Tuesday, November 17, 2009

Economics 101

The utter failure of the Obama administration to reach out or listen to progressive economists - economists who tend to be right on most issues when you can look at them in hindsight - is a big problem.
Nobel economist Joe Stiglitz didn't receive invite to Obama "Jobs Summit" either

I reported the other day that Nobel laureate in economics Paul Krugman had not received an invite to President Obama's "Jobs Summitt" in early December. I now have an update from Anya Schiffrin, Joe Stiglitz's wife, who just emailed me (the email is real, we know each other):

I saw your post mentioning Joe. We never saw an invitation. It is possible they sent one and it didn't get passed on to us, but I am guessing he was not invited.
I wrote the White House a letter:
As a strong supporter of President Obama, I have great difficulty understanding why your administration consistently fails to include world class, progressive economists like Dr. Krugman and Dr. Stiglitz as key outside advisors on economic issues. They tend to be right on the issues, when we are able to look at them in hindsight. For example, they were both right on the need for a larger stimulus plan.

So why in the world are they not invited to your December jobs summit? The last thing I expected of an Obama administration was a tendency to exclude viewpoints that might be politically or ideologically uncomfortable.

Do you really think that behaving like the Bush administration is a good thing?
So why, exactly, is the WH not inviting this guy?
It’s the stupidity economy

OK, maybe a more polite way to say it is this: bad ideas are acting as serious constraints on policy.

We’re in a liquidity trap, with interest rates up against the zero bound. This means that conventional monetary policy isn’t sufficient. What should we do?

The first-best answer — that is, the answer that economic models, like my old Japan’s trap analysis, suggest would be optimal — would be to credibly commit to higher inflation, so as to reduce real interest rates.

But the key thing to recognize about this answer is that it’s all about expectations — the central bank only has traction over expected inflation to the extent that it can convince people that it will deliver that inflation after the liquidity trap is over. So to make this policy work you have to (i) convince current policymakers that it’s the right answer (ii) Make that argument persuasive enough that it will guide the actions of future policymakers (iii) Convince investors, consumers, and firms that you have in fact achieved (i) and (ii).

In reality, we haven’t even gotten anywhere near (i): the conventional wisdom is still that any rise in expected inflation above 2 percent is a bad thing, when it’s actually good.

So some readers have asked why I’m not making the same arguments for America now that I was making for Japan a decade ago. The answer is that I don’t think I’ll get anywhere, at least not until or unless the slump goes on for a long time.

OK, so what’s next? The second-best answer would be a really big fiscal expansion, sufficient to mostly close the output gap. The economic case for doing that is really clear. But Washington is caught up in deficit phobia, and there doesn’t seem to be any chance of getting a big enough push.

That’s why, at this point, I’m turning to what I understand perfectly well to be a third-best solution: subsidizing jobs and promoting work-sharing.

Call it constrained optimization, where the constraint comes from the power of bad ideas.

Yglesias: State Budget Deficits


I’m not really sure how the view that ARRA is somehow causing a malign delay in necessary and beneficial structural adjustments can really survive contact with this analysis of federal aid to state budgets from the Center on Budget and Policy Priorities. As you can see here, there’s pretty clearly an awful lot of adjusting taking place even with the ARRA money pouring in. Looking at this it’s pretty clear that we should have provided a lot more money for FY 2009 and FY 2010 in order to forestall the need for mid-crisis fiscal contractions from state government. That still would have left states facing massive FY 2011 and FY 2012 shortfalls in which any positive things that you may think follow from state budget cuts could have happened.

These details aside, I can’t help but think that it would be really nice to see some work done on clever things the federal government could do on a systematic basis to prevent (or discourage) the boom/bust cycle in state budgeting. I’m not really sure what kind of constitutional limits may exist, but this poor budgetary behavior is a perennial macroeconomic problem. It’s also a kind of serious political problem, since the tendency of boom/bust budgeting is to make anyone who happens to be governor during a boom (see George Pataki or George W. Bush or Charlie Crist) look like a brilliant innovative governor while anyone who governs through a bust (see John Corzine, David Patterson) looks like a fool. The reality is that it’s easy to be a successful pragmatist as long as economic growth lets you cut taxes, hike spending, and then stick someone else with the structural imbalance when the next recession hits.

Krugman: Fiscal perspective

It’s truly amazing, and depressing, how completely deficit-phobia has swept the field in Washington. The economy remains in deeply dire straits: here’s long-term unemployment:

DESCRIPTIONBureau of Labor Statistics

Yet the respectable thing, all of a sudden, is to claim that we can’t possibly afford to spend any more money on job creation.

History says differently. Here’s a comparison of debt/GDP levels, actual levels for several countries (OECD for Belgium, IMF for the rest), and projected levels (from the IMF) for the United States. (Note that these are for general government, i.e., including state and local, so they’re higher than the numbers you usually read).


Yes, we’re going fairly deep into debt. No, it’s not unprecedented. Other advanced countries have been substantially deeper in debt without either defaulting or having runaway inflation — and some of those countries have historically had weak governments (Belgium because of the linguistic divide, and Italy because it’s Italy).

I’d be a little more forgiving of the nonsense if all the people screaming about the deficit were sincere. And some are. But many, if not most, are perfectly happy to incur huge unfunded liabilities for the wars they want to fight, and/or to eliminate inheritance taxes for the heirs of multimillionaires. It’s only deficits incurred to help working Americans that get them all moralistic.

Anyway, the point is that the economy desperately needs more help — and yes, we can afford to provide it.

Chris in Paris (AmBlog): TARP recipients falling behind on payments

Especially in light of the soft touch on Wall Street, this is very troubling. Neither the Bush administration nor the Obama administration has had the stomach to be firm with the financial industry despite their deep responsibility for the recession. Maybe it's wishful thinking or perhaps too many have bought into the Wall Street centric view of the world. Wall Street is important for the future growth of the US but we can't overlook the severe damage that they inflicted on everyone else.

To repeat, rescuing the financial industry had to be done. There is little doubt that the recession could have been much more painful without the bailout. The terms were all too often botched, which is why we are seeing failures, more money and a two-tiered financial industry based on the haves and have-nots. (Goldman Sachs, obviously is on the "haves" list.) So will the banks will be treated differently from individuals who can't meet the terms of their agreements. Surely they will, but this round needs to push back against the banks instead of providing a wish list for the banks. As we are seeing from AIG and others, the initial round was about as poorly implemented as possible. Unfortunately, the current team were leading the first bailout so it's hard to imagine any major improvement or lessons learned. Washington Post:

Officials poured about $700 billion into investments in scores of companies, from giants such as the automaker General Motors and the insurer American International Group to smaller regional banks. Of them, 46 had missed required dividend payments to the government as of the end of September, according to the inspector general overseeing the program.

On Nov. 6, United Commercial Bank of San Francisco failed, becoming the first recipient of the Troubled Assets Relief Program, or TARP, to collapse. The cost to taxpayers: $299 million.

Analysts expect more bailed-out firms to fail in the months ahead. Others may survive but will struggle to repay the government. Steven Rattner, the former head of the government's efforts to bail out the auto industry, said recently that the full public investment in GM is unlikely to be repaid. Meanwhile, AIG is dismantling itself, selling healthy subsidiaries at what critics say are bargain prices in an all-out effort to get cash to repay the government.
John Cole: Thick as Thieves

More good news about the Goldman boys and Tim Geithner:

The Federal Reserve Bank of New York gave up much of its power in high-pressure negotiations with the American International Group’s trading partners last year, according to a government report made public on Monday.

Just two days before the New York Fed paid A.I.G.’s partners 100 cents on the dollar to tear up their contracts with the insurance giant, one bank volunteered to take a modest haircut — but it never got the chance.

UBS, of Switzerland, alone offered to give a break to the New York Fed in the negotiations last November over how to keep A.I.G. from toppling and taking other banks down with it. It would have accepted 98 cents on the dollar.

But UBS’s good-faith gesture was quickly drowned out by Goldman Sachs and the top French bank regulator. They argued, with others, that it would be improper and perhaps even criminal to force A.I.G.’s trading partners to bear losses outside of bankruptcy court.

The banks and the regulator were confident that the New York Fed was not willing to push A.I.G. into bankruptcy, because earlier in the fall the New York Fed had stepped in with $85 billion to prop up the insurer.

The New York Fed, led then by Timothy F. Geithner, who is now the Treasury secretary, therefore had little leverage in the negotiations, according to a post-mortem of what has emerged as the most inflammatory episode in the rescue of A.I.G.

In the Army, we had a saying called “Fuck up, move up.” Looks like that sure was the case for Geithner. And you just have to love the sense of entitlement from the Goldman boys- it would be illegal for them to not get paid in full! And, because of who they are and where their people are in our government, the gambit worked.

I seriously think Goldman Sachs and the folks like them are the biggest threat to the future of this country, but since they own everyone, they’ll just keep siphoning off the money until the nation collapses.

tristero: 49 Million Americans
I am so glad that Wall Street is on track for such huge bonuses this year. That's because they can use all that money to buy food for the 49 million Americans - 49 million Americans! Jesus! who "lacked consistent access to adequate food" by the end of the Bush administration.

49 million Americans. Shameful. Shameful!

And check this out towards the end:
“Very few of these people are hungry,” said Robert Rector, an analyst at the conservative Heritage Foundation. “When they lose jobs, they constrain the kind of food they buy. That is regrettable, but it’s a far cry from a hunger crisis.”
49 million Americans have been "struggling with hunger" - as the director of the food center who sponsored the study says - and all conservatives can say is, "Hey, that's not so bad."


My God, that anyone takes conservatives seriously on anything simply boggles the mind. 49 million Americans can't eat well on a regular basis - not won't, but can't - and this asshole pooh-poohs the problem. (By the way, you might want to Google "Robert Rector Heritage Foundation" for a good idea of how wrong someone can be. Authoring flawed studies on immigration. Advocating worthless sex education programs. He's one more extreme-right conservative clown clone.)

Let's look closer at the situation. Here's a pdf of the report and and here are a few details from the introduction:
On a given day, the number of households with very low food security was a small fraction of the number that experienced this condition “at some time during the year.” Typically, households classi´Čüed as having very low food security experienced the condition in 7 or 8 months of the year, for a few days in each of those months. On an average day in late November or early December, 2008, for example, an estimated 1.1 million to 1.4 million households (0.9-1.2 percent of all U.S. households) had members who experienced very low food security, and children experienced these conditions in 86,000 to 111,000 households (0.22 to 0.28 percent of all U.S. households with children).
The report says that a "small fraction" of those with "very low food security" are suffering badly on a given day. That is not cause for celebration or relief. To understand exactly what this statistic means we have to personalize it. There isn't a single person reading this blog who wouldn't be appalled at the prospect, let alone the reality, of "having very low food security... in 7 or 8 months of the year, for a few days in each of those months."

That is what Heritage's Robert Rector dismisses. There is only one appropriate and measured response to him: Fuck you, Rector.

All Americans should be ashamed that this is how low the richest, most powerful nation on earth has sunk. True, Bush and Cheney drove this country off a cliff, but it is our collective country, not theirs alone, and this is simply unacceptable. They caused the economic conditions that caused this, but we must address the food access problems that resulted and do so immediately (and seek criminal charges, where appropriate, against those who caused this misery). To the extent that hunger in America - or "food insecurity," to use the euphemism - is not among the most important of our national issues, that is the extent to which this country has had its moral compass warped by rightwing social ideologies, including the ideology of greed.

And man, of man, 49 million Americans struggling with hunger is damned warped.

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