Thursday, December 13, 2012

Fox Business to Federal Reserve: Destroy the Economy, Please!


Well, I'm back from my lengthy hiatus. Sorry about that, real life intervened in the form of final exams and papers and all that. Apparently now I have a degree in economics, or something. Take that for what it's worth, I suppose. In any case, I just finished reading an article on Fox Business in which the author writes about the growing calls by some for the Fed to raise interest rates in order to boost the economy. Yes, you read that right--contractionary monetary policy will benefit the economy right now. Their reasoning is that the current Fed policy of very low interest rates is "punishing savers" and thus is hurting the economy. This is a common criticism of Fed policy right now, and I think it ought to be debunked, because it is misleading at best and downright dangerous at worst.

The article's thesis, such as it is, goes like this:
"The argument holds that interest rates held at a range of 0% and 0.25% for over four years -- and with no end in sight -- combined with open-ended asset buying programs designed specifically to push long-term rates such as mortgages lower are beginning to take their toll on the broader economy by shrinking household incomes such that consumers are being forced to cut back on spending."
I wasn't sure at first what the author even meant in the last part of that, since he provided no reasoning behind why household incomes would shrink because of low interest rates. Then I realized that what he really meant by "household incomes" was that the policy punishes savers:
"Kelly suggested these households would stand to benefit if the Fed started gradually raising interest rates. Higher interest rates would potentially increase their household income, allowing them to spend more, which would ultimately drive up demand for goods, generate jobs and lead to economic growth."
Again, there's not much explanation of precisely how higher interest rates would do any of this. The only inkling of an explanation is that somehow higher interest rates would allow households to get slightly higher returns in their savings accounts and thus have more money to spend. But there are two issues with this seemingly tortured logic: yes, households might get a little more of a return off of a savings account if rates were a few percentage points higher, but businesses would start laying people off if rates were hiked--remember the early 1980s? So that same family that started getting 2% interest paid on their savings account would suddenly find themselves without jobs. Needless to say, their incomes probably wouldn't be higher if that happened.

The other issue with the "punishing savers" line of reasoning is that it doesn't account for what "saving" really is. When people save money, they basically buy up an asset--it could be anything from stock in a company to a plot of suburban land--and they hold on to it in the hopes of selling it later for a profit. If the economy does well over the next several years, say, because of low interest rates at the Fed, your "saving" will also do well--you'll be able to sell a lot of those assets for a profit. Now imagine, if you will, that the hard-money brigade rolls up to the Federal Reserve building in Washington and Ron Paul demands higher interest rates, and rates are raised. Suddenly the economic outlook doesn't look so hot--consumption plummets, general demand in the economy takes a nosedive as firms cut back on hiring and investment, and construction sputters to a halt. What do you think happened to the value of your assets when those rates were raised? That's right, they've gone way down in value. 

Now which of those two policies do you think punishes  the bulk of savers more? The answer, I hope, should be fairly obvious now.


Thursday, November 15, 2012

Europe in Crisis, Part 93814


Well, as you may have finally heard, Europe stopped teasing us with the prospect of recession and cut straight to the chase today, finally contracting by 0.4% last quarter and officially entering a recession. Although this new-found distinction is meaningless in the grand scheme of things since Europe's been on the ropes for years now, it gave me an excuse to write about it. Also, I'm doing a presentation on the Eurozone today and felt like sharing some of my discoveries.

My particular presentation is about the European Central Bank's (ECB) reaction to the crisis. Or is it crises, now? Anyways, up until Mario Draghi announced his unlimited bond-buying program, I've felt that the ECB's reaction to the crisis was incredibly inadequate. More specifically, I think that its monetary policy has been far too tight. I would say that there are probably two reasons for this:
  1. Germany's fear of/hatred of inflation in any and all forms.
  2. The price index that the ECB uses to gauge inflation has a fairly severe flaw.
The first reason is one that I've explained before, so I'll outsource on it:
"The Germans, of course, have an almost paralyzing fear of inflation, one which brings up images of wheelbarrows full of cash being used to buy bread, as well as the rise of Hitler and the Nazi Party. While the bit about wheelbarrows is true, the fact is that hyperinflation had little to do with the Nazi Party's rise to power. Hyperinflation ended in 1924 in Germany, and Hitler wasn't sworn in as Chancellor until January of 1933. Might there have been something happening during those nine years? Something of the "Great Depression" variety? Via Clayton White:
"Inflationary finance did not bring about the Nazis; mass unemployment did. Crushing debt burdens owed to foreigners did. Foreign mandates imposed in a beleaguered population did. THAT'S the kind of environment that leads to radical leaders whose messages of spite and hatred can take root."
Between 1924 and 1929, the German economy was pretty prosperous, by the way. So Germany ought to get its facts straight, lest the rest of Europe pay an even higher price just because the members of the Bundestag didn't pay much attention in history class."
The second reason is probably far more interesting (to me, at least). The ECB's inflation target is to achieve a yearly increase in consumer good prices of around 2% a year. That's fair enough, I suppose. Here's the issue though: the price index they use doesn't include house prices. There's an obvious problem with this, of course. You all might have heard a little something about housing prices plummeting around 2008. So what's the implication for the ECB's monetary policy?

Well, without including depressed housing costs into their price index, the ECB is overstating the overall level of inflation in Europe. This, in turn, has led them to be far more fearful of actually easing monetary policy, to the point of not even cutting interest rates to zero percent! So it isn't as if they can't ease at least a little bit more, it's just their fear of inflation which is exacerbated by their faulty price index. To help illustrate matters, here's a graph of two different measures of inflation in Europe, one with housing prices and one without them:



The graph below is also pretty informative, too. You'll notice that the Eurozone has fallen way below trend on inflation.



Of course, I'm not arguing that all of that disparity is due to housing prices, but you can't realistically deny that some of it is. 

All of this leads me to conclude that money in Europe during the crisis has been too tight. Sure, interest rates are low, but interest rates are fairly meaningless when they're not put in context. For example, interest rates in Europe were cut during the crisis, which means money was easier, right? If money is easy, you'd expect a growth in the overall money supply, right?

Exhibits A and B:



This is of course, not to confuse the difference between the monetary base and the money supply. Just as an aside, the monetary base is the total money "printed" by the central bank, whereas the money supply is all of the money in the economy. The point of using the total money supply rather than the monetary base here is to show that the central bank has failed to ensure stable money supply growth that is critical to economic growth. But I digress...

Anyways, if the ECB wanted easier money, shouldn't the money supply have started growing faster around late 2008, not slower? There's a notable shift to slower money growth there, which is really the only meaningful way to know the stance of monetary policy, as you'll see below.


And this graph, inspired by Clayton White does a great job of illustrating my point: interest rates fell along with the growth rate of the money supply. South Park best explains my sentiments on this:



Money is loose, they said! Interest rates are at historic lows, they said.

Friday, November 9, 2012

Do Guns Make Us More or Less Safe?

I know this is unrelated to what I usually talk about on this blog, but I had a flash of curiosity last night and decided to take a look at gun policy. As someone who doesn't really have a strong opinion one way or the other, I feel like I'm more impartial than your everyday NRA or Brady Campaign advocate. So, in the interests of pseudo "science," I ran a crude regression comparing data on gun ownership rates in the 50 states vs rates of firearm deaths in each state to see what I'd find. Well, here are my results, take them as you will (click to enlarge):



As you all know, correlation doesn't imply causation, but I was curious so I ran the regression anyway. Any thoughts on this?

Sources here and here.

Update: I've re-run the regression using more up-to-date data, you'll find the new sources above. Ultimately, the results are pretty much identical, but I thought I'd be more careful with the data. In my second run-through, I tried to find out if Excel could label the data points for each state, but apparently the only way is to manually input the labels, which is just horribly time-consuming. In any case, I've uploaded my spreadsheet with all of the data, for those of you interested in each individual state's data. Also, if you hate Google's formatting of the file online, you can go to the top right of the screen after opening up the spreadsheet and hit File > Download to open it on your computer.

Wednesday, November 7, 2012

Lessons From This Election


I'm sure all of you know by know who I've been rooting for to win in 2012. I'm also sure you know who did win last night. No, Barack Obama isn't my ideal candidate, but is anyone ever really? I'm sure the Republicans felt that way about Mitt Romney, who, had he run as the so-called Massachusetts Moderate, would have actually had a chance against the President, not to mention actually making my time at the ballot box a bit less of a no-brainer. In any case, I'm not here to gloat (mostly), I'm actually here to draw several lessons that ought to be learned from this election, and to give my insight on what's to come in America. (Hint: A socialist wasteland isn't at the top of that list.)

Anyways, first up is things I've learned from this election cycle. At the top of that list is that the Citizens United decision, which allows for unrestricted and undisclosed private contributions to political campaigns (think SuperPACs), has ultimately had little effect on the outcomes of a lot of races. Case in point: I live in Ohio, which Jon Stewart affectionately dubbed to be a "swing-state hell." Well, he was right. Outside of its importance in the Presidential race, Ohio also played host to a contentious Senate race between incumbent Democrat Sherrod Brown and challenger Josh Mandel. What ended up happening here is that SuperPACs supporting Mandel outspent those supporting Brown by five to one. Thanks for all of those ads, guys, really. Anyways, the point is that even with all of that big spending from the Roves and Kochs of the world, Josh Mandel still lost. Now, maybe if Mandel had been a better candidate he'd have had a chance, but the fact remains that huge amounts of outside spending didn't seem to actually move the needle one way or the other, especially if, you know, the candidate is well-liked by a lot of Ohioans.

Moving on then. The second big thing that you ought to take away from this election is that Fox News has the predictive power roughly equivalent to that of a crone reading goat entrails. No, but seriously, many people (including and especially the Romney campaign) came into this election cycle sure, just so sure that any challenger to Barack Obama would be a shoo-in for President. They were so sure that four years ago America had lost its collective mind in a bizarre torrent of hope-y change-y optimism and voted in a closet socialist. Not quite. This is probably the biggest mistake that those on the right made this cycle. Well, that and continuing to nominate people who are completely, utterly insane (see: Mourdock, Richard and Akin, Todd). Indeed, Fox News, as they so often do, perpetuated a kind of alternate reality in which Romney would sweep this election, no sweat, as voters overwhelmingly rejected Barack Obama's big government agenda and his tepid recovery. And people bought that story. I legitimately hope that this comes as a lesson to news organizations like Fox and the National Review. Being so utterly out of touch with reality will at some point come back to bite you. And so it has, on a grand scale: if Florida keeps going the way it is, Obama will have won every state he did in 2008 with the exception of North Carolina and Indiana. Oracles of Delphi, they aren't.

In any case, let me wrap this up with a few thoughts of what's to come in America. It is important to point out that with a split Congress, I'm not terribly confident that much will be agreed upon if Republican obstructionism persists as it has since 2009. Perhaps being roundly defeated in a presidential race they thought was a shoo-in will have jarred a few of them into being reasonable again, I hope so, but I guess we'll have to see. Rather, the most important things that will unfold under Obama's second term have already passed: the Affordable Care Act and the Dodd-Frank financial regulation. More importantly, as Matt Yglesias so wisely pointed out yesterday, whomever wins will preside over a growing economy and their policies will be vindicated. In this case, Barack Obama will be the one who is vindicated, and I'm not ashamed to admit that I'm glad of that.

With that, I leave you with undeniable proof of widespread voter fraud (From the movie Gangs of New York):





Thursday, November 1, 2012

My Voice, Talking at You.

Sorry to all you readers out there who have missed my commentary on the latest political and economic news over the past week or so. In an effort to make it up to all of you, I've got something of a special treat lined up. Drum roll please...Tomorrow evening, between 7-8 PM Eastern time, I will be on the radio, having a spirited, free-flowing debate with a Romney supporter on "The Pregame Show with Mike and Dan." It should be a lively discussion, and you all should definitely tune in to hear me (hopefully) translate my blogging skills into masterful debating skills.

No, but really, you ought to tune in and listen to the debate. It'll be a good one.

P.S. The link above goes live at 7 pm Eastern Time tomorrow evening and I'm told that the show will re-air at 5 PM EST on Saturday as well, in case you missed it the first time around. 


I assure you, this is what I look like on the air.

Tuesday, October 23, 2012

The Chinese Currency Boogeyman


A quick few comments on last night's debate, mostly about Obama and Romney's mutual obsession over China's currency manipulation:

  • Tariffs are a bad way to "get tough on China." Obama and Romney have both supported this policy. The President has bragged in an ad about how he slapped a tariff on cheap Chinese tires to save American jobs. Here's the problem: that's an awfully expensive way to save a handful of American jobs. According to one study, the cost to consumers of that tariff was $1.1 billion--that is, about $900,000 per job that was saved. And Romney, instead of offering a critique of this policy based on the benefits of free trade, has attacked Obama for not making the tariffs big enough
  • This issue has largely stopped being relevant over the past several years. China's real exchange rate has risen dramatically because of domestic inflation and their trade surplus has gotten much, much smaller:

Frankly this was, if anything, an issue for 2008, not 2012.

The problem here is that neither of the candidates are offering a policy that would really help America's economy. If anything, as I pointed out above, their proposed policies would likely hurt the economy, because tariffs are effectively just a tax on our collective purchasing power. If the candidates really want to help Americans, they should probably talk a little more about their respective jobs programsOh, wait.

Sunday, October 21, 2012

Week of Weeks

Sorry to disappoint everyone, but the next week or so will feature limited, if any, posting, as I've been swept up by midterms and problem sets galore. I also won't be able to host my customary live-blog of the debate tomorrow. Posting will probably pick up again sometime after October 29th. Have a good week, everyone.


Wednesday, October 17, 2012

The MUSS Method and John Taylor


In a recent blog post, Economist John Taylor makes the comparison between our current recovery and previous U.S. recoveries. He argues that our current recovery, which he calls "unusually weak," is not, as economists like Ken Rogoff and Carmen Reinhart have argued, slow because it was caused by a financial crisis. He argues that Rinhart/Rogoff's original work is inapplicable to the U.S. because it largely covered financial crises in foreign countries. Instead, he asserts that poor policy-making is what holds our recovery back, and that an observation of previous U.S. financial crises and their recoveries proves him right.

As evidence of this, he uses research from Michael Bordo and Joe Haubrich to show that previous recoveries from American financial crises have been much, much faster. Specifically, he uses this chart:
Definitive proof, right? Here's the problem: at first glance, a number of these recessions listed weren't even caused by financial crises. For example, the 1973 recession was largely an oil-price supply shock. The 1981 recession was caused by the Fed. And those are just the ones I personally know about off the top of my head! In response to Taylor's arguments, Ken Rogoff and Carmen Reinhart released a new paper as a rebuttal, in which they compare actual financial crisis-induced recessions in the U.S. (not things like 1973 and 1981!) and their subsequent recoveries to our current recovery. This chart encompasses their findings:
At worst, the U.S. is par for the course by comparison, and at best, we did far better than relevant historical recessions and recoveries. John Taylor seems to have fallen into the same sort of trap Phil Gramm and Glenn Hubbard fell into in their June op-ed, except that this time, instead of falsely comparing one recession and recovery to another, Taylor drew false comparisons writ large. Last night, Noah Smith criticized Taylor's argument, saying that he was using the MUSS (Make Up Some...Stuff) method of economic debating. It sure looks that way, doesn't it?

Update: Paul Krugman picks up on something I should have:
"The first is that looking at the rate of recovery from the trough is a very peculiar criterion — especially when, as Taylor does, you look only at the first year (!) of recovery. By this standard, the New Deal was a tremendous success story, because growth was fast in 1933-4. Never mind the fact that pre-crisis per capita GDP wasn’t restored for more than a decade. As R-R say, surely the relevant comparison is with the pre-crisis peak, especially given the fact that post-crisis economies often suffer periods of relapse (as is happening in Europe now)."
Excellent point.
 

Tuesday, October 16, 2012

Second Presidential Debate Live-Blog!

Do I even need to describe this again? Come one, come all to the live-blogging of the second presidential debate! The last one was pretty successful, so let's see if we can't keep that going! 

Monday, October 15, 2012

"Getting Government Out of the Way"



Something I've noticed more and more among some people is the belief that "government needs to get out of the way" or that we ought to "leave it to the private sector" or to the states, regardless of what "it" actually is. This, I think, is representative of a broader intellectual flaw among Tea Party-types in the GOP, who seem to believe that anything the government does must be inefficient and bad, simply because it was done by the government. Now, don't get me wrong, there are plenty of examples of government waste and inefficiency, (farm subsidies, anyone?) but blanket statements like this don't do us much good. If I were to hazard a guess, I would say that the Tea Party wing of the GOP believes this because they also believe that government is only in the business of redistribution of income, ignoring the fact that the government provides public goods that undeniably contribute to economic efficiency.

To be sure, the government does redistribute, but you would be mistaken if you believed this was all the government did. We don't have a government simply for that reason, we have it because it can provide certain things that the private sector either will not or cannot provide at all or at optimal quantities--things like police, firefighters, research, national defense, courts, infrastructure, schools, etc. These are public goods, and when you think about it, public goods are arguably the whole reason why we have a federal government in the first place. 

As an example, imagine that a private company provided a road connecting two cities. The company's benefit from building this road is derived from whatever profit it can get through tolls and such. By contrast, the benefits to society are a good deal higher than the amount they pay for the use of the road, because the road is so instrumental to facilitating things like commerce and travel. Put simply, what this means is that because the private firm's benefits are lower than those of society, the firm won't build (provide) as much road as society would like. That's where the federal government comes in with road-building: it provides a useful, continuous network of roads and highways that spans the nation.

Yet today, we see many in the Tea Party and its associated off-shoots denigrating infrastructure spending by the federal government as wasteful. To be sure, it can be wasteful and excessive, just look at Japan! But as I've already shown, it would be wrong to assume that the private sector would provide the optimal level of infrastructure either. The only real way we're going to get the optimal level of infrastructure is if we make the government work optimally, not by retiring ourselves and our minds to the intellectual dustbin of boilerplate statements.

Friday, October 12, 2012

Romney Doesn't Have A Jobs Plan and Obama Won't Talk About His

Anyone who's been carefully following this presidential campaign has noticed that, for all the talk of job-creators, jobs-this and jobs-that, neither incumbent nor challenger has pushed an actual plan to create jobs. This may strike some of you as odd, but if you've listened to both of the debates, neither of them focused heavily on direct creation of jobs. Instead, they focused on debt, deficits, taxes, and foreign policy. Sure, they reference the unemployment crisis in the U.S. and how they'll create jobs, but these were more obligatory statements rather than specific plans to combat current joblessness. Ezra Klein noted this in a post today, and I wanted to expand on his points a bit. 

Let's take last night's debate as an example. Both candidates were asked this question by the moderator: 
"So will both of you level with the American people: Can you get unemployment to under 6 percent and how long will it take?"
Both responses were, in my view, unsatisfactory. Biden mostly described what has gone on since 2009 and then mentioned how the Bush tax cuts needed to expire for top earners but not the middle class. How that will create jobs is beyond me. Ryan, after falsely stating that unemployment was rising across the nation, offered a five-point plan for economic growth:
"It’s a five-point plan. Get America energy independent in North America by the end of the decade. Help people who are hurting get the skills they need to get the jobs they want. Get this deficit and debt under control to prevent a debt crisis. 
Make trade work for America so we can make more things in America and sell them overseas, and champion small businesses. Don’t raise taxes on small businesses because they’re our job creators."
This plan does almost nothing to address our current crisis and looks an awful lot like the same economic plans pushed by Republicans since 2004. This suggests that the Republicans lack a specific plan for combating unemployment. From looking at this plan, you would think that the Great Recession somehow flipped a switch and suddenly robbed Americans of all of their skills and made us a great deal more dependent on foreign energy. Needless to say, neither of these things are true. The bit about a debt crisis is just--as Biden would say--a bunch of malarkey. Balancing the budget during a recession doesn't create jobs, it destroys them. Just think about it: if you fire a bunch of government employees, they have less money to spend in the economy, firms have lower demand, they cut back, hire less/fire more people, and so on. That's what hurts business confidence, not our current debt levels, which is probably why so many CEOs are against going over the fiscal cliff. Making trade work for America is mostly irrelevant--what would that do to reduce household debt levels? I'm all for free trade, but arguing that it would address our current unemployment crisis is akin to a doctor prescribing a meningitis vaccine to a cancer patient--its not a bad thing in and of itself, it just won't help address the bigger issue. Finally, the last point in the plan is not raising taxes on small businesses. Again, I'm not against it, but old post of mine explains its irrelevance right now:
"First, imagine that you're a business owner. Imagine that you're employing, say, 20 people right now. You run a car wash, or something. Now imagine that, because of the economy, business is a bit slower than usual, so you only use about 60% of your workforce's capacity. Now imagine that the government comes and says, "Oh, hey, all businesses only have to pay half as much in corporate taxes this year, hope this makes you guys want to hire!" Now stop. If you're only using 60% of your workforce because of insufficient demand for your services, how would paying less in taxes make you want to hire more workers? The only way you'd hire more workers is if you were already using your workers at full capacity, which most firms are not doing right now."
So, again, even if you think all of these are laudable goals for long-term economic growth (I do!), they do almost nothing to effectively address the current unemployment crisis in anything more than a tertiary manner.

Now, on to Obama/Biden. They actually have a jobs plan, but the problem is that they haven't been pushing it at all. On the campaign trail, all they've been saying is that they'd like to hire new teachers and that taxes won't go up for most Americans. Hiring teachers is good, since so many were laid off because of state and local cutbacks, but maintaining current tax levels won't get us anything better than what we already have, which is not good enough. The sad part is that the jobs plan that Obama put out last September actually looks pretty good, since it does a lot to shore up state budgets and undo the public-sector layoffs there that have played such a big part in hobbling our recovery. In fact, state and local cutbacks have made total government investment including the $787 billion stimulus look something like this:
Government investment is way down, private/business investment is way up. You wouldn't know it, though, from the way many Republicans have painted the situation.

Anyway, it seems that, rather than focusing on actually addressing unemployment, both campaigns have instead resorted to trading barbs about their tax plans, one of which is mathematically impossible, while the other is a relatively modest change of current policy. You can be sure of one thing, though, none of it will help the jobless in America.


Wednesday, October 10, 2012

Live-Blogging the VP Debate

You know the drill, folks, at 9 PM on October 11, I'll be hosting a live-blogging of the Vice Presidential debate. For those of you who don't know the drill, what happens is that you'll join what is effectively a chat-room where you comment on the events going on during the debate. Snarky comments are a must, serious comments appreciated. All are welcome and bring your friends! Yes, that means you, conservatives. You're all welcome to join in on the fun. 


Tuesday, October 9, 2012

Sesame Street Economics


I realize that I'm a bit late to the game on this, but I wanted to weigh in on the debate. No, not what I thought of it as a whole--in short, Obama was distracted and rambling while Romney, honesty notwithstanding, forcefully pressed his points home. Rather, I wanted to talk about one particular segment of it that just rubbed me the wrong way. I'm talking about Romney's desire to cut PBS as part of his effort to balance the budget.

First of all, from a cost-benefit standpoint, public broadcasting is a pretty good investment for the money. More broadly, though, Romney's statement during the debate seemed to insinuate that PBS is the Great Evil that is driving our current and future deficits. Less-informed viewers might have fallen for that, and I think that that's what bothers me--the statement gave off the air that our budget can be balanced simply by cutting funding for things like NPR and PBS. Indeed, many people, when asked, believe that funding for PBS and NPR is far higher than it really is--a shocking 30% thinking it was above 5% of annual federal spending. These programs, in reality, comprise  about .013% of annual federal spending--about $500 million a year. Put another way, we spend more money than that in 36 hours in Afghanistan. Public broadcasting, then, is practically a rounding error in budgetary terms. Let me be clear: I'm not saying that just because a program doesn't cost much that spending money on it can't be wasteful, but there's spending and then there's spending. I don't know about you, but I'm willing to shell out $1.35 a year to do my part to help teach kids how to read and write and count.

In any case, my ultimate point is that this whole PBS funding business completely ignores what the actual sources of our high deficits are--the recession, increasing health care costs, and to a lesser degree, Social Security. Note the budget chart:



In the debate and on the campaign trail, Romney said that he wouldn't stop the unnecessary over-payment of doctors and insurance companies by Medicare, which costs us $716 billion over ten years, while yielding arguably scant benefits. He also expressed his desire to increase the defense budget by 2.1 trillion over ten years, which is well above what the Department of Defense requested. Don't forget about that $5 trillion tax cut, either.


But seriously, we can't afford Sesame Street anymore, sorry kids.

Update: I see that the Obama campaign caught on:


Tuesday, October 2, 2012

Live-Blogging the First Presidential Debate!

We'll be live-blogging the debate starting at 9 PM on Wednesday, October 3rd, so bring your friends, because it'll be a good time! Also, bring all of your sarcasm and snark to the table. Constructive commentary is optional, but appreciated.

No, Social Security Won't Stop Existing in 2033



I read an op-ed online today by Scott Paulson, a conservative commentator, in which he exalts Romney for having a plan for Social Security's future and criticizes Obama for not having one. I take issue with his op-ed on a number of levels, but primarily because Paulson, in typical political pundit fashion, blows wildly out of proportion the problems faced by Social Security. At certain points in the op-ed, Paulson, whether deliberately or through ignorance, throws out lines that are demonstrably false. Let's take a deeper look, shall we?

First, Paulsen opens with this paragraph:
"It’s encouraging to see that the presidential challenger is tremendously concerned about the Social Security issue now because the program’s demise is only 21 years away. Furthermore, each year that passes, the method of fixing the program’s financial concern – by running totally out of money – becomes increasingly more difficult to correct."
This paragraph is utterly off-base, to be honest. Paulson seems to be implying that Social Security will simply cease to exist once the trust fund's contents run out. I initially thought that I may have been reading too much into things, but then my suspicions were vindicated:
"Continuing as it is, it will definitely be a non-functional program by the year 2033 due to lack of funds."
I'm not sure which Trustee's report on Social Security Paulson read, but the real report said nothing of the sort. In 2033, when the trust fund runs out, Social Security will keep right on functioning--all that would happen is that the money paid out would have to equal the money paid in. According to the Trustee's report, Social Security would basically be able to sustainably pay beneficiaries about 75% of the promised benefits. That is, if your monthly check was supposed to be for $1,000 it would instead be for $750. Hardly non-functional, if you ask me. For you visual learners:
Now, I'm not saying this isn't a big deal or that a 25% cut in benefits wouldn't be a bad thing, but  Paulson writing that the program will become non-functional only serves to distort peoples' efforts to understand the problem. A problem, I should note, that has been wildly overblown.

While bringing Medicare costs down is a tremendously complicated affair, the problems facing Social Security are simply a matter of accounting--we have to either cut benefits or raise revenues, that's it. Many people say we should raise the retirement age, but in pointing to our rising life expectancy, they miss the fact that life expectancy for the poor--those who rely most on Social Security--has declined over the past several decades. In any case, rather than seeing the sudden end of Social Security, the worst-case scenario we face is that benefits would face a 25% reduction, and that's if we literally sit on our hands for the next two decades.

Thursday, September 27, 2012

Fed's Plosser is Worried QE3 Might Work

Via Matt Yglesias:
QE 3 skeptic and Philadelphia Federal Reserve President Charles Plosser gave a very strange speech outlining his opposition to monetary stimulus which I think can best be summarized as starting with concerns that it won't work and ending with dire warnings that it might work. Perhaps the strangest part comes when he warns that aggressive monetary stimulus in today's era might lead to consequences similar to those seen in the mid-1930s, when FDR's stimulative monetary policies broke the back of the Great Depression:
With such a large balance sheet, our transition from very accommodative policies to less accommodative policies will involve using tools we have not used before, such as the interest rate on reserves, term deposits, and asset sales. Once the recovery takes off, long rates will begin to rise and banks will begin lending the large volume of excess reserves sitting in their accounts at the Fed. This loan growth can be quite rapid, as was true after the banking crisis in the 1930s, and there is some risk that the Fed will need to withdraw accommodation very aggressively in order to contain inflation.
This is, I think, totally accurate. In 1933, the Roosevelt administration and the Federal Reserve began a program of aggressive monetary stimulus. This worked really well and loan growth was quite rapid. Indeed, the economy in general grew at a furious pace for about four years as idle resources were put back to use. But there was no immaculate growth and the rapid expansion was somewhat inflationary. And then in 1937 policymakers felt they had to counter these trends and implemented contractionary policies. Indeed, in their fear they went too far and produced an unfortunate recession-within-the-depression."
For those of you who wanted to see a graph of Plosser's dreaded 30's recovery, here's real GDP growth:



And here's inflation during that same exact period:



Not seeing anything catastrophically inflationary there, are you? In fact, the inflation that the U.S. did get was critical in fostering the robust growth that we saw during the mid-30s, since it worked to end debt deflation, etc. In any case, I'm short on time and Matt said everything that I would have said, but better, so I'll leave it at that.

Wednesday, September 26, 2012

This Could Get Ugly, Eurozone Edition

Well, here we are again folks, mere weeks after European Central Bank President Mario Draghi announced an unlimited bond-buying program, rioting has erupted across Spain and Greece over the drastic austerity programs that have been forced upon those countries. Ever since I started studying economics, I've come to realize what a clumsy contraption the Eurozone really is, with monetary policy being determined  for a myriad of very economically diverse nations by one central bank. On top of that, it lacks fiscal unity because, at the end of the day, nationalism still is still fashionable. 

As plenty of people have said before, the crisis in Europe isn't really about debt, when you get right down to it. As Brad Plumer aptly noted in a post today:
"In a country with 24 percent unemployment, those measures are already inciting protests and labor unrest. And now it turns out, according to reports from Germany, that those austerity measures won’t even be enough, because Greece’s economy is hurting so badly that its deficit keeps swelling anyway.

The same goes for Spain, where thousands of protesters have surrounded the parliament building in Madrid, incensed at perpetual budget cuts and tax hikes that never seem to get the country on pace for recovery. Ditto for Portugal, which has been the star poster child for austerity and yet keeps getting choked by poor growth and widening deficits."
Therein lies the rub: The more austerity these nations undertake, the more depressed their economies get, the more anxious the bond markets get about loaning money to them, the larger their deficits get, leading to more cuts in a vicious cycle. Ultimately, the problem isn't one of deficits. Yes, the PIIGS countries will have to get their budgets under control, but they're not going to be able to do that until they've recovered, which they can't do because they're so uncompetitive. 

What I mean by this is that these countries have high labor costs--that is, the costs of employing people in a business there have become wildly more expensive than in, say, Germany. For you visual learners, here's a chart I pulled from Krugman:



Anyway, the point I'm getting to is that countries usually can get around this problem easily--they just devalue their currencies, so that it gets cheaper to do business there. A notable example of this would be Iceland, which sharply devalued its currency and is now experiencing a robust recovery. The only way for the Eurozone to achieve something like this would be for the ECB to pursue a higher rate of inflation, such that Southern Europe's labor costs get back into line with Germany's. 

The Germans, of course, have an almost paralyzing fear of inflation, one which brings up images of wheelbarrows full of cash being used to buy bread, as well as the rise of Hitler and the Nazi Party. While the bit about wheelbarrows is true, the fact is that hyperinflation had little to do with the Nazi Party's rise to power. Hyperinflation ended in 1924 in Germany, and Hitler wasn't sworn in as Chancellor until January of 1933. Might there have been something happening during those nine years? Something of the "Great Depression" variety? Via Clayton White:
"Inflationary finance did not bring about the Nazis; mass unemployment did. Crushing debt burdens owed to foreigners did. Foreign mandates imposed in a beleaguered population did. THAT'S the kind of environment that leads to radical leaders whose messages of spite and hatred can take root."
Between 1924 and 1929, the German economy was pretty prosperous, by the way. So Germany ought to get its facts straight, lest the rest of Europe pay an even higher price just because the members of the Bundestag didn't pay much attention in history class. 

Monday, September 24, 2012

Emergency Room Visits Aren't the Same As Being Insured


Via Sarah Kliff over at Wonkblog, I learned that Mitt Romney, in an interview with 60 Minutes, suggested that the uninsured could obtain health care in the emergency rooms, where most hospitals, per federal law, are required to provide care regardless of ability to pay. Romney is right that people can get care in emergency rooms no matter how poor they may be, but I think his statement misses the point--it isn't whether or not uninsured people can get care, it's whether or not this is the best or most efficient way to provide care. I don't think that it is, and Romney didn't either just a few years ago.

Visiting the emergency room for non-urgent reasons is enormously inefficient. Experts estimate that visiting the ER for treatment of a non-urgent condition is two to five times more expensive than visiting a primary care doctor with the same symptoms. That makes perfect sense, doesn't it? I mean, imagine that you had a bad case of the flu and you were taken to the ER. Doesn't it seem that a primary care doctor could just as easily take care of you, without all of the added costs of ER care? 

I know this is nothing really new to those of you who read my blog regularly, but it always is good to remind people that just because you can get "free" care in an ER, doesn't mean that the uninsured wouldn't be better off without health insurance. Romney, to his credit, once realized this. Not anymore, unfortunately. Using the ER for everyday health care is, in my view, sort of like driving a Land Rover on a well-paved road--you can do it and it'll probably work, but a Honda Civic can do it just as well, and for a lot less money.



Monday, September 17, 2012

Meet the New GOP Economic Plan, Same as the Old Plan

One of the things I frequently think about when I hear the GOP's economic policies is, "Hmm, this looks familiar." As a result, I've always thought that the GOP's current economic platform, rather than being a product of our current economic circumstance, actually reflects the same generic platitudes that they have been advocating for since 2004. I've never specifically looked into how well their talking points lined up over the years, but thanks to Mike Konczal, I don't have to dig too deeply. He's written a post that includes economic talking points from 2004, 2008, and 2012 Republican Conventions. Here are the five big points in Romney's economic platform, as heard during his speech at the RNC this past month:
  • First, by 2020, North America will be energy independent by taking full advantage of our oil and coal and gas and nuclear and renewables.
  • Second, we will give our fellow citizens the skills they need for the jobs of today and the careers of tomorrow. When it comes to the school your child will attend, every parent should have a choice, and every child should have a chance.
  • Third, we will make trade work for America by forging new trade agreements. And when nations cheat in trade, there will be unmistakable consequences.
  • Fourth, to assure every entrepreneur and every job creator that their investments in America will not vanish as have those in Greece, we will cut the deficit and put America on track to a balanced budget.
  • And fifth, we will champion SMALL businesses, America’s engine of job growth. That means reducing taxes on business, not raising them. It means simplifying and modernizing the regulations that hurt small business the most. And it means that we must rein in the skyrocketing cost of healthcare by repealing and replacing Obamacare.
So, to sum these five points up, energy independence, better education through school choice, free trade, cutting spending/balancing the budget, and reducing taxes and regulations on businesses. Let's compare these points to  quotes in McCain's speech in 2008, given on the eve of the financial crisis, when unemployment stood at 6.1%:
  • I will open new markets to our goods and services. My opponent will close them.
  • I will cut government spending. He [Obama] will increase it.
  • We all know that keeping taxes low helps small businesses grow and create new jobs.
  • Reducing government spending and getting rid of failed programs will let you keep more of your own money to save, spend, and invest as you see fit.
  • We need to shake up failed school bureaucracies with competition, empower parents with choice.
  • We'll produce more energy at home.. Senator Obama thinks we can achieve energy independence without more drilling and without more nuclear power. But Americans know better than that.
So in 2008 the GOP's platform is free trade, cutting government spending, cutting taxes on businesses, school choice, and energy independence. This platform looks pretty familiar, but maybe it changes if we go back another four years, to when the economy isn't right on the cusp of a major recession. Perhaps the platforms were similar because both elections took place in or around a recession. Maybe Bush's speech in 2004 will show an economic platform that changes based on the state of the economy? As a reminder, when Bush gave his speech in 2004, unemployment was at 5.4%, which is basically "full employment." Anyway, here are some excerpts:
  • To create jobs, my plan will encourage investment and expansion by restraining federal spending, reducing regulation and making the tax relief permanent.
  • To create jobs, we will make our country less dependent on foreign sources of energy.
  • To create jobs, we will expand trade and level the playing field to sell American goods and services across the globe.
  • And we must protect small-business owners and workers from the explosion of frivolous lawsuits that threaten jobs across our country. Another drag on our economy is the current tax code, which is a complicated mess.
  • He's [John Kerry] proposed more than $2 trillion in new federal spending so far, and that's a lot, even for a senator from Massachusetts.
So, cutting regulations, expanding free trade, cutting taxes, and cutting federal spending. The only thing that was left out of the 2004 economic platform was school choice, presumably because Bush's signature education policy was No Child Left Behind, which was geared more towards public schools. In any case, I'm assuming that many of you picked up on a pattern here: the GOP's economic platform has been virtually the same since 2004, regardless of economic conditions. That is, rain or shine, recession or full employment, the GOP's economic platform has remained some iteration of the same few talking points for the past 8 years. Regardless of what you think about the performance of the so-called Bush economy, the idea that economic conditions in 2004 are comparable to those of today is utterly insane. 

This quote by Stephen Colbert sums things up nicely: "He believes the same thing Wednesday that he believed on Monday, no matter what happened Tuesday. Events can change; this man's beliefs never will."



Wednesday, September 12, 2012

Who Cares What Ratings Agencies Say?

Fairly quick post today, I just wanted to make a point about ratings agencies. It always seems popular for commentators and pundits to crow about the importance of a nation's credit rating, as determined by the three ratings agencies. Well, I may be among the minority here, but I personally don't care what the ratings agencies say. It just doesn't matter very much. 

Let me be clear, when I say that a rating change doesn't matter, I mean that it won't change a nation's creditworthiness. To be sure, when S & P downgraded the United States in 2011, a lot of things happened, most notably among them being a large decline in the stock market. But, if you'll all recall, a sovereign credit rating is intended to describe the riskiness of a nation's debt. The riskiness of a nation's debt is represented by its borrowing costs, that is, the lower the interest it pays on its debt, the less risky a nation's debt is seen to be by credit markets. In the U.S. right now, we pay 1.625% interest on a ten-year bond. Those are historic lows.

Now, when S&P announced their big credit downgrade on August 5, 2011, here's what happened to Treasury yields (borrowing costs) over the next month:



Yields plummeted. So investors saw U.S. debt as less risky, not more. S&P really is the prognosticator of prognosticators.

There are those of you who might say that the Fed is buying up our debt, and that's why interest rates remain so low for the U.S. Well, that's demonstrably false. By that logic, interest rates would spike if the Fed stopped buying bonds up, right? Well, lucky for me, they did just that in 2011. Here's what happened:



Yields stayed low regardless. So I don't think the Fed has a lot to do with it, to be honest. But back to the ratings agencies.

Now, the ultimate unimportance of the 2011 downgrade isn't the only reason I don't much care what the ratings agencies say. They already have a reputation for shoddy work, as they proved a mere four years ago. You see, I am of the view that the financial crisis, in large part, would not have happened if not for the ratings agencies. They told the world that mortgage-backed securities were AAA-rated, when in fact there is every indication that they knew the assets were complete trash. Had they been rated appropriately, no one would have bought them. Crisis averted. 

In any case, the only thing that brought this tirade up was the fact that I saw this article, in which Moody's is apparently threatening a U.S. credit downgrade. I'm not the type who usually makes predictions, but I'm calling it right now: if the U.S. credit rating is downgraded by Moody's, our borrowing costs likely won't go up. 



Sunday, September 9, 2012

Obama's Reckless Spending/Cutting is Helping/Hurting the Economy

Government spending destroys jobs, except when it creates them:


Criticizing Obama for spending too much and for cutting too much? I think Romney/Ryan are trying to have their cake and eat it too. And just in case any of you have forgotten the point I've made many times, government employment is down under Obama:

The x-axis is months since inauguration, the y-axis is thousands of jobs (i.e. -1000 is a loss of one thousand thousand, or one million)



The spike under Obama is hiring for the Census in 2010

But is anyone that is in favor of smaller government lauding Obama for his dramatic reduction in public-sector employment? Not a chance. Instead, they're claiming government employment is way up, in stark contrast to the facts. At the same time, members of the GOP are lamenting the jobs threatened by budget cuts. Budget cuts, if you'll recall, that they insisted upon making in return for raising the debt ceiling.