The lead article in the current AER is available here (gated, apparently, though the link isn't working; h/t Tom Bozzo [on FB] and Brad DeLong; I was using the paper copy). The most interesting part so far: the authors only considered the documented costs of air pollution—not land, not water—in deriving the (embarrassingly negative) ROI figures for coal and oil.

As Cousin Lucia and Tom Zeller, Jr., note today, the cost of water pollution makes oil power plants an even worse option.

In such a context, Europe in general and Germany (the top maker of solar panels until China recently passed them) in particular rubs in our faces that they're winning on the alternative-energy sources front (h/t Barry Ritholtz):

The 15 mile-per-hour winds that buffeted northern Germany on July 24 caused the nation’s 21,600 windmills to generate so much power that utilities such as EON AG and RWE AG (RWE) had to pay consumers to take it off the grid.

Rather than an anomaly, the event marked the 31st hour this year when power companies lost money on their electricity in the intraday market because of a torrent of supply from wind and solar parks. The phenomenon was unheard of five years ago.

More below the fold...

Brad DeLong points us to a post from The Nation on early Koch brothers and Hayek The Road to Serfdom!!

Yasha Levine and Mark Ames:

Charles Koch to Friedrich Hayek: Use Social Security!: [I]n early June 1973, weeks after [Charles] Koch was appointed president of the Institute for Humane Studies. Along with his brothers, Koch inherited his father’s privately held oil company in 1967…. Koch invited Hayek to serve as the institute’s “distinguished senior scholar” in preparation for its first conference on Austrian economics, to be held in June 1974.

Hayek initially declined Koch’s offer. In a letter to IHS secretary Kenneth Templeton Jr., dated June 16, 1973, Hayek explains that he underwent gall bladder surgery in Austria earlier that year, which only heightened his fear of “the problems (and costs) of falling ill away from home.” (Thanks to waves of progressive reforms, postwar Austria had near universal healthcare and robust social insurance plans that Hayek would have been eligible for.)

More below the fold...

by Mike Kimel

It has been a very long time since I looked at the National Review. Apparently it is still there.

Jonah Goldberg (apparently also still there) had a post that begins like this:

And now let us recall the “Fable of the Shoes.”

In his 1973 Libertarian Manifesto, the late Murray Rothbard argued that the biggest obstacle in the road out of serfdom was “status quo bias.” In society, we’re accustomed to rapid change. “New products, new life styles, new ideas are often embraced eagerly.” Not so with government. When it comes to police or firefighting or sanitation, government must do those things because that's what government has (allegedly) always done.

“So identified has the State become in the public mind with the provision of these services,” Rothbard laments, “that an attack on State financing appears to many people as an attack on the service itself.” The libertarian who wants to get the government out of a certain business is “treated in the same way as he would be if the government had, for various reasons, been supplying shoes as a tax-financed monopoly from time immemorial.”

If everyone had always gotten their shoes from the government, writes Rothbard, the proponent of shoe privatization would be greeted as a kind of lunatic. “How could you?” defenders of the status quo would squeal. “You are opposed to the public, and to poor people, wearing shoes! And who would supply shoes . . . if the government got out of the business? Tell us that! Be constructive! It’s easy to be negative and smart-alecky about government; but tell us who would supply shoes? Which people? How many shoe stores would be available in each city and town? . . . What material would they use? . . . Suppose a poor person didn't have the money to buy a pair?”

All that is true. But what Rothbard apparently didn't get, and no doubt Goldberg doesn't either, is that it goes the other way too. If people always got their shoes from the private sector, it would never occur to anyone that the government might provide shoes. Now it might seem stupid for the government to be in the business of footwear distribution, and in general, outside of the military, my guess is that it is.

But sometimes a different approach is what works. Sometimes when the government is doing things, it is doing them inefficiently and the private sector can do better. But sometimes it goes the other way. Sometimes when the private sector is doing things, it is doing them inefficiently and the government can do better. And sometimes, sometimes its a good idea for things to be done worse, and in a way that only the government can.

I'll give you an example. I've noted a few times that you can stroll into most car dealerships in Brazil today and buy a tri-flex car. That is, the same car can run on any mix of gasoline, ethanol and natural gas. (There are two fuel tanks - one for ethanol and/or gasoline and one for natural gas.) You can then drive that vehicle into any number of fueling stations and fill up with whatever fuel is going to get you the most miles (er, kilometers) for your dollar (er, real). The technology to run cars on a number of different fuels, which you won't see in the US for a very long time, is marketed under such exotic brand names as GM, Ford, Toyota, Honda, Volkswagen and Fiat to name a few. (Look 'em up if you haven't heard of 'em.)

I've posted on how it came to be that Brazilians have choices that Americans do not, namely to buy a tri-flex vehicle. The Brazilian government wanted to reduce the country's dependence on gasoline, but it realized that nobody would buy a car that ran on a fuel other than gasoline if there was no place to buy that fuel, and hence no manufacturer would make such cars. The government also realized that Shell and Esso and Texaco (remember them?) weren't going to start selling other types of fuel because there weren't enough cars on the road that could use those fuels. But the Brazilian government owned an oil company that had a chain of gas stations. One fine day, that chain of gas stations started selling ethanol even though there was no market for it. It wasn't profitable. It was insane. No private company would have done something that stupid. But the result, a few decades later, is that about 80% of cars sold in Brazil in 2010 were flex-fuel. Guess what percentage of cars sold in the US in 2010 were tri-flex?

Rothbard would never approve of what the Brazilian government did. Neither would Goldberg. Personally, I like having choices. I wish I could pick among three different fuels for my car and go with whichever is cheapest. I suspect that in a few decades, when that technology finally arrives in the US, Goldberg might like having those choices too.

By Linda Beale

Disaster Aid Disaster Averted, barely.

Once again, Republicans intent on obstructing the normal operation of the federal government unless they can extract cuts to programs they don't like (in the name of deficit reduction) applied the combination of House recalcitrance and Senate anti-majoritarian filibuster to threaten a government shutdown and siderail needed funding for emergency assistance to ordinary Americans until they could get at least some of their objectives. A compromise that will get money to FEMA and keep the government funded for a spell has been reached.

(AP video at ataxingmatter, see link...I am still mostly missing my internet connections)

Think Progress carries quotes from the Presidential contenders and election slogans

The release of this plan immediately spurred the natural Republican tax apoplexy, with the GOP presidential candidates decrying tax increases as a surefire way to destroy jobs:

MITT ROMNEY: President Obama’s plan to raise taxes will have a crushing impact on economic growth. Higher taxes mean fewer jobs – it's that simple. This is yet another indication that President Obama has no clue how to bring our economy back.

RICK PERRY: President Obama’s plan is a bait and switch that offers more than a trillion dollars in higher taxes for a promise of temporary tax relief…Worst of all, the Obama plan fails to provide the certainty employers need to create jobs.

More below the fold...

by Mike Kimel

There's a story going around in the news about a new prostate cancer drug. Here's press release:

A life-extending new drug to treat patients with advanced prostate cancer, developed by The Institute of Cancer Research (ICR) and The Royal Marsden Hospital, has received its UK license.

Abiraterone acetate, marketed by Janssen under the trade name ZYTIGA®, has been shown in clinical trials to prolong survival for men with advanced prostate cancer. An estimated 10,500 men in the UK have advanced prostate cancer that has become resistant to standard hormone treatments.

The once-daily pill officially launches in the UK today after the European Commission earlier this month approved it for the treatment of metastatic prostate cancer. Abiraterone acetate was licensed for use in combination with the steroids prednisone or prednisolone, by men whose disease has developed resistance to conventional hormone therapies and docetaxel-based chemotherapy.

Abiraterone acetate is a new type of treatment for prostate cancer that works by blocking the synthesis of testosterone in all tissues including the tumour itself, not just the testes. This testosterone would otherwise continue to fuel prostate cancer growth and spread. Abiraterone was discovered at the ICR in what is now the Cancer Research UK Cancer Therapeutics Unit and further developed at the ICR and The Royal Marsden.*

The ICR's Chief Executive Professor Alan Ashworth says: “This drug was discovered in the UK at The Institute of Cancer Research. Its launch is the culmination of immense hard work and dedication by scientists and clinicians here and around the world. To have reached the point where thousands of prostate cancer patients will be able to benefit from this life-extending treatment is hugely rewarding.”

Royal Marsden Chief Executive Cally Palmer says: “The development of abiraterone by The Royal Marsden and the ICR highlights the national importance of funding pioneering cancer research. We are delighted our patients at The Royal Marsden have been among the first to benefit from the very latest in drug development.”

Another quote:

Results of a major international Phase III trial of almost 2,000 men jointly led by Professor Johann de Bono from the ICR and The Royal Marsden showed that patients given abiraterone acetate lived on average 15.8 months compared to 11.2 months for men taking a placebo. Pain also eased for a higher proportion of patients taking abiraterone, while side effects were easily manageable and reversible.

From the footnotes:

Cancer Research Technology assigned abiraterone acetate to BTG International Ltd, who in turn licensed it to Cougar Biotechnology Inc., now a member of the Janssen Pharmaceutical Companies.

Now, I'm not that familiar with British entitites, but as I understand it, a publicly funded university and its research hospital developed a new wonder-drug using grants from the public, a charity, and a formerly government owned but now private company. Commercialization rights eventually ended up with Janssen, a company owned by Johnson & Johnson.

How long will it be before Zytiga gets trotted out as an example of the European healthcare system free-riding on American research and who will be the first pundit to make that argument?

Angry Bear contributor Rebecca Wilder has begun writing her own column, The Wilder View, at the internationally prestigious Economonitor (Nouriel Roubini).

The Wilder View at Economonitor

Europe: Why the One-Size-Fits-All Solution Won’t Work and

Linking sovereign risk to corporate credit spreads in Europe

...and is interviewed and quoted by Floyd Norris in the New York Times.

Government Debt Doesn't Tell the Whole Story
New York Times by Floyd Norris

In Ireland, as in Spain, the government paid down debt while private sector grew,” said Rebecca Wilder, an economist and money manager whose blog at the ...

You can follow her there in the sidebar feed for other blog contributions.

Health Care Thoughts: No CLASS Act

The Community Living Assistance Services and Supports, aka CLASS, was to be an integral part of PPACA (Obamacare), providing a funding source for some part of long-term care costs.

When DHHS Secretary Sebelius declared she would have to fix the program because the poor design was not financially viable, the vultures started to circle. Now it appears the Obama administration is likely to abandon the program, due to the poor design.

Liberals will not believe me, but complexity is the enemy of successful implementation, and PPACA is too complicated to work.

Tom aka Rusty Rustbelt

(I don't agree with Rusty's notion that 'liberals' won't agree...comments after the jump)

Talk is called "Neat, Plausible, and Wrong: the Deluded Discipline of Economics."

I have to quibble with the "plausible" portion: there is no possible way to rationalize contemporary Microeconomics with any reasonable conceit that the Macroeconomics produced are "first-best" or anything similar.*

I doubt I'll be there at 5:00, but certainly by 6:00. Hope to see some of you there.

Any questions for Professor Keen can be emailed to me or put in comments.


*This may be the root of my disagreement with Brad DeLong, who learned Macro and Micro when it was still possible—barely—to envision a GUT of Economics, even in a (weak form, as it were) Arrow-Debreu world. In the past thirty years, the strange delusion that Arrow-Debreu actually reflects the world has come to dominant Micro—with the rather predictable adverse consequence that Macro has to be more-than-the-sum-of-the-parts—i.e., include a positive social aspect—to be the best of all posible current worlds. But a positive social aspect is not part of the NeoKeynesian** cant, so you end up, effectively, declaring (for instance) that Gary Becker is wrong and discrimination is a beneficial business practice.

**As I have noted before, in economics the phrase "neo" is added to the front of a word if you are putting forth a belief set that is diametrically opposed to what came before: neoClassical and neoKeynesian are the most obvious examples of this.

I have to support a fellow Rutgers-Newark alum. But I doubt my endorsement would be so eloquent as Buce's discussion of her.

Felix Salmon comments on media bias at Seeking Alpha:

But let’s not kid ourselves that there’s any particular reason why global stocks are falling. And especially, let’s not try to invent some spurious reason for the fall, be it broad and inchoate (“global economy fears”) or weirdly specific (“Federal Reserve pessimism”).
...
As a general rule, if you see “fears” or “pessimism” in a market-report headline, that’s code for “the market fell and we don’t know why”, or alternatively “the market is volatile and yet we feel the need to impose some spurious causality onto it”.

This kind of thing matters — because when news organizations run enormous headlines about intraday movements in the stock market, that’s likely to panic the population as a whole. They think that they should care about such things because if it wasn’t important, the media wouldn’t be shouting about it so loudly. And they internalize other fallacious bits of journalistic laziness as well: like the idea that the direction of the stock market is a good proxy for the future health of the economy, or the idea that rising stocks are always a good thing and falling stocks are always a bad thing.

Or, most invidiously, the idea that the most interesting and important time period when looking at the stock market is one day...

More below the fold...

Elizabeth Warren begins her campaign for the Senate seat in Massachusetts with:


(h/t Mark Thoma)

Also on MSNBC
(h/t reader eric)

by Linda Beale

The AMT: why we should retain it with minor reforms to protect the true middle class

A commenter on an earlier thread complained about the Alternative Minimum Tax (AMT), saying it should be abolished. He seemed somewhat misinformed, suggesting that the alternative to the AMT is better enforcement.It seems that it might be timely to remind readers about the purpose of the AMT, its advantages as well as its flaws, and the way that reform could reasonably be undertaken to better accomplish its purposes. The following is an edited excerpt of my response to that reader on this issue.

The purpose of the AMT is to limit the advantage from aggregating deductions and exclusions and other provisions that are of particular benefit to those with high incomes.

For background, readers may want to read my extensive article on the AMT, available on SSRN at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=726362. Or you can skim through the more accessible (and less dense) series of blogposts on the AMT based on the ideas and information in the article, titled "What Should Congress Do about the AMT?:

More below the fold...

The High-Frequency Traders who have been distorting the U.S. stock market and raising the costs for everyone else have had their pride wounded. After starting with a straightforward definition:

High frequency trading -- the use of computer-driven, algorithmic-based techniques to execute trades in a matter of microseconds -- is drawing scrutiny, but Wall Street argues regulators may be focusing on the wrong issues.

we quickly get the we-don't-like-our-name crowd:

"The term is widely used. Yet you never find a definition for it," said Chris Concannon, partner at Virtu Financial. "People have stats based on a term that has not been defined. How do you know that HFT volume in the US moved up to 63% without knowing what that term even means?" he asked.

Rarely do journalists make people stupider so quickly, outside of political reporting.

It gets worse:

Virtu Financial is often referred to a high frequency trading firm. But Concannon says he struggles with the definition. "The brand we like to fit under is electronic market making," he said. "we need to craft better terms," he added.

Other panelists also seemed reluctant to define themselves as high frequency traders. Adam Nunes of Hudson River Trading, said his firm, founded by mathematicians, considered itself a "quantitative trading" outfit....

It was a theme echoed later in the day by NYSE Euronext(NYX) COO Larry Leibowitz. "We have lumped anyone who does algorithmic trading into high frequency because so much of what algorithm trading does is high frequency," he said.

Gosh, the poor, suffering HFT traders who desperately want another name. But at least we know that Regulatory Capture is still enforced:

Gregg Berman, senior advisor to the director of the SEC's Division of Trading and Markets, said there was no "clear, identifiable" link between high-frequency trading and the volatility that was experienced in the global market in August. He called the debate over HFT's role, "high frequency theorizing", the Wall Street Journal reported.

Yep, it's all just theory (last link h/t Barry Ritholtz).

Brad DeLong and Matthew Yglesias report that operation Twist worked, because 30 year bond yields have declined since it was announced.

Brad "30y Treasury yield down 13 bps, 2y yield up 5bps. Exactly what you would expect with announcement of twist operation." So Brad why were you so sure that the 30y yield would not decrease by 12 or 14 bps ? Do you use "exactly" exactly according to the exact dictionary definition ?

Matt Yglesias also reports that it works. He didn't type "exactly" and showed a bar graph.

The latest from Bloomberg shows change from last close of +0.03% not -0.13 %

I actually don't know if this means -0.1 from the announcement or +0.03 from the announcement. I don't really care. 0.1 % one way or not will make almost no difference.

The answer to the question is no. Yglesias and DeLong did not give a hostage to fortune, because making a big deal about -0.13% is silly no matter what happens later.

OK Brad did say the FOMC did 10% of what it should have done. That is giving a hostage to fortune. - 1.3 % sure isn't enough but it is significant. +0.35 % not so good. So that is a hostage to fortune hanging from a linear extrapolation.

Possibly irrelvant figure on certainly tiny changes after the jump.

update: The figure shows the 2 days after compared to the day after. So the 30 year yield is lower than it was at the time of announcement. I have trouble with time zones. As I typed before when I didn't know for sure what day it is. Who cares ?

update II: Good thing I didn't give any hostages to fortune. The change in the 30 year Treasury bond yield Sep 20 to latest is now -0.4% which sure isn't negligible.

More below the fold...

Of the three Financial Services firms that were downgraded yesterday, the market appears to be sending a positive, er, Wells notice. Google Finance provides the details:

As regular—well, obsessive--readers know, I’m stealing a title from the sainthood-destined Michèle Tertilt.  But it seems appropriate—and a better title than “Engaging Boys and Men as Allies for Long-term Change”—for today’s Plenary hosted by Former Chilean President Michelle Bachelet.

We got a taste of this yesterday, on the panel hosted by Robin Roberts (now a host at Good Morning, America, apparently; I stopped paying attention to her career after she left ESPN, around the time I stopped paying attention to ESPN), when Dikembe Mutombo declared that having daughters had changed his worldview, no to mention a CGI member from the floor who reminded anyone who had forgotten that the doors that opened for Roberts herself were largely driven by the opportunities created by Title IX, If you treat half of the population as if it only consume and can never produce, you lose opportunities. When you stop doing it, opportunities open and the pie gets larger.

Gary Thomas Barker, the International Director of Instituto Promundo, notes that two-thirds of the men in the world don’t abuse women, and that we need to move closer to 100%, since abuse reduces chances of economic development (no matter how self-delusional the U.S. Supreme Court may have been), even if there were an excuse for it.

UPDATE: Market share corrected in the following paragraph; with thanks to Maggie Edinger at Hill & Knowlton for the correction and a link to this Reuters article discussing the company's plans in Afghanistan for this year.

Karim Khoja, Chief Executive Officer of mobile phone provider Roshan runs the largest telephone company in Afghanistan—with 6% 35% of the market—and notes that 55% of the people in Afghanistan (his potential customers) are women. But Roshan knew when going into the country that the financial decisions for the household are controlled by the men, so direct targeting of women would not work—until very recently.  The initial pitch was “know where your wife is.”  Three years later, there are women buying their own mobiles—with, presumably, the full knowledge and blessing of men who have seen and understood the advantage to themselves of having them doing so.

More below the fold...

by Mike Kimel

Recently I had the opportunity to speak to Professor David Cohen's class on the US Presidency in the Political Science department at the University of Akron.

My talk was structured around three questions involving some extremely simple recent economic history. None of the questions were trick questions.

The questions appear below.

---

Question 1. From 1980 to 1992, the top marginal tax income tax rate was:
-70% in 1980
-69.125% in 1981
-50% from 1982 - 1986
-38.25% in 1987
-28% from 1988 - 1990
-31% in 1991 and 1992

Given this pattern, which of the two graphs that follows do you expect shows the growth rate in real GDP over that period?

Figure 1 Option A

Option A: A few years after the first tax cuts, there was one year of unusually strong growth. Subsequent growth slowed a lot, and continued slowing as tax rates fell further.

or...

Figure 1 Option B

Option B: The more tax rates were cut, the faster the economy grew. And then Bush I broke his “read my lips, no new taxes” promise and the economy slowed again.

---

Question 2.
The following is the list of eight year administrations since 1929:
-FDR (1933 – 1941)
-Truman (1945 – 1953)
-Ike (1953 – 1961)
-JFK/LBJ (1961 – 1969)
-Nixon/Ford (1969 – 1977)
-Reagan (1981 - 1989)
-Clinton (1993 – 2001)
-Bush 2 (2001 – 2009)
(FDR's first 8 years are included, but the War years are left out. Also, Truman took over a few months into the term.)

It turns out that the degree to which each administration cut the tax burden (i.e., current tax receipts/GDP) during its first two years in office seems to strongly affect the growth rate in real GDP in the subsequent six years in office. (E.g., the amount by which Reagan cut the tax burden from 1980, Carter's last year in office, to 1982 seems to strongly affect the annualized growth rate in real GDP from 1982 to 1988.)

Which of the following two graphs do you think best explains the relationship that was observed between the change in the tax burden in the first two years of the administration and the subsequent growth in real GDP over the remaining six years?

Figure 2 Option A

Option A: Administrations which reduced tax burdens early on enjoyed rapid growth later. Administrations which increased tax burdens early had poor growth later.

or

Figure 2 Option B

Option B: Administrations which lowered tax burdens early on suffered through poor growth later. Administrations which raised tax burdens early had strong growth later.

---

Question 3
Reaganomics involved cutting taxes and reducing regulation. The New Deal (for our purposes, not including World War 2 years) involved tax hikes and increased government control over the economy. Which of the following two graphs shows the growth rate in Real GDP over the Reagan and FDR years?

Figure 3 Option A.

Option A. Growth was faster under Reagan than under FDR.

Figure 3 Option B.

Option B. Growth was faster under FDR than under Reagan

(ANSWERS AFTER THE JUMP)

More below the fold...

Brad DeLong cited this passage from Ron Suskind’s latest book on Monday:

Both [Christina Romer and Larry Summers], in fact, were concerned by something the president had said in a morning briefing: that he thought that high unemployment was due to productivity gains in the economy.

The same meme spread across the economics spectrum: Scott Sumner was horrified. Mike Konczal’s reaction (on Twitter) was restrained (“This is…depressing”) by comparison.

In the context of Suskind’s book, we might just assume that Obama was, as usual, being gulled by his handler Rahm and his Svengali, Timmeh Geithner. However, via Karl Smith, we can set to rest any doubt that Barack Obama is just being misled. Matt Yglesias catches a lazy piece of  “thinking” from the President—who has had Austan Goolsbee, Larry Summers, Peter Orszag, Alan Kreuger, Jason Furman, Jason Bernstein, and several others (even dissing Christina Romer, as the Now-Sainted-by-the-Press-for-his-Fairness-to-Women Obama explicitly did) to correct him:

In a June interview with Fox News, President Obama appeared to argue that the country is suffering from high unemployment because productivity enhancing technologies such at ATMs have reduced the need for work.  It wasn’t clear to me at the time if the president really meant that or if it was just a bad moment in an interview,  . . .

Team Obama has, I think, landed on a more sophisticated version of this theory, and that explains some of the reason why Romer & Summers aren’t in the administration anymore and haven’t been replaced by like-minded people. [link in original]

Now, Barack Obama “might not be particularly well-informed about economics” (Sumner), but I never would have thought he was that obtuse.

Let me talk for a moment about our shared experience. Obama was a year behind me in college. As a transfer student, he didn’t start with on-campus housing; he got a room in a flat in the mid-100s.  So he walked to school—past several banks, one of which was undoubtedly more than happy to open an account for a never-attended-public-school Ivy Leaguer who, even then, knew how to manage up. (Heck, they opened one for me, and I fail miserably at most of that description.)

And the one thing you got—whether it was Chase (back before Manny Hanny acquired it) or Citibank (before it became The Big C)—as a student, no minimum balance required, was an ATM card, usable (in the case of Chase) virtually any time in one of the three (3) enclosed ATMs.  They dispensed $5 and $10 bills.

(The “enclosed” is essential, not just for nighttime safety, but also for days of rain and snowses. Years later, in MBA school, we attended the presentation of a guest speaker, a prominent Georgian who had founded an “Internet bank.” He freely stated that he didn’t understand why some companies enclosed their ATMs; I put the now-bankrupt company on my “short” list immediately.)

That was thirty (30) years ago. Putting this as politely as possible, that’s a heckuva long time for “structural change” in employment to take effect.  To put it in context, I know hot type setters who have been out of that business for less time.

More below the fold...

Elaine Kamarck wrote an article in The Washington Monthly's blog "Ten Miles Square" entitled "NO Time to Go Wobbly on Welfare Reform"

Briefly for those who have not clicked the link, the article stresses that TANF (aka welfare) is a very small component of the social welfare safety net (as was AFDC before welfare reform). Kamarck argues that one would not have such a negative view of welfare reform if one considered the whole poverty assistance system. She presents data on the poverty rate and discusses its change over time. Then mixing political strategy and policy analysis, she argues that it would be very politically costly for Democrats to question welfare reform.


I agree entirely with the first claim, which is not related to the rest of the article (which discusses policy not politics and reality not the median voters' perception of reality).

The article contains factual errors. They are not minor.

More below the fold...

From my email (with formatting lost):

Ask the Experts: What's Next for the Economy?

It's a big week for the American economy. President Obama announced his plans to reduce the deficit on Monday, and Wednesday afternoon the Federal Reserve announces its new plan to boost growth. Do these proposals make sense? And what do they really mean for your money?

MoneyWatch editors Jill Schlesinger and Jack Otter will discuss in this week's live "Ask the Experts" webcast. They will be joined by economist and MoneyWatch blogger Mark Thoma.
• Where should you be investing now?
• Will any jobs be created this year?
• Where can you find a job now?
• Has the housing market finally hit bottom?
• What will it really take to restart the American economy?

________________________________________
If you have questions, concerns, or comments send an e-mail to AskTheExperts@MoneyWatch.com, or join the webcast via our live chat feature.
________________________________________
Don't miss Ask the Experts on Wednesday, September 21st, 2pm ET / 11am PT.

Lifted from comments on the housing situation by Spencer...Housing vs. Household formation. Of course the point also being...what is going to be the source of growth for US citizens?

kharris comments and adds another contributing factor on the housing market:

...Banks already have pretty nearly all the housing assets they care to have, thank you very much. If banks don't want more housing assets, then they won't lend much money against houses. That reluctance to lend is going to keep effective housing demand down, even if demographics are favorable.

And herein lies the problem. Housing demographics are responding to labor market conditions, and financial conditions. Each needs to improve, and the failure of either to improve limits improvement in the other. We traditionally rely on housing to lead recoveries, and there are self-reinforcing limitations on housing right now. Rather than overall growth responding to housing, this time housing needs overall growth. That means we need some other source of growth to lead.

In response to that situation, one party says "cut taxes and regulation and (mumble, mumble, mumble), and then the economy will be great and all our problems will be gone." The other party says "the best we can do is go small and pretend it's enough." There is no alternative source of growth in either of those.

This post is late in the game but might be handy. Certainly a lot has been said so far. American Jobs Act 2011 link and transcript of speech by the President.

Van Jones of Rebuild the Dream introduces the two presenters by noting that we are in the “post-Whale oil” strategy for liquid fuels; using algae and biomass technologies. Jonathan Wolfson, CEO of Solazyme, Inc. opens by thanking his investors and then stating,  “We make oil.”  He declares that oil is not going away, and is not going to be replaced; the choice is what type of oil we are going to use of the three types: petroleum, plant, and animal.

It’s fairly easy to figure out where he is heading.  As Van Jones noted, we tried animal, and we’re using petroleum now.  Peak oil is past or, at best, demand for petroleum is going to outstrip supply even if we find and refine more and more of it.

More below the fold...

This post was provoked by a moment of frustrated pique, another in a series of 'shakes cane at clouds' moments as this classic New Deal Liberal is driven to craziness by otherwise sensible social liberals who still fetishize markets. And yes I am pointing fingers right at Erza K, Matt Y and Kevin D. But in this case directly at Kevin and his piece today that should raise hackles at the very sight of its title: A Conservative Medicare Plan Liberals Could Love Here is the core proposal:

What to do? Via Reihan Salam, Yuval Levin proposes a revised version of Ryan's plan that's based on a genuine conviction that market forces can work. Each year, Medicare would define a minimum benefit level, and then providers in each Medicare region (there are four) would bid for business:

The level of the premium-support payment in each region for that year would be set at, for instance, the level of the second-lowest of the bids. Seniors would then be able to apply that amount toward the purchase of any of the plans on offer in their area. Thus, in each region, there would be at least one option that would cost less than the Medicare benefit, and seniors choosing that option would get the difference back as cash in their pockets; there would be at least one plan that cost the same as the benefit, so that seniors could obtain it with only the same out-of-pocket costs they have today; and there would be other plans that cost more (perhaps because they offered more, or because they failed to find ways to drive greater efficiency in their networks of doctors and hospitals) and for which seniors would pay an additional premium if they chose.

More below the fold...

President Clinton introduces the panelists, noting that there is a UN discussion of Libya scheduled for 10:00 a.m. and that they will have to leave quickly.  First up is Mexican President Felipe Calderón Hinojosa, about whom President Clinton is enthusiastic.

Calderon is less vibrant, but presents an impressive array of detail on Mexico’s unilateral reduction in carbon usage, noting that 26% of the energy used in the country now is from renewable sources.  Part of this has been accomplished by the simple things: a concerted consumer campaign toward replacing old refrigerators and light bulbs with modern ones.

President Calderon notes that much of the problem in developing countries has originated with cutting down the extant trees.  The Cancun meetings resulted in a new international agreement.  Today, we have a new challenge: continuing the Kyoto Protocol.  “Most important agreement and most important instrument”—saying this in front of President Clinton—needs leadership and mobilization of public opinion.

More below the fold...

[updates and edits, especially in the 4th-6th grafs]

"The winner" in Haitian development created 12,000 jobs in the garment industry in the past eight years in Haiti.  Seems as if all of the participants today will be garment manufacturers, though WJC notes that companies such as Coca-Cola and Newmont Mining are also considering investment.

When I sent an email out indicating that I was thinking of attending, the best response I got to questions you would like to ask was "Is Haiti doomed forever to be the developed world’s sweat shop? Will it ever be allowed to have an agricultural economy of its own?"

Only 43% of the aid pledged after the earthquake nearly two years ago has been disbursed today. (Take that, "shovel-ready" complainers!) WJC: “Haiti will not have a sustainable economy unless there are new investments, new jobs, and new business.”  President Clinton describes the disaster as “best opportunity in my lifetime” for the country.” (I’m guessing this is in the same way as education privatization has worked in New Orleans since Katrina.)  Most of the donor monies have not gone through the local institutions, but President Martelly is determined to have local government integrated in the discussions. 

More below the fold...

As with last year and the year before, I will be (as much as possible) at the Clinton Global Initiative, now with even more Social Media and Networking Goodness.

If you're here, say hello. If you're not, look for posts and peruse the offerings for the conference. If there's something you're especially interested in, email me or mention it in comments.

(cross-posted from Skippy)

I was going to write something about Reed Hastings's inane email, but Wired covered the main point, even if they did bury the lede:

However, it’s impossible to see how the split itself benefits customers. The price and plan changes that flustered many of them months ago remain in place, but the company now directs them to two web sites with two search indexes, two completely separate sets of recommendations, two entries on their credit card statements, and so forth.

More below the fold...

Recently there has been some discussion of housing in the economy that looked at housing starts versus the long term trend of housing starts and concluded that starts have been so far below trend over the last few years that it should offset the excess housing built before the recession.
If the excess housing stock has been worked down the stage would be set for a rebound in housing starts and stronger growth in construction employment.

I have major problems with that analysis that is based on the assumption that trend demand was the same as trend supply. Several variables enter into determining the demand for housing. A couple include income trends and interest rates. While these are important determinants of the short run cyclical trends in housing the factor that drive the long run secular housing demand is household formation. Moreover, there is a tendency to assume that household formation has a flat or rising trend because of population growth. But actually, the long run trend for household formation has been down. In the 1970s-80s the baby boomers becoming adults and forming their own household inflated household formations. In more recent years the baby bust after the baby boom and the poor economy has held household formation down as young adults have had to continue to live with their parents. Recently household formation has been roughly half what it was in the the 1970-80s.


If you look at the smoothed data it shows that housing completions is strongly tied to household formations. Basically the data implies that back in the 1970s-80s household formation was strong enough to justify annual housing starts and/or completions of over 2 million. But in recent years that has not been true.

More below the fold...

(Still cross posted from dKos. But since coberly and I have an extended colloquy there maybe not a bad place to start)
Part 1 was kind of a set-up in both senses of the word in that it didn't really deliver on the post title. But I think a necessary set-up and so lets resume.

When we left off we had Social Security after having a long period of positive cash flow from 1936 to 1956 and so a lot of pre-funding, leveling off in terms of Trust Fund Ratio through the 60's, only to go into some decline in the 70s. And if we return to Table VI.A2.— Operations of the OASI Trust Fund, Calendar Years 1937-2010 we can see a system that was by any measure you like very sick by 1981, and much sicker than today. Whereas the year end balance for OAS in 2010 still represented 4 full years of 2011 cost (TF Ratio of 400) the corresponding balance in 1981 was less than a fifth of a year (TF Ratio of 18). Action was imperative and the motivation was not Reagan's desire to tap into worker pocketbooks to fund tax cuts, as far as the Trust Fund was concerned it was the farthest thing from a piggy bank. Which gets us to our second set-up point: the Myth of the Reagan Raid. Onward and lowward (i.e. below the fold).

More below the fold...

by Mike Kimel

[UPDATE: Graphic title corrected below. h/t Eric Whitaker]

This post is the seventh in a series that looks at the relationship between real economic growth and the top individual marginal tax rate. The first looked at the period from 1901 to 1928, the second from 1929 to 1940, the third from 1940 to 1950, the fourthh looked at 1950 - 1968, and the fifth from 1968 to 1988. Because the Reagan era is so pivotal in the American psyche, it was also covered again in the sixth post, which looked at the period from 1981 to 1993. This post will look at the period from 1988 to the present.

Before I begin, a quick recap... both the 1901 - 1928 period and the 1929 - 1940 failed to show the textbook relationship between taxes and growth. In fact, it seems that for both those periods, there was at least a bit of support for the notion that growth was faster in periods of rising tax rates than in periods when tax rates were coming down. It is worth noting that growth from 1933 to 1940 was generally quite a bit faster than at any other peacetime period since data has been available, both on average and for individual years. Not remotely what people believe, but that's what it is.

In the 1940 - 1950 period, we did observe slower economic growth following a tax hike and faster economic growth followed a tax reduction. However, that happened when the top marginal tax rate was boosted above 90%.

Interestingly enough, though the so-called "Kennedy Tax Cuts" are often used as one of the prime exhibits on the benefits of cutting taxes, a look at the 1950 - 1968 period yields no such conclusion. Growth rates were already rising before the tax cuts occurred in 1964 and 1965, reached a peak when the tax cuts took place, and started shrinking immediately afterwards. The other period that is always pointed to as evidence that tax cuts spur growth is the Reagan years, which showed up in the 1968 - 1988 and the 1981-1993 posts. It turns out that put into context, the Reagan years produced one year of rapid but not particularly extraordinary growth a few years after tax cuts began. That's it. In fact, its worse than that... during the Reagan Bush 1 years, aside from that one good year, growth tended to shrink as tax rates were slashed.

Real GDP figures used in this post come from Bureau of Economic Analysis. Top individual marginal tax rate figures used in this post come from the IRS. As in previous posts, I’m using growth rate from one year to the next (e.g., the 1980 figure shows growth from 1980 to 1981) to avoid “what leads what” questions. If there is a causal relationship between the tax rate and the growth rate, the growth rate from 1980 to 1981 cannot be causing the 1980 tax rate. Let me stress this point again as I've been getting people e-mailing me to tell me I've got the growth rates shifted a year. That is correct, and is being done on purpose (and is shown on the graph labels). To avoid questions of causality, the growth rate in year X used in this post is the growth rate from year X to year X+1. And when I say "to avoid questions of causality" - you'd be amazed at how many people write me when I don't do this and insist that sure, higher tax rates seem to be correlated with faster growth, but that's because when growth is faster governments feel more willing to charge higher tax rates.

So here's what the period from 1988 to the present looks like [update: Graphic Title Corrected; h/t Eric Whitaker)

Once again, the data fails to show anything resembling the old "lower taxes = faster growth" story. In fact, once again, it kind of looks like things go the other way. The two biggest dips in the graph occur when tax rates are at low points (28% and 35%). The highest tax rates also coincide with the fastest overall growth. But no doubt next week's post looking at the next period will be the one that finally shows what everyone believes is there. Oh wait, we've run out of years.

Now, I'm sure someone will bring up the fact that there was a tech boom and the internet in the late 1990s. And no doubt there was some of that. But that doesn't explain why only once did the graphs appear to show that cutting tax rates correlates with faster economic growth, and that one time occurred in the middle of WW2 during what was essentially a command economy when tax rates were above 90%. Talk about a special case. Conversely, most of the other graphs that we've seen in this series have not shown any relationship between tax rates and economic growth. And then there were a few, such as those showing the Reagan era, that seem to at least suggest that faster growth was more likely when tax rates were higher. None of this matches what we hear in the liberal (ha ha) media. None of this matches what I see in econ textbooks. It doesn't match what I read in economics journals. But anyone, and I mean anyone, can do these graphs. Not sure many people can replicate Barro.

Next post in the series... what it all means.

As always, if you want my spreadsheets, drop me a line. I'm at my first name which is mike and a period and my last name which is kimel (note that I'm not from the wealthy branch of the family that can afford two "m"s - make sure you only put one "m" in there) at gmail period com.

(cross posted from Daily Kos Social Security Defenders Group)
There are three prevalent myths about the assets in Social Security Trust Funds, plural because there are two of them OAS-Old/Age Survivors and DI-Disability Insurance. The first myth, which comes mostly from the Right, is that those assets are just 'Phony IOUs'. The second myth comes mostly from the Left and is just a version of 'Phony IOU', that the assets of the Trust Fund were real but were raided starting with Ronald Reagan. I and others have dealt with these two before and I mention them only to dismiss them for now, though happy to discuss the ideas in comments.

The third myth, and the topic of this post is the idea that the Trust Fund assets were and are real and are just a big juicy target of Wall Street, that is that they have not been raided YET. Well this like the first two is based on a profound misunderstanding of the nature and operations of the Trust Funds since their inception. But to clear up, or even begin to, requires some tedious plodding through the numbers and concepts, but for those that do I hope you will understand with I used the descriptor and made the claim in the post Title. Oh and did I say there would be numbers? Continued below the fold.

More below the fold...

 By Daniel Becker

This is a bit of an interlude in my writing regarding the income tax of yore. Though, this does involve taxation. This is also a continuation in my postings regarding real world small business experiences. Yes, you are going to get to read about a real situation that involves a real small business and tax policy.

Before I mislead anyone, the taxes of concern are not about income taxation. Your business has to actually have an income for that tax to matter. I'm not talking personal income. I'm not talking capital gains taxes. Darn few honest to goodness small businesses ever have to worry about that in their daily activities. Maybe in the end you will have some capital gains after you pay yourself back all the personal money you put into your small business. I'm not talking payroll taxes cuts. Yeah, on what was a $100,000 payroll you gain maybe a couple thousand dollars, but on what was a ½ million business that is now 55% of what it was with payroll adjusted to match, it means little. I mean, that business is sure going to be hiring new people with that!

 Oh, just in case you think I'm off the mark, consider this poll from 11/10.   In the poll, 90% hired what was needed or fewer than needed. The catch: Only 1% hired because of the a new tax break. 41% were to replace an employee. When asked why they hired fewer than needed: 79% worried that sales or revenue would not justify more employees. However, 13% did hire because business was better. The lucky ones. So go ahead, keep giving me tax cuts, blah, blah, blah and all that monetary relief because that US Chamber of Commerce sure represents my thoughts and desires. NOT! Idiots!

Some perspective on small business.

“In 2009,there were 27.5 million businesses in the United States, according to Office of Advocacy estimates.The lastest available Census data show that there were 6.0 million firms with employees in 2007 and 21.4 million without employees in 2008. “

I know it is soothing to croon over the days when the Dodge Brothers, Ford, Colt, Walton and Gates were small and became major examples for their time of the American Dream of economic power. But really, the truth is most small business were and are people earning a living on their own vs working for Microsoft (the definition of part time abuse) or Walmart or GM, or GE or Boeing... They were huge numbers of small local retail. All gone. Small local banks? Going. Small local agriculture (RI used to have a state fair), forget about it.  Look around.

So lets get to the heart of it. First a bright spot. The flower shop had it's first month this year that was better than last year. August. No, I'm not assuming this is a trend and here is why.

More below the fold...

Buy Greek bonds.

I am very suspicious of proposals that the Fed do more to save the economy which do not specify what. They seem to be based on the idea that expanding Fed liabilities would be useful no matter what assets the Fed buys. I am convinced that Fed purchases are useful if and only if the Fed purchases assets which private investors fear. I think the QEII experiment supports this view.

Investors fear Greek government bonds. The Fed certainly has the legal authority to buy foreign treasury securities. It can save Greece any day it pleases. This would be good for the USA, because it reduces the risk of another world financial crisis.

There is no chance that the Fed will do this. I don't know why ?

I won't be saying anything publicly about this one. (Cue sighs of relief from ignorant economists.)

Kid Dynamite will.

by Mike Kimel

Following a merger, a few months ago I took a severance package from my most recent employer. Put another way, I became unemployed. I started looking for another job but without much luck. In the last few weeks, I've also started doing some consulting work with two clients. Its been sporadic but lucrative, and I'm trying to figure out how to ramp that up quickly. Having been a consultant before for eight years, I know the tough thing is always maintaining a strong enough stable of clients. (FYI, the work I've been doing has been economic analysis, business analytics, and litigation support. If you or anyone needs that sort of a skillset, drop me a line at "mike" period "kimel" at "gmail.com.") Fortunately, in addition to the consulting, we have some other income coming in and a fair amount saved up, so I don't need to get 100 mph immediately.

One of the drawbacks of being unemployed or an independent consultant involves health insurance. When I left my employer, I became eligible for COBRA. Here's my ongoing COBRA story. I'm going to change all names to protect the guilty and innocent alike. Call my former employer A, the COBRA administrator they use B, and my insurance company C.

A few weeks after I took the severance, A informed B that I was no longer with the company and thus eligible for COBRA. I had been checking B's website religiously because I'm kind of paranoid about lacking health insurance. So one day, I logged on and found that I was eligible. But there was a small problem - somewhere along the line, I had lost my dependents. So I called B, B called A, some other stuff happened in the background, a day or two went by, and when I logged in, lo and behold, my wife was now listed as a dependent. But there was a small problem - I also happen to have a (at the time) thirteen month old son. So I called B, B called A, some other stuff happened in the background, a day or two went by, and when I logged in, lo and behold, my son was now listed as a dependent. But there was a small problem - neither of my dependents was listed as having been on my insurance policies when I was employed, thus making them ineligible for COBRA coverage. So I called B, B called A, some other stuff happened in the background, and when I logged in, lo and behold, my wife was listed as having been on my health insurance. But there was a small problem - my son was not listed as having had health insurance, making him ineligible for COBRA. So I called B, B called A, some other stuff happened in the background, and when I logged in, lo and behold, both my dependents were listed as having been on my health insurance policy when I was employed. But there was a small problem - it seems that the records provided indicated that I had two spouses and no son. One of my two spouses, interestingly enough, had the same name, birthday and gender as my now non-existent son. The records, in other words, indicated that I personally was violating a nontrivial number of laws. So I called B, B called A, some other stuff happened in the background, and when I logged in, lo and behold, well, I couldn't find the mistake in the records. So I signed up for COBRA, and I put us on direct payment from my bank account.

All's well that ends well, no matter how much time is wasted. But I did mention that my insurance company, C, was going to be a part of the story, right? Today a letter comes in the mail. My wife had gone to a dermatologist. The dermatologist submitted the bill to C. C informed the dermatologist that we no longer had coverage.

So I called B. It was a lovely conversation. I was informed that, yes, they have been withdrawing money from my account, and yes, I am paid in full, but nevertheless, C's records do show us having no coverage. I was told B is calling C. I was told that in 24 to 48 hours I need to call C to see if they listed us as having the insurance coverage for which I have been paying. At some later point my wife or I will also have to call the dermatologist. Call me cynical, but I expect this is going to take a lot of time and interfere with my ability to generate income.

As an aside, in the past few weeks we've started looking at new insurance options. Interestingly enough, it seems that if everyone in the family is generally healthy, COBRA is generally not the best option.

Health Care Thoughts: Please do everything you can....

.... to keep mom/dad alive.

Physicians and nurses often dread these conversations. Any of us who have been on the family side of this know how agonizing it can be.

And I know even mentioning this can cause a firestorm.

However, there are some unsettling issues raised by these conversations, issues that are a sort of third rail of health care (and no there are no proposed death panels).

First, does this attitude increase suffering? Many of the elderly have 4 - 10 major diagnosis (COPD, CHF, PAD, diabetes, a-fib, etc. etc.) and very little quality of life. Especially problematic is the ping-pong that often occurs between the hospital and the nursing home (families often see a transfer to the hospital as a magic bullet, physicians often give in).

Second, Medicare is paying for a great deal of hospital care that may have very little value.

No one wants the government making these decisions, but at some point the care is futile and often painful. Some patients and families deal with these issues well, others do not.

For my part, I have a health care POA, a living will, and everybody in the family knows the course of action I want in various situations. Ditto for Mrs. R. It is still tough though.

Tom aka Rusty Rustbelt

In August real average hourly earnings fell fell -0.6% as nominal wages fell -0.1% and the CPI rose a stronger than expected 0.4%. On a year-over-year basis real average hourly and weekly earnings are down -2.4%.

With real wages falling so steeply no wonder the retail sales report was weaker than expected.
I continue to stick with my position that with wage growth so weak the economy can not sustain accelerating inflation. Higher inflation will lead to a weaker economy, not an inflationary spiral.

More below the fold...

by Mike Kimel

Speaking Engagement

If anyone is in the Akron, Ohio area and has any interest, I will be giving a guest lecture at David Cohen's American Presidency class on Monday Sept. 19. The class runs from 12:05-12:55 in Leigh Hall 510.

I'll be talking about Presimetrics, the book I co-authored with Michael Kanell. I've prepared a few slides which I'll make into a post after the lecture.

by Rebecca Wilder

I present some basic statistics to highlight the problem in Europe. In short, there exists a deleterious positive feedback loop between overly leveraged banks and their sovereigns in key markets.

Exhibit 1: European Banks are overly levered. Spanning 2006 through the latest data point, key European banking systems - France, Germany, and Italy - increased leverage.

The chart above illustrates the ratio of bank assets to capital (see the IMF's Financial Soundness Indicators for the data and description of 'capital'). The countries are ranked by largest % drop in bank leverage spanning the period 2006 to current (Greece, Austria, and Belgium) to the largest % surge in leverage spanning the same period (France, Italy, and the UK). Note: the 2006 data is taken from the 2007 IMF Global Financial Stability Report.

The level of leverage is not strictly comparable across countries due to differences in national accounting, taxation, and supervisory regimes. However, while the US banks have delevered over the period, the big European banks - Germany, Italy, and France - have increased leverage. Assets need to be written down.

More below the fold...

Some of you may remember that last cycle I sometimes posted charts showing real exports and imports versus trend to show how trade was doing. It is now over two years since imports and exports bottomed so I thought It was time to update those charts for this cycle. But as I started looking at the data I made a very interesting discovery.

Real petroleum exports -- both crude and refined product -- are exploding. After being flat for years, petroleum exports have been growing at some 33% to 50% rates since 2006. They have leaped from about $2 B (2005 $) to over $5 B (2005 $). This is a significant development that few people have recognized.

To but this in perspective, petroleum exports had been a relative small factor in trade and the economy for years. For example from 1994 to 2005 petroleum exports had fallen from a sum equal to about 10% of petroleum imports to under 5%. But they now amount to almost a third of petroleum imports.

More below the fold...

The Census Bureau has released estimates of poverty in 2010. Coverage focused on the headline poverty rate which is horrible enough. Much worse, 6.7% of people in the USA suffered severe poverty, that is lived in households with income less than half the poverty line. This is the highest severe poverty rate on record (the series only goes back to 1975 -- I don't know why).

Look at Table Five.

I blame welfare reform. Yes the severe recession and slow recovery is a major factor, but the 2010 ratio of the severe poverty rate and the poverty rate is 0.444 which is also the highest on record. That ratio is a crude way of looking at the effect of welfare reform.

Like the poverty rate, the severe poverty rate goes up in recessions, goes up when inequality increases and goes down when per capita income grows. However, the pattern is very different with a long term trend of increasing severe poverty and no correspond trend of the headline poverty rate.

More below the fold...

The current low level of long term interest rates is creating all types of debate about what it is suppose to signify and what investors are discounting.

Maybe they are not signaling anything and it is just a return to normal for interest rates. For example, from 1871 to 1960 long Treasuries were below 4% some 75%of the time. Over the long sweep of history very low rates were more the norm than the high rates of recent decades. Maybe the recent history was the exception and we are now just returning to a more normal level of rates.

More below the fold...

by Mike Kimel

The Effect of Individual Income Tax Rates on the Economy, Part 6: 1981 - 1993

This post is the sixth in a series that looks at the relationship between real economic growth and the top individual marginal tax rate. The first looked at the period from 1901 to 1928, the second from 1929 to 1940, the third from 1940 to 1950, the fifth looked at 1950 - 1968, and the sixth from 1968 to 1988. Because the Reagan era is so pivotal in the American psyche, though it was covered in the last post, I intend to focus on it again. The last post included the lead in to Reagan's term, this post contains the follow-up to his term. In this post I'll look at the period from 1981 to 1993.

Before I begin, a quick recap... both the 1901 - 1928 period and the 1929 - 1940 failed to show the textbook relationship between taxes and growth. In fact, it seems that for both those periods, there was at least a bit of support for the notion that growth was faster in periods of rising tax rates than in periods when tax rates were coming down. It is worth noting that growth from 1933 to 1940 was generally quite a bit faster than at any other peacetime period since data has been available, both on average and for individual years. Not quite quite what people believe, but that's what it is.

In the 1940 - 1950 period, we did observe slower economic growth following a tax hike and faster economic growth followed a tax reduction. However, that happened when the top marginal tax rate was boosted above 90%.
Interestingly enough, though the so-called "Kennedy Tax Cuts" are often used as one of the prime exhibits on the benefits of cutting taxes, a look at the 1950 - 1968 period yields no such conclusion. Growth rates were already rising before the tax cuts occurred in 1964 and 1965, reached a peak when the tax cuts took place, and started shrinking immediately afterwards. The other period that is always pointed to as evidence that tax cuts spur growth is the Reagan years, which showed up in the 1968 - 1988 post. It turns out that put into context, the Reagan years produced one year of rapid but not particularly extraordinary growth a few years after tax cuts began. That's it.

More below the fold...

Yesterday in the New York Times Greg Mankiw -- a professor of economics at Harvard, an advisor to the governor of Massachusetts, in the campaign for the Republican presidential nomination and a former Chairman of the Council of Economic Advisers under president Bush -- had a column in which he argued that a cut in the corporate tax rate would induce greater investment. This is a key premise of Republican campaigns that has driven Republican policy since the early 1980s. The article is here.

We should look at the record and see how well such cuts to corporate taxes actually has worked.

First, average corporate profits versus tax business pays. Contrary to the statutory rate of 39% widely quoted, the effective rate corporations actually pay is now about 22%. That is down from about 50% in 1950 and a local peak of some 44% in the early 1980s. The right likes to compare the statutory rate to other advanced countries statutory rate and claim that the US has about the highest corporate tax among advanced countries. But according to a recent study by the US Treasury the US effective rate is in about the middle of the pack of effective rates for advanced countries.

More below the fold...

by Mike Kimel

Can someone explain to me why people volunteer at for-profit hospitals? I can understand volunteering at a not-for-profit hospital, but how is volunteering at a for-profit hospital different from, say, volunteering at Exxon-Mobil or Wal-Mart?

NYTBR, 11 September 2011

Ten years ago today, nineteen people, including fifteen Saudis--using funding from the House of Saud and led by a distinguished member of that House--used airplanes to attack the U.S., destroying the World Trade Towers, damaging the Pentagon, and being prevented from attacking the White House only by the heroic efforts of passengers on board the fourth plane and a suicide mission by an unarmed U.S. fighter jet.

Fortunately, there was quick action from President Bush and his Administration. They detained all fourteen of Osama bin Laden's relatives in the United States, interrogating each. This was followed by the execution of surgical strikes within Afghanistan, where Osama bin Laden himself was hiding. By the time Special Forces troops captured him in the caves near Tora Bora, in part due to intelligence gained from his relatives, domestic uprisings and U.N. support led to the overthrow of the Taliban government.

More below the fold...

by rdan

Angry Bear and I have reached an understanding regarding the blog and decision making. He has been referred to as owning the blog, as much as it can be with such a rowdy group, and has agreed to transfer this ownership to me, sort of the Bill Gates giving over to Steve Ballmer analogy, to use AB's words.

If I was to devote more time to the blog's expansion and look, I felt that the originator of AB should give the go ahead to transfer ownership his blessing as respect for what he created, the goodwill built to his initial retirement and after, and the material I would like to steal from the days of AB, pgl, and Kash that I was not a part of.

I want to acknowledge cactus as a pivotal player over the last several years as continuing this excellence. As I told him in an e-mail, I still ask myself 'What would cactus do?' when faced with executive decisions regarding the blog.

I look forward to working with this noisy bunch of people with a great deal of pleasure, trepidation which I will not expose very often, and learning.

If either one of us had earned the same money as Gates or Ballmer, we would not be here with you today. You guys are so lucky!

Dan

One of the current Republican talking point is that a major reason that firms are not hiring is regulatory uncertainty.

Of course there is little or no evidence to support this argument and virtually every poll of business and especially small business shows that fear of regulation is a very minor factor in current business decisions. The dominant factor in poll after poll is inadequate demand.

ON 11 June 2004 Milton Friedman published an interesting article in the Wall Street Journal Editorial Page called "Freedom's Friend" [reprint available here], where he proposed that the number of pages in the Federal Register could be used as a measure of government's interference in people lives and a measure of freedom.

More below the fold...

Lifted from comments from Spencer's post on Productivity and the stock market

Dan Becker:

Mike Panzer at Financial Armageddon has been on the issue that the "street" is missing all that is going on around them. From his blog: http://panzner.typepad.com/

However, I wonder if a new paper, From Keeping Up with the Joneses to Keeping Above Water: The Status of the US Consumer from the BlackRock Investment Institute,

If long-term leverage sustainability is assumed to reside near 1990 levels, then the bulk of the deleveraging process remains ahead of the American consumer, regardless of the income measure used...

We think that these trends, coupled with stubbornly high unemployment, higher commodities prices, and slower growth in wages and salaries, will likely contribute to a lower level of personal consumption growth over the next few years. Moreover, since consumer spending is a key component of the GDP growth rate, this would argue for generalized economic growth levels that are, at best, modest for years to come, and may in fact appear anemic when compared to pre-crisis growth rates.

Spencer

I have believed for years that the US is following the Japanese model.

But note that while the general belief is that the Japanese government policy has not stimulated the economy, the alternative might very well (be the) belief that Japanese policy may be preventing a depression.

I still think Obama is toast—a result of his own making, since he’s really the apotheosis of a government-hating Republican who never tries to do anything because he’s afraid it would succeed.  He’s basically Jon Huntsman, economic policy and all, with a slightly better social policy—or at least a willingness not to try to compete globally in the 21st century using employment policies that were outdated in the 19th. (Short version: you might be able, in general, to exclude 55% of your potential workforce—women and gay men—if you have the population of an India or a China. You can’t do it when you have 1/3 or less of their population; you need a market that is open to everyone, which means you need social policies to match.)

But there are way in which he is a Bad Republican (traditional definition—think Gerald Ford’s Presidency), and those, as much as anything else,are what has destroyed his re-election chances.  Not to mention U.S. employment data.

I’d like to think I’m wrong, but let’s look at the data, comparing the last three recessions: the ones with so-called “jobless recoveries.”  In the grand tradition of Mitt Romney, let’s look at job growth over the following 24 months.*  First, the Private Sector:

The first thing we notice is that The George W. Bush-Mankiw-Hubbard “Recovery” Really Massively Sucked for U.S. Private Sector Employment.** Two-thirds of those post-recession months were negative, and the negatives were more than 1/3 again worse than the gains.  Even the 24 months that follow the 1980 recession—half of which were the first 3/4 of the 1982 recession—show a net positive gain in Private Sector Employment.

But the second thing is that the Obama Administration really isn’t doing that poorly in Private Sector Employment. It’s rather similar to the George H. W. Bush Administration.***  The loss months are slightly more severe than the gain months (about 5%), but there are 2 gain-months for every loss-month.  It’s still a “jobless recovery”—as was the post-1991 era—in that producing slightly over 1,000,000 jobs in a 24 month period is falling behind the growth in available workers, but it’s not a disaster, if the criterion is the recovery of private-sector hiring.

Sadly for BarryO—again, I consider this what the tennis-playing Brad DeLong calls an “unforced error,” a direct result of the errors of his priors—there is also employment in the non-private sector.  Which both Bushes knew that, the “small government Democrat” appears not to:

On a proportionate basis, George H. W. Bush oversaw as large a post-recession expansion of Government workers as Barack H. Obama has overseen a reduction in those workers.  This is even before one considers that at least three of those six positive months—a figured dwarfed by W’s 15 months of public-sector worker increase, let alone his father’s 19 months—are due to temporary hiring of U.S. Census workers. March, April, and May of 2010 show net gains because of Federal hiring that is more than completely reversed by September.  Great “Recovery Summer,” that was!

But if we really want to be fair to Barack Obama, we would have to break this down further.  After all,while the data is national, the breakdowns are not always so:

Federal government employment—now including the ever-expanding Department of Homeland Security, and with a military that continues to fight (at least) three wars—has been essentially flat during the “recovery”period.  The damage has been done extensively at the State and, especially, Local levels.

Part of this is simply that the 2007-2009 recession was longer and deeper than the other two (18 months long v. 8 for each of the previous two; more than 7.5 million private-sector jobs compared to just over 1 million in 1991 and just under 2 million in 2001).  That’s a lot more time and a lot less money flowing into taxes and budget-balancing requirements.

But if I were Barack H. Obama, and if I really wanted to be re-elected, the speech I would be giving tonight wouldn’t be about extending tax credits or capital amortization credits—with or without the idiocy of budgetary offsets—but direct state aid. Billions of dollars of it.  Without offsets. The speech would run something like this:

The latest few years have been difficult for you.  Almost every state in the Union has to balance their budgets, and with record levels of unemployment and job losses, that’s not easy to do.  So they made decisions that affected you, your children, and your friends. They laid off police officers, firefighters, teachers, librarians, surveyors, road repair personnel, and trash collectors. They’ve cut back hours at the DMV, Social Security, and Employment Offices.  They’ve made it more difficult to get an appointment to get health insurance for your children, support to buy healthy food for you and your children.  Your classrooms are more crowded, your property taxes are higher, and you’re getting less for your money while you have to put in more effort.

The Federal Government doesn’t have to balance its budget, and the bond market has given us a rare opportunity to borrow money for less than it will cost us.  I plan to take full advantage of that now, so that your children will have food, your streets will be safer, your opportunities for education will be greater, and the services for which you pay will be more available.

The private sector is rebuilding and restaffing, but that will—as it has in the past, as it almost always does—take time.  But they cannot rebuild if there is no demand, and you cannot demand things if you cannot pay for them. So, along with $1T in infrastructure improvements to be made over the next 15 years, I will tomorrow send a bill to Congress to triple the total of the two previous grants-in-aid to the States that were made as part of the ARRA.

Now you have heard many people—and to my shame, I am one of them—who live in fear of deficits. They pretend that the government “has to be like a family”—a family that never takes out a mortgage, never borrows to buy a car, never needs a loan to pay for schooling or training, and never uses a credit card.  I’ve seen families like that. They live on the streets of Honolulu and New York City and Chicago and Washington, D.C., and Richmond, Virginia, and Cincinnati, Ohio, and Detroit, Michigan, and Paint Creek, Texas.  They’re impoverished.

The United States is not impoverished, and I will not allow it to become so. We will rebuild opportunity now and build our superhighways—information and otherwise—for life in the 21st and 22nd Centuries.  The bankers—grateful for the bailouts that have been heaped upon them by my predecessor and myself—are willing to loan us money for less than the cost of inflation. We would be foolish not to borrow.  Even as those of you who can are refinancing your houses, the U.S. government will—as families do and should—borrow now to make a better life for our children and their children.

We have a unique opportunity. We have massive unemployment because the states do not have the money to employ and hire workers—workers who help keep our streets and homes safe, who keep our roads in good condition, who educate our children, who find us opportunities for work and ways to keep us healthy so that we can do that work.  And the bankers are telling us, “We will give you that money for free!”  And some people are telling you that we should not take that money.

We have given the bankers enough.  Now, they are willing to Pay It Forward, to give some small portion of that money back to us for less than it will cost them to do it. I intend to take that money and use it to make a better present—and the chance for a better future—for the American family.

Yeah, I want a pony, too.

*All data following derived from FRED(R).
**Let us leave aside whether this was a feature or a bug of that Administration
***It is left as an exercise that GHWB was a one-term president.

Simon Johnson comments on Standard and Poor's irrational ratings:

Standard & Poor’s downgrade of United States government debt last month has been much debated, but not enough attention has been devoted to the fact, reported last week by Bloomberg News, that it continues to rate securities based on subprime mortgages as AAA.

In short, S.&P. is suggesting that these mortgages are more creditworthy than the United States government — a striking proposition. Leave aside for a moment that S.&P. made a big mistake in its analysis of the federal budget (as explained by James Kwak in our blog). Just focus on all the things that can go wrong with subprime mortgages: housing prices can fall, people can lose jobs, the economy may fall into recession and so on.

With all of the problems I have been having with my internet connection I may have missed it, but the revisions to second quarter productivity did not seem to have been covered very well.

But nonfarm productivity growth is slowing sharply. It was actually negative in the first and second quarter ---0.6% and -0.7% in the first and second quarters, respectively -- and the year over year change is now only 0.7%

Moreover, productivity lagged two quarters is a great leading-concurrent indicator of real GDP growth. Productivity growth now implies that the second half will be weak. This is in sharp contrast to the still consensus expectations of a stronger second half.



With weak productivity growth, unit labor costs is moving up sharply. Moreover, the increase is due almost exclusively to the weak productivity, not rising compensation.


Unit labor cost is now rising more faster than the nonfarm deflator. The spread between unit labor cost growth and price growth is a primary determinate of profits growth and it is saying
that profits expectations are still too high-- Standards and Poors, for example, is still carrying
a bottoms up forecast of some 20% EPS growth for 2011. The recent stock market volatility
-- it's interesting that stock market is only volatile when it is declining, not rising -- appears to stem largely from investors revising their earnings expectation down. Moreover, the productivity data implies that this downward revision is not over.

More below the fold...