at 0.9% for the past twelvemonth. Even if you include those in the longer measure, annual inflation has been 1.7%. (Recall that we paid an average of more than $3.00/gallon for most of the Spring of 2010, for instance.)

There is a simple reason "everyone" expected higher numbers: they were looking at money supply, not circulation.

As Jim Hamilton notes, money is only supply when its being circulated.

The "intermediaries" aren't intermediates; they're SPOFs. Hamilton's graphic tells all:

All that "extra" money is being kept in mattresses. Financial-Institution-shaped mattresses, but mattresses nonetheless. The velocity of monetary reserves is 0. So the weighted-average velocity of money is much less than the standard formula would imply.

There is inflation out there. For instance, China, whose "stimulus" was an impossible 17% of its GDP (h/t Susan of Texas, of course), is seeing inflation.

The U.S. needs to deal with financial institution mattress stuffing before it can have such problems.

Eurointelligence cites a Die Zeit interview (the original interview here) with ECB central bank President Jean-Claude Trichet. Their take on it is quite interesting, which suggests that most are 'wrong' about the path of ECB policy. According to Eurointelligence:

Central bankers are trained not to say anything of any relevance in long speeches or interviews, and Jean-Claude Trichet is a master at this. So we were a little surprised when he told Die Zeit that governments should fine tune their fiscal policy in the fight against inflation. Here is the quote: "Individual countries must accept the monetary policy as a given and adjust their national policies accordingly...When a country experiences a boom, it needs to make its own national policies ...more restrictive in order to avoid the economy overheating or speculation getting out of control." The policy consensus has been for the last few decades that monetary policy is the instrument of choice to control inflation and inflation expectation, while fiscal policy should be oriented towards medium-term goals. Fiscal policy has a role to play in countries that overheat relative to the rest of the eurozone – like Spain before the crisis – but this is hardly applicable now. (If you consider Germany as overheating, there is not much you can do with fiscal policy to constrain the inflationary pressures, especially considering the time lags through which fiscal policy operates. We interpret Trichet’s statement as saying: monetary policy is currently constrained, so fiscal policy is all we have got. This is quite extraordinary, and makes us wonder whether the ECB is really determined to prevent an upward drift in inflation.)

(read on after the jump!)

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The quality of the posts at Disruptive Women in Health Care(r) varies widely, but their special issues bring out the best and leave most of the chaff behind.

Their latest eBook is Innovation Nation: Recognizing the Benefits of Innovation in Health Care. The PDF (direct link here) collects a series of posts from December, and includes references and research links that formed the basis of their posts and ancillary material dealing with innovation and research in both the specifics of health care/medicine and general research.

Worth a look to see how people who work in the field view their future.

Worthwhile Canadian Initiative's Stephen Gordon suggests "that even if an economic model cannot predict market failure, it can still be quite valuable in helping with the remedy".

Lots of thoughts occur to me, but will join the discussion in comments.

by Linda Beale

Truth in Budget Numbers
crossposted with Ataxingmatter

Seems like everybody these days is into misrepresenting, distorting, or at least stretching the facts to suit the spin they want to give.

One issue that I raised in my snarky post on the 15th about the Budget commentary was the way most media has described the December 2010 Tax Relief ....and Job Creation Act.  As you will recall, that bill extended the Bush tax cuts for another two years, and most of the media talks about it as a "tax cut" bill.  But in fact that bill ended the "Making Work Pay" provision, a cornerstone of the Obama Administration's attempt to make the stimulus package work for ordinary Americans.  The end of that provision resulted in a substantial tax increase for 51 million Americans in the lower income distribution.  See, e.g., Floyd Norris,  Some Taxes Went Up   (Feb. 4, 2011); Tax Policy Center, Table on the 2010 tax bill (Dec. 13, 2010).  When we talk about that bill, wouldn't it be more accurate to discuss it as a tax bill that increased the burden on some of those in the most unfortunate circumstances, while giving substantial tax cuts to those at the top?

FactCheck.org, of course, spends its time looking for just those kinds of distorting statements and trying to set the record straight so that we are all talking about the same set of facts. 

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In the context of Dan's post below, I just want to repeat what Bruce Bartlett said so accurately yesterday:

[H]ere's what I would be doing if I were organizing opposition to the Republican budgetary disinformation campaign. First of all, I would be holding hearings five days a week in the Senate Appropriations Committee and every other Senate committee on the impact of proposed Republican budget cuts. Whose benefits are going to be cut? What programs will be shut down? What are the real world consequences of the Republicans' plans?

I have no idea and I have made an effort to try and find out. But there are undoubtedly people who know at the Office of Management and Budget and the various departments of government that are filled with assistant secretaries eager to testify before a congressional committee and respond in detail to the implicit Republican argument that spending can be massively cut without hurting anyone.

Another thing I would be doing is commissioning reports by the Congressional Research Service, the Government Accountability Office, and the Congressional Budget Office to provide data and analysis on the impact of Republican plans. And believe me, any request from the chairman of the appropriations committee gets the very careful attention of those who run these organizations for obvious reasons.

The next obvious step is to get all of the various organizations that represent farmers, defense contractors, health providers and so on to do their own analyses based on their intimate knowledge of how spending cuts will affect them. These people will also be more than happy to testify before a congressional committee on short notice.

Within a couple of weeks I think it would be very easy to put flesh on the bones of the Republican plans and mobilize the millions of people who will be affected but probably have no idea at this time that this is the case because no one has told them. I think the political dynamics could change quickly. But someone needs to get the ball rolling, get the analyses started, organize the hearings and so on. Why this isn't already being done, is a complete mystery to me. [emphasis mine]

That no one has been willing or able to answer Mr. Bartlett's question tells me all I need to know about who will be hurt by the cuts: the vast majority of the American people. We're not just talking the people who scheduled a trip to DC after their kid was fascinated by Night at the Museum: Battle of the Smithsonian. We're talking the kids, their parents, and their neighbors.

The silence from the DSCC members is deafening. And, in more than one sense of the word, Depressing.

The Continuing Resolution (H.R. 1) was introduced Friday night. Information about the bill (copy of the legislation, bill summary, list of program cuts, and the subcommittee savings tables) is linked here:

Appropriations Committee Introduces CR Containing Largest Spending Cuts in History
February 11, 2011

CR Spending Cuts to Go Deep
February 9, 2011

Rogers Announces Intent to Cut $100 Billion in the Continuing Resolution
February 10, 2011

FY 2012 Federal Budget

The following links are to federal government sources for the federal budget,

OMB

The Budget

Summary Tables

Terminations, Reductions and Savings

TESTIMONY OF JACOB J. LEW DIRECTOR OFFICE OF MANAGEMENT AND BUDGET BEFORE THE SENATE COMMITTEE ON THE BUDGET
February 15, 2011

People have been asking me what I think of the Obama administration’s budget for 2012, as well as Republican plans to cut government spending. My thought in both cases is this: it’s all understandable – even predictable – if you recognize that both sides have one primary goal right now: to win the presidential election in 2012.

More below the fold...

by Mike Kimel

Canada too! Part two
Cross posted at the Presimetrics blog.

In response to my post commenting on Frances Woolley's post, Frances Woolley left the following comment:

On WCI, one of the commentators suggested that the Liberal/Conservative growth differential is partly due to differences in military spending. In Canada where we don't have a large defence industry, money spent on "guns and bombs" probably has a low multiplier. So the spending story could well be part of it.

There's also differences in monetary policy (Liberals are more expansionary) and immigration policy (Liberals are more pro-immigration) - though in general anti-immigrant sentiment rises in economic downturns so it's hard to figure out what the causal mechanism is there. On the other hand, a lot of commentators on WCI have argued that, because political platforms change so much over time, it's hard to identify any political party with any particular policy stance.

I figured I probably needed at least one graph to respond properly, so its easier to do it in a post. I would note first - I am not that familiar with Canadian data and I don't have the time right now to plunk down some cash at Statistics Canada, so I'll stick to the US side of things.

1. Guns and Butter. For the US, using data from 1929 to the present, this doesn't work. Yes, in recent decades, Republicans have been more military oriented than Democrats. However, FDR was president during WW2, Truman was president during Korea, and the bulk of Vietnam occurred under LBJ. (FDR and LBJ had monster growth, Truman had crummy growth.)

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Prof. Barkley Rosser at Econospeak makes a few observations on the changes in the Middle East as they relate to oil producers. (Dan here...An oil shock in prices of crude oil would be problematic for the economic recovery we all hope for.)

Gordon Adams via Capital Gains and Games takes a look at the military side of the budget that is being sidestepped by most in the deficit spending whirlwind of claims and political negotiations happening on Capitol hill.

Re-posted from New Deal 2.0 with permission from the author

Liberal Fallacies: Protecting Social Security from its ‘Friends’
by L. Randall Wray

Liberal attacks on Social Security are the unkindest cut of all.

The Center for American Progress’s Matt Miller has argued that liberals can learn a valuable lesson from NY Governor Andrew Cuomo’s proposed budget. With his state facing a fiscal crisis, the Governor has proposed to cap growth of state spending on the Medicaid program. Miller has argued that we should follow his example and apply a similar cap to Social Security spending.

Briefly, New York’s Medicaid spending was slated to grow by 13%, much faster than the overall inflation rate. Governor Cuomo has proposed to ignore funding formulas and to limit growth to 6%. Miller wants liberals to follow that example by changing Social Security’s formula used to adjust benefits.

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by Linda Beale

David Cay Johnston on Stiffing the Working Poor
crossposted with Ataxingmatter

David Cay Johnston, former New York Times tax reporter and now a columnist at Tax Analyst's Tax Notes, writes this week about  the way both the Obama White House and the Republican party conspire to provide every-increasing benefits through the tax system to some while stiffing the working poor.  Download David Cay Johnston. Obama and the GOP United Against the Working Poor. TN 14Feb11.

The beginning paragraphs make the critical points.

The tax compromise passed in December has been hailed everywhere as a payroll tax cut combined with an extension of the Bush tax cuts, despite the fact that it raised taxes on a third of Americans. The killing of Obama’s Making Work Pay tax credit, which the White House called the biggest middle-income tax cut ever, and the replacement of it with the Republicans’ payroll tax cut raised taxes on single workers whose wages come to $20,000 or less and married couples with less than $40,000 in wages. That’s 51 million taxpayers, the Tax Policy Center estimated.

[Two-thirds of the poorest quintile had a tax increase of $134 (about 1.3% of total cash income), whereas] at the top, just 1.8 percent of the top 1 percent ([those with] more than $564,600) were hit with a tax inrease.  Just 1.3 percent among the top tenth of 1 percent ([those with] more than $2 million) got a tax hike.  These best-off one in 1,000 Americans got a tax cut worth on average $45,000 each, all financed with borrowed money.

Crossposted at The Street Light.

The more I get to know this recovery, the more I’m starting to like it.

Yes, it’s been rather standoffish, giving the cold shoulder to millions of unemployed Americans. And true, through much of 2010 it was maddeningly elusive, never giving us confidence that it was here to stay. But the more data I review from the second half of 2010, the more I start liking what I see. Particularly because the data suggests to me that this recovery, while not roaring, is being built on a solid foundation, and therefore has the potential to grow into something pretty meaningful as this year progresses.

There are four things in particular that make me guardedly happy about this recovery.

More below the fold...

Key European CDS are starting to turn in the more northern direction again, as the German-French 'pact for competitiveness' faces near-unanimous pushback across Europe.

Credit default swaps (CDS) are a market security used by investors to buy 5-yr protection (in this case) against default (or the like). As the spread rises the implied probability of default does too. Current market values imply a 39% probability of default by the Irish sovereign (listed in legend), 20% by that of Spain, and 14% by the Italian sovereign, etc. Cash bond spreads are blowing out again, too, where Spain now must pay a 216 bps premium over Germany on a 10-yr loan (the sovereign bond). I'd say that's not totally irrational.

I completely understand why these negotiations are stalling. I'm Spain - it's not clear that Spain commented against the pact based on this article, but I digress - why would I agree to a deal that forces more 'competitive' measures, which really just means quashing indexed wage growh, reducing the government deficit, adhering to a fiscal policy rule (which, by the way should be modeled after Germany's debt brake), and adopting a standardized tax rate? Okay, I will if you (Germany) will. Meaning, I'll increase my competitiveness by stripping away aggregate demand if you allow prices to rise. I'm Germany - no way. (Please see my previous post which argues that a successful transition to a more stable Eurozone depends on higher Germany inflation.)

Der Spiegel spells it out pretty succinctly in an article that is now two weeks old but still totally relevant:

Germany will only agree to additional guarantees for the euro rescue fund -- as the Commission and other parties have called for -- if its partners approve its competitiveness pact.

Simply put: we (Germany) will only agree to eventually bail you out if you agree to our harsh demands at that time, or you agree to our harsh demands now. You're choice.

This political drama is far from over. (More exciting analysis below the jump)

(Dan here...Kantoos responds to Rebecca...http://kantoos.wordpress.com/2011/02/15/rebecca-wilder-on-eurozone-monetary-policy-and-german-inflation/ )

More below the fold...

Reposted from New Deal 2.0 with permission from author.

Deficit Hawks Down: The Misconstrued “Facts” Behind Their Hype
by James K. Galbraith

Economist James K. Galbraith attends a Pete Peterson-funded road show.

The Fiscal Solutions Tour is the latest Peter G. Peterson Foundation effort to rouse the public against deficits and the national debt — and in particular (though they manage to avoid saying so) to win support for measures that would impose drastic cuts on Social Security and Medicare. It features Robert Bixby of the Concord Coalition, former Comptroller General David Walker and the veteran economist Alice Rivlin, whose recent distinctions include serving on the Bowles-Simpson commission. They came to Austin on February 9 and (partly because Rivlin is an old friend) I went.

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The NYT moves deeply into delusion:

The rolling real estate crash that ravaged Florida and the Southwest is delivering a new wave of distress to communities once thought to be immune— economically diversified cities where the boom was relatively restrained.

In the last year, home prices in Seattle had a bigger decline than in Las Vegas. Minneapolis dropped more than Miami, and Atlanta fared worse than Phoenix. [emphasis mine]

Putting it politely, that is h*rs*sh*t. Anyone who was paying attention in the Atlanta area—or who has been paying attention to Georgia Bank Failures—has described the Greater Metro Area's housing prices (let alone Atlanta itself) as a bubble. (As I noted at the link above, one of our commenters, Nancy Ortiz, was all over this in June of 2009; and the old Business Week covered it in an article published in October of that year. Does the NYT believe that local banks fail for no reason? As Peter Carbonara wrote in the BusinessWeek piece:

One Material Loss Review released today, for example, describes the death throes of FirstCity Bank, which had $297 million in assets and was based in Stockbridge, Georgia, a town not far southeast of Atlanta. FirstCity, like many other banks in the metro Atlanta area, partook of the state's late, lamented enormous real estate boom, making a large number of loans to local builders. When the boom turned into a crash in 2007, those loans turned bad. The bank failed on March 20. [emphasis mine]

Minneapolis is another clear case where the locals were talking about a bubble back in late 2006/early 2007. Commenter TrickStar was all over Minneapolis at Barry Ritholtz's place it in November of 2008. (Indeed, by March of 2010, the S&P/Case-Shiller Index was claiming a "recovery" for Minneapolis [link is PDF]. Talk about "green shoots.")

That same PDF&again, from 11 months ago, using January 2010 data—discusses Seattle, which had the fifth-largest drop in housing prices during 2009. And that was over a year ago. As the Seattle Bubble blog noted, things only got worse last year.

SEATTLE UPDATE: Even David Leonhardt piles on. Hint to the NYT: Institutional Memory is an Asset only when used. If you need someone to run your Knowledge Management division, give me a call and we'll talk.

In short, anyone who was paying attention knew that all three cities were prime examples of housing bubbles. The idea that the NYT's best economics writer doesn't is frightening at best.

To riff on a phrase from Brad DeLong, Why Can't We Have a Better-Informed Press Corps?

by Linda Beale

New Program for Offshore Accounts
crossposted with Ataxingmatter

As I mentioned in earlier posts, the IRS has released information about a new voluntary disclosure program for offshore account holders.  The last program, which closed in October 2009, provided a low penalty of 20% of the highest aggregate balance in offshore accounts for the various failure to file information returns (FBAR and others) and elimination of any risk of a 75% fraud penalty or criminal prosecution for those accepted into the program who 'truthfully, timely, and completely" comply with their disclosure obligations under the initiative.  This one is only slightly harsher, with a 25% aggregate-balance penalty.  Participants would also pay a 20% accuracy-related penalty on any tax underpayments for relevant years.

The information is available on the IRS website under "How to make a Voluntary Disclsure under the 2011 OVDI (standing for "Offshore Voluntary Disclosure Initiative") and in a new Q/A on the website, 2011 OVCI frequently asked questions and answers.  Generally, a taxpayer (or representative) asks the IRS criminal investigation division for a "pre-clearance".  If granted, it essentially means that the taxpayer is not already a person of interest to the IRS for offshore accounts.  Then the taxpayer has thirty days to comply with the reporting obligations by filing an "offshore disclosure letter".  That letter discloses the source of the funds, informs the IRS if the taxpayer or related entities are under audit or criminal investigation, and estimates the highest values and income of the offshore accounts for the years between 2003 and 2010.  The taxpayer has to reveal the country, institution, contact at the institution, date account opened, information about any entities connected with the account(s), and details of all meetings and other communications with the account institution and with other advisers about the account.  Once accepted into the program, the taxpayer must make a "full" voluntary disclosure by August 31, 2011--this includes filing amended returns, paying the prescribed penalties, providing complete information on facilitators of the offsore accounts, and filing a closing agreement with the IRS.

More below the fold...

by Mike Kimel


Canadian economic growth is about two percentage points higher under Liberal governments
Cross posted at the Presimetrics blog.

Frances Woolley has a piece in Worthwhile Canadian Initiatives that begins like this:

Canadian economic growth is about two percentage points higher under Liberal governments. At least, that's what my colleagues Stephen Ferris and Marcel Voia found in their recent article in the Canadian Journal of Economics (earlier ungated version here).

This is a large impact. For example, if the economy was growing at 1 percent under a Conservative government, switching to a Liberal government would increase the predicted GDP growth rate to around 3 percent.

If you've been reading my blog posts, or Presimetrics, the book I co-authored with Michael Kanell, you'll recognize this is about the same conclusion that can be drawn about the United States.

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David Beckworth points to Scott Sumner, who points to Kantoos on the effectiveness of nominal income targeting in Germany. Kantoos' illustration certainly suggests that the ECB has been successful in getting the dynamics of output and prices (nominal GDP) right over the last decade.

I have no contention with the historical evidence. Whether or not the historical data supports an effective nominal GDP target is trivial compared to the suggestion that the ECB will tolerate a pickup in German nominal GDP going forward. Wage pressures and lower unemployment will lead higher nominal GDP, but will likely increase German inflation as well; this will set the stage for tighter, rather than accommodative, ECB policy.

Although Kantoos did acquiesce that the ECB doesn't officially target nominal GDP, he didn't, in my view, give this simple fact enough face time. The ECB is the most hawkish of the G4 central banks. As you can see from the histogram of inflation over the last decade, the central tendency is very strong at 2-2.5%.

As the histogram shows, the ECB rarely institutes a policy rule that drives inflation above its stated objective: "the ECB aims at inflation rates of below, but close to, 2% over the medium term." The ECB's reaction-function to German price pressures will be of utmost importance, given Germany's 26% weight in Eurozone inflation.

Kantoos and David Beckworth posit that the 2% wage growth achieved due to highly competitive German industry (see reference at end of post) is evidence that the ECB targeted nominal GDP and nominal per-capita GDP effectively. In contrast, I would argue that the ECB's had it pretty easy, where the recession simply delayed the inevitable tightening that would have occurred in favor of the 2% inflation target.

(Read more after the jump)

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