On the lack of serious discussion or an honest opposition

Professor Krugman channels the outrage at alleged GOP "policy wonks" who are little more than ethically-challenged propagandists:

I fairly often receive mail pleading with me to take a more even tone, to have a respectful discussion with people on the other side rather than calling them fools and knaves. And you know, I do when I can. But the truth is that on most of the big issues confronting us, there just isn’t anyone to have a serious discussion with. Ezra Klein offers a nice illustration of this point today, in his takedown of Avik Roy on Obamacare in California.

The thing you want to bear in mind is that Roy is widely considered a good example of a reformist conservative, not to mention a health policy wonk. So what does this reform-minded wonk have to say about Obamacare?

Klein tries really hard to keep his temper even; too hard, I think, because I wonder how many readers will stay with him all the way through. But to cut to the chase, Roy claims that Obamacare will cause soaring insurance rates, using a comparison that is completely fraudulent — and I say fraudulent, not wrong, because he is indeed enough of a policy wonk here to know that he is pulling a fast one.

Reinhart And Rogoff's Pro-Austerity Research Now Even More Thoroughly Debunked By Studies

Mark Gongloff @ Huffington Post:

The debunking of Carmen Reinhart and Kenneth Rogoff continues.

The Harvard economists have argued that mistakes and omissions in their

influential research on debt and economic growth don't change their ultimate austerity-justifying conclusion: That too much debt hurts growth.

But even this claim has now been disproved by two new studies, which suggest the opposite might in fact be true: Slow growth leads to higher debt, not the other way around.

In a post at Quartz, University of Michigan economics professor Miles Kimball and University of Michigan undergraduate student Yichuan Wang write that they have crunched Reinhart and Rogoff's data and found "not even a shred of evidence" that high debt levels lead to slower economic growth.

And a new paper by University of Massachusetts professor Arindrajit Dube finds evidence that Reinhart and Rogoff had the relationship between growth and debt backwards: Slow growth appears to cause higher debt, if anything.

The Unemployed Need Bold, Creative Moves from the Fed

Mark Thoma @ Fiscal Times:

The Federal Reserve has increased the size of its balance sheet nearly four-fold

since the onset of the financial crisis, from around $870 billion in 2007 to $3.35 trillion today. This has caused people like Peter Schiff to predict that we are headed for a severe outbreak of inflation. An inflation problem is just round the corner we’ve been told again and again since 2008, yet inflation remains below the Fed’s 2% target, long-run inflation expectations are well-anchored, and there is little evidence in recent data that inflation is or will be a problem. 

Why is inflation so low?

More on the persistence of low inflation

Catherine Rampell @ New York Times Economix:

The personal consumption expenditures, or P.C.E., price index, which the Fed has said it prefers to other measures of inflation, fell from March to April by 0.25 percent. On a year-over-year basis, it was up by just 0.74 percent. Those figures are quite low by historical standards, and helped push consumer spending up. (Measured in nominal terms, consumer spending fell slightly in April. After adjusting for inflation, it rose.)

When looking at price changes, a lot of economists like to strip out food and energy, since costs in those spending categories can be volatile. Instead they focus on so-called “core inflation.” On a monthly basis, core inflation was flat. But year over year, this core index grew just 1.05 percent, which is the lowest pace since the government started keeping track more than five decades ago.

                             Source: Bureau of Economic Analysis, via Haver Analytics. The core P.C.E. price index refers to the price index change for personal consumption expenditures, excluding food and energy.

Low inflation may be one reason that consumers have proven so resilient in recent months (in addition to the lift they’re getting from rising home prices). A measure of consumer sentiment released Friday by the University of Michigan surged in May, and is at its highest level since July 2007.

Thought for Memorial Day on The Hate-America Right

This can't be said too often - contemporary "conservatism" isn't conservative, it's extremist.  The GOP is batshit crazy and totally dysfunctional.  Denizens of this far Right zoo hate the America that actually exists. Ryan Cooper @ Political Animal:

The problem with the conservative movement isn’t that mainstream Republican policies are all insane (they are), it’s that the party has completely lost it. It is “ideologically extreme; scornful of compromise; unmoved by conventional understanding of facts, evidence and science; and dismissive of the legitimacy of its political opposition.” Taking the debt ceiling hostage, for example, is not the action of a conservative party. It’s the action of an extremist party, willing to risk economic Armageddon for trivial policy changes.

Honestly, to a large degree the problem is today’s Republicans don’t believe in the American system. They’re unpatriotic.

This is, I think, due to the conservative media ecosystem and the perverse incentives of minority parties in the US constitutional system. Conservative media is ruled by liars, con men and charlatans who actively profit from having Democrats in power, and who whipped the Republican base into a seething frenzy after the election of Obama.

Matters of policy have dissolved almost completely into the froth of tribal resentment and Obama hatred, which produced a huge class of new Republican house members who were slavering to attack the president with whatever tool was closest.

"Why the world faces climate chaos"

Financial Times' Martin Wolf has an excellent column on the looming climate change disaster:

Last week the concentration of carbon dioxide in the atmosphere was reported to have passed 400 parts per million for the first time in 4.5m years. It is also continuing to rise at a rate of about 2 parts per million every year. On the present course, it could be 800 parts per million by the end of the century. Thus, all the discussions of mitigating the risks of catastrophic climate change have turned out to be empty words.

Read the rest HERE @ Financial Times.

The Inflation Is Too Damned Low!

Professor Krugman @ New York Times:

Larry Ball makes the case that we would be a lot better off with a 4 percent inflation target rather than the 2 percent that is now central bank orthodoxy.

Intellectually, this position is hardly outlandish; indeed, Ball’s case is very similar to the case Olivier Blanchard made three years ago, just stated more forcefully and with more evidence.

The basic point is that a higher baseline for inflation would make liquidity
traps, in which conventional monetary policy is up against the zero lower bound, less likely and less costly when they happen. Ball estimates that if we had come into this crisis with an underlying inflation rate of 4 percent, average unemployment over the past three years would have been two percentage points lower. That’s huge — it amounts to millions of jobs and trillions of dollars of extra output.

Gangster Bankers: Too Big to Jail

This is several months old, but a "must read" by Matt Taibbi @ Rolling Stone:

The deal was announced quietly, just before the holidays, almost like the government was hoping people were too busy hanging stockings by the fireplace to notice.

Flooring politicians, lawyers and investigators all over the world, the U.S. Justice Department granted a total walk to executives of the British-based bank HSBC for the largest drug-and-terrorism money-laundering case ever. Yes, they issued a fine – $1.9 billion, or about five weeks' profit – but they didn't extract so much as one dollar or one day in jail from any individual, despite a decade of stupefying abuses.

People may have outrage fatigue about Wall Street, and more stories about billionaire greedheads getting away with more stealing often cease to amaze. But the HSBC case went miles beyond the usual paper-pushing, keypad-punching­ sort-of crime, committed by geeks in ties, normally associated­ with Wall Street. In this case, the bank literally got away with murder – well, aiding and abetting it, anyway.

 Read the rest HERE.

A Stock Market Boom in the midst of a faltering economy

James Surowiecki  @ The New Yorker takes a look at the stock market boom - driven by a growing disconnect between the welfare of Americans and the profits of "U.S." corporations:

With the stock market setting new highs on a nearly daily basis, even as the

real economy just slogs along, there seems to be one question on everyone’s mind: are we in the middle of yet another market bubble? For a growing chorus of money managers and market analysts, the answer is yes: the market is a house of cards, held up by easy money and investor delusion, and we are rushing all too blithely toward an inevitable crash. Given that we’ve recently lived through two huge asset bubbles, it’s easy to see why they’re worried. But in this case the delusion is theirs.

The bubble believers make their case with a blizzard of charts and historical analogies, all illustrating the same point: the future will look much like the past, and that means we’re headed for trouble. Smithers & Company, a London market-research firm, says that, according to a number of market indicators, stocks are, by historical standards, forty to fifty per cent overvalued. The bears admit that corporate profits are high, which makes the market’s price-to-earnings ratio look quite normal, but they insist that this isn’t sustainable.

They think that earnings will return to historical norms, and that, when they do, stock prices will be hit hard. Today, after-tax corporate profits are more than ten per cent of G.D.P., while their historical average is closer to six per cent. That’s a vast gap, and it’s why bears believe that the market is, in the words of the high-profile money manager John Hussman, “overvalued, overbought, overbullish.”

It’s certainly unusual for corporate profits to soar during a slow recovery. But the argument for a stock-market bubble is flawed: when it comes to the role that corporations play in the U.S. economy, the present looks very different from the past, which means that historical comparisons to the nineteen-fifties, let alone the thirties, tell us little. The four most dangerous words in investing may be “This time, it’s different.” But this time it is different.

Take taxes: one big reason that after-tax corporate profits are much higher than their historical norm is that corporations pay much less in taxes than they used to. In 1951, corporations had to pay almost half of reported profits in taxes. In 1965, they had to pay more than thirty per cent. Today, they pay only around twenty per cent.

"How the Case for Austerity Has Crumbled"

Professor Krugman has a long essay

on the austerity fallacy
HERE, @ NY Review of Books

Slowdown in health-care costs creates problems for right-wingers

John Chait @ New York mag:

The recent slowdown in health-care costs is one of those facts, like climate change or the rapid growth after Bill Clinton raised taxes, that flummoxes American conservatism. The slowdown of health-care costs is one of the most important developments in American politics. The long-term deficit crisis — those scary charts Paul Ryan likes to hold up, with federal spending soaring to absurd levels in a grim socialist dystopian future — all assume the cost of health care will continue to rise faster than the cost of other things. If that changes, the entire premise of the American debate changes. And there’s a lot of evidence to suggest it is changing — health-care costs have slowed dramatically, and experts believe it’s happening for non-temporary reasons.

Journal Publisher Rupert Murdoch

The general conservative response to date has involved ignoring the trend, or perhaps dismissing it as a temporary, recession-induced dip likely to reverse itself. Yesterday, the Wall Street Journal editorial page offered up what may be the new conservative fallback position: Okay, health-care costs are slowing down, but it has absolutely nothing to do with the huge new health-care reform law. “It increasingly looks as if ObamaCare passed amid a national correction in the health markets,” the Journal now asserts, “that no one in Congress or the White House understood.” It’s another one of those huge, crazy coincidences!

Of course, it’s not just that the Journal didn’t predict the health-care cost slowdown. The Journal insisted it couldn’t possibly happen. Indeed, it insisted that Obamacare would destroy — was already destroying — any possible hope for a health-care cost correction, and would instead necessarily lead to a massive increase in health-care inflation.

Why Washington saved the economy, then permanently destroyed the labor market

Derek Thompson @ The Atlantic:

On April 24, Minnesota Sen. Amy Klobuchar scheduled a hearing. Fun story,

right? A hearing in Washington is like a fern in the rainforest. But this hearing was notable for both its subject and its attendance. It was a meeting about the most important economic crisis facing America today: long-term unemployment.

At 10:30am, the hearing began. She was the only attendant.

***

I have two stories for you about Washington and the economy. Both true. But very different.

The first story is called: How Washington Saved the Economy. You might begin in 2008, when the Federal Reserve went on an unprecedented spree of asset-buying to un-gunk the banks, push down interest rates, and spur investing in mortally weakened economy. This was followed, in 2009, with an equally historic stimulus package aimed at filling holes in state budgets and sending cash back to families and businesses. The government ran steep $1+ trillion deficits to keep as much money in the weak private sector as possible.

There is little question that monetary and fiscal stimulus blunted the recession -- and saved the economy.

The second story is called: How Washington Permanently Scarred the Labor

Market. You might begin this story in 2011, when Congress (led by Republican obstructionism) embarked on a historic quest to crush deficit spending by any means necessary. Hold the economy hostage over the debt ceiling? Check. Kill the American Jobs Act while scheduling a too-awful-to-be-a-real-law sequester? Check. Allow the too-awful-to-be-a-real-law sequester to become a real law? Checkmate.

The deficit fell fast. As unemployment ebbed, the ranks of long-term jobless calcified, creating two separate job markets. One broken market for people out of work for more than six months. And another slowly healing market for everybody else. But the combination of a thermostatic recovery and a deep aversion to stimulus crushed any hope that the long-term unemployed would get the help they needed. Long-term unemployment isn't special just because it's longer; it's special because it's self-perpetuating. Skills atrophy, networks dry up, and employers discriminate, creating a vicious cycle of joblessness that can't be cured by normal economic growth.

There is little question that, in the last two years, Washington has essentially left the long-term unemployed to fend for themselves -- and permanently scarred the labor market.

***

This isn't so much a tale of two cities, but a tale of one city that responded differently to two crises: (1) the collapse of the financial system and (2) the scarring of the labor market. These are both emergencies. So why did we respond to the first emergency like an ambulance siren and the second like a harmless murmur of white noise?

What's wrong with the economy?

Here's the biggest problem with the US economy:

This is a chart of percentage of national income going to wages:

Since the end of the 1960s, the percentage of national income going to wages has decreased by ten percentage points. That's not a "10% decrease."  That's nearly a 20% decrease - from just below 54% to just below 44%.  This is a national scandal and a shift of wealth from labor to the very wealthy and to corporations - whose earnings are other than "wages" - that is as extreme and structural as any of our myriad economic problems.

In terms of overall economic growth, this suppression of consumer demand and rising inequality is as bad for real businesses that make things and sell things as it is for workers. 

"Deficit reduction" is killing jobs and stalling economic growth (which is the key to long-term deficit reduction)

Today's New York Times:

The nation’s unemployment rate would probably be nearly a point lower,

roughly 6.5 percent, and economic growth almost two points higher this year if Washington had not cut spending and raised taxes as it has since 2011, according to private-sector and government economists.

After two years in which President Obama and Republicans in Congress have fought to a draw over their clashing approaches to job creation and budget deficits, the consensus about the result is clear: Immediate deficit reduction is a drag on full economic recovery.

We need a bigger deficit!

Professor Krugman @ NYT:

Bad news for Dr. Evil fans: the days of a ONE TRILLION DOLLAR deficit are over. In fact, the deficit is falling fast...

This is not good news — or not unambiguously good news, at any rate. A deficit falling to probably less than 5 percent of GDP this year and well below that next year is MUCH TOO LOW for an economy whose private sector is still engaged in a vicious circle of deleveraging.

Clown Shoes?

Oh, by the way, it is now 26 months since Bowles and Simpson predicted a US fiscal crisis within two years.

7 Myths About Keynesianism

Economics professor and master econo-blogger Mark Thoma @ Fiscal Times pushes back against the cranks, ideologues and academic fundamentalists who attempt to peddle distortions of the Keynesian tradition:

Harvard Historian Niall Ferguson has apologized for suggesting that John

Maynard Keynes’ sexual orientation and lack of children made him indifferent to long-run economic issues. However, leaving the references to sexual orientation aside, it is commonly asserted, “Keynesian economists often dismiss … long-run concerns when the economy has short-run problems.” The claim that Keynesians are indifferent to the long-run is one of many myths about Keynesian economics:

Myth 1: Keynesians do not care enough about long-run economic problems: This has it backwards. Conservatives who oppose Keynesian economics are not concerned enough about short-run economic problems, particularly unemployment, and failing to address our short-run problems can bring long-run harm. Prolonged recessions, for example, cause people to permanently exit the labor force and this lowers our long-run growth potential. Keynesians care very much about the long run, but they do not go along with the idea that neglecting short-run issues is the best way to solve our long-run problems. 

Myth 2: Keynesians are not concerned with economic growth: Keynesians understand the value of economic growth, but they want firms to take full account of externalities such as carbon emissions, and they care how growth is distributed. If all of the income is going to the top of the income distribution even as the productivity of workers is rising – as it has in recent decades – then there is reason for concern. Growth is the key to rising incomes, but growth must lift all boats, not just the yachts, and avoid fouling the water.

Myth 3: Keynesians are advocates of big government: This is probably the biggest and most common confusion about Keynesian economics. Keynesian stabilization policy involves increasing government spending or lowering taxes to stimulate the economy in recessions, and then reversing those policies when the economy improves. Thus, under Keynesian policy the change in spending or taxes is temporary, e.g. spending goes up in recessions and then goes back down after the recovery, and the average size of government does not change over time. If, however, politicians decide to increase taxes rather than cut spending after the economy recovers then the average size of government will increase. If politicians do the reverse, use tax cuts to stimulate the economy and then pay for it by cutting spending when things improve, the average size of government will fall. But when the changes are truly temporary as Keynesian policy requires, the average size of government does not change at all.

Myth 4: Keynesians do not care about government debt: Keynesians understand that debt can be problematic under certain conditions, and that we need to address our long-run debt problem. The issue is getting the tradeoff between the cost of debt and the cost of unemployment correct. In severe recessions and at debt levels such as ours, the cost of unemployment is much larger than the cost of deficit spending. As the economy recovers, the tradeoff will change so that deficit reduction provides the larger benefit; but for now, unemployment should be our biggest concern. 

Myth 5: Keynesians are unconcerned with inflation: Keynesians care first and foremost about maintaining high and stable levels of employment and income for working class households. To the extent that inflation interferes with these goals, of course it is of concern. What Keynesians object to is the misstatement of the costs of inflation versus the costs of unemployment by those who are ideologically opposed to government intervention in the economy.

Myth 6: Keynesians do not believe in monetary policy: Keynesians don’t deny that monetary policy can help the economy, but they disagree with those who say that monetary policy alone can cure deep recessions. Fiscal policy is needed too. 

Myth 7: Keynesians use old, outdated, and inferior models: When the crisis hit and modern macroeconomic models failed, many of us turned to the old Keynesian model for guidance, a model built to answer the kinds of questions we were confronting. We didn’t have time to wait for the modern models to be fixed, and the old Keynesian model proved useful so long as its strengths and weaknesses were taken into account. At every point in the crisis Keynesians used the very best model available without being overly concerned with when the model was built. Sometimes the modern models were helpful, sometimes the insights were older – whatever was best to answer the important questions. Interestingly, as modern “New Keynesian” models have been fixed they have generally supported the policy recommendations that came out of the older models. 

If those policies had been aggressively pursued, problems such as long-term unemployment might not be so bad today – even at this late date there’s still a need to do more. I had hoped we’d learn from our experiences so far, but the myths described above continue to stand in the way of a more effective response to our unemployment problem.

Harvard historian Niall Ferguson is a world-class jerk and an academic fraud

Kathleen Grier @ Washington Monthly has a pretty comprehensive round-up of Harvard historian Niall Ferguson's latest venture into right-wing crankery (Ferguson wrote a famously insidious and dishonest Newsweek cover story rant last year - cleverly titled "Obama's Gotta Go" - that was skillfully dissected by James Fallows and likely helped to kill the magazine)

“There’s wrong, there’s very wrong and then there’s Niall Ferguson.” -

Fergie

economist John Aziz on Twitter

Aziz tweeted that earlier this week, before Ferguson made yesterday’s instantly infamous homophobic attack on John Maynard Keynes at a talk for financiers:

Harvard Professor and author Niall Ferguson says John Maynard Keynes’ economic philosophy was flawed and he didn’t care about future generations because he was gay and didn’t have children.

Speaking at the Tenth Annual Altegris Conference in Carlsbad, Calif., in front of a group of more than 500 financial advisors and investors, Ferguson responded to a question about Keynes’ famous philosophy of self-interest versus the economic philosophy of Edmund Burke, who believed there was a social contract among the living, as well as the dead. Ferguson asked the audience how many children Keynes had. He explained that Keynes had none because he was a homosexual and was married to a ballerina, with whom he likely talked of “poetry” rather than procreated. The audience went quiet at the remark. Some attendees later said they found the remarks offensive.

Ferguson should be the last person to be casting aspersions on anyone else’s personal life, given that, while still married to someone else, he began an affair with author and activist Ayaan Hirsi Ali and knocked her up. He then dumped his wife of over 20 years (they had had three children together) to marry Ali. What a heart-warming demonstration of traditional values!

Ferguson’s slur was ugly indeed — so much so that the no-doubt conservative audience fell into a stunned silence following his remark. But Ferguson — a man for whom the term “hackademic” would surely have been invented, had it not already existed — is part of a long right-wing hack tradition. He is far from the first to take this line of attack.

"Austerity for Dummies"

A "layman's guide" to anti-austerity from Stephanie Kelton @ New Economic Perspectives that does a pretty good job of tackling the central arguments in non-econospeak terms:

1. When we allow our economy to operate below full employment (as now), we are sacrificing trillions of dollars in lost output and income each year. We can never go back and recover it.  It is gone forever.  You’ve seen the debt clock?  Here’s the lost output clock.

2. Capitalism runs on sales. In survey after survey, we find that the Number One reason businesses are slow to hire and invest in new plant & equipment is a lack of demand for the things they produce.  Businesses hire and invest when they’re swamped with customers.  See this story in The Wall Street Journal.

3. The two decades after WWII certainly aren’t the only time that robust growth reduced the DEBT/GDP ratio.  During the late 1990s and early 2000s, the economy grew at an above average clip.  Unemployment fell to 3.7%.  Inflation remained modest.  There was a job vacancy for every job seeker in America — genuine full employment.  Because people were working, there was less spending to support the unemployed (food stamps, unemployment compensation, etc.) and more people paying income taxes. The deficit disappeared, and the national debt fell to around 40% of GDP.  So you do not need post-WWII conditions to support the argument that economic growth is the way to reduce the debt.

4. The debt/GDP ratio falls when the denominator grows faster than the numerator.  Right now, just about everyone is fixated on using austerity (raising taxes and slashing spending) to reduce the numerator (DEBT).  The problem, as Europe has kindly shown us for years, is that austerity “works” by crushing incomes, which in turn crush sales (or what we call GDP).  So instead of bringing the ratio down, austerity hampers growth, which causes deficits and debt loads to rise.

"Believing that we had made big economic fluctuations a thing of the past took a remarkable amount of hubris"

Some key insights from a very "wonky" post-crisis commentary by Joseph Stiglitz @ the IMF Global Economy Forum, emphasizing the need for more effective structural reforms:

In analyzing the most recent financial crisis, we can benefit somewhat from the misfortune of recent decades. The approximately 100 crises that have occurred during the last 30 years—as liberalization policies became  dominant—have given us a wealth of experience and mountains of data.  If we look over a 150 year period, we have an even richer data set.

With a century and half of clear, detailed information on crisis after crisis, the burning question is not How did this happen? but How did we ignore that long history, and think that we had solved the problems with the business cycle? Believing that we had made big economic fluctuations a thing of the past took a remarkable amount of hubris.

Markets are not stable, efficient, or self-correcting

The big lesson that  this crisis forcibly brought home—one we should have long known—is that economies are not necessarily efficient, stable or self-correcting.

There are two parts to this belated revelation. One is that standard models had focused on exogenous shocks, and yet it’s very clear that a very large fraction of the perturbations to our economy are endogenous.  There are not only short‑run endogenous shocks; there are long‑run structural transformations and persistent shocks.  The models that focused on exogenous shocks simply misled us—the majority of the really big shocks come from within the economy.

Secondly, economies are not self-correcting.  It’s clear that we have yet to fully take on aboard this crucial lesson that we should have learned from this crisis: even in its aftermath, the tepid attempts to fix the economies of the United States and Europe have been a failure.  They certainly have not gone far enough.  The result is that we continue to face significant risks of another crisis in the future.

So too, the responses to the crisis have not brought our economies anywhere near back to full employment.  The loss in GDP between our potential and our actual output is in the trillions of dollars.

Of course, some will say that it could have been done worse, and that’s true. Considering that the people in charge of fixing the crisis included some of  the same ones who created it in the first place, it is perhaps  remarkable it hasn’t been a bigger catastrophe.

More than deleveraging, more than a balance sheet crisis: the need for structural transformation

In terms of human resources, capital stock, and natural resources, we’re roughly  at the same levels today that we were before the crisis.  Meanwhile, many countries have not regained their pre-crisis GDP levels, to say nothing of a return to the pre-crisis  growth paths. In a very fundamental sense, the crisis is still not fully resolved—and there’s no good economic theory that explains why that should be the case.

Can't get enough of Krugman waving his arms

The Professor on perils of low inflation @ NYTs:

Ever since the financial crisis struck, and the Federal Reserve began “printing money” in an attempt to contain the damage, there have been dire warnings about inflation — and not just from the Ron Paul/Glenn Beck types.

Thus, in 2009, the influential conservative monetary economist Allan Meltzer warned that we would soon become “inflation nation.” In 2010, the Paris-based Organization for Economic Cooperation and Development urged the Fed to raise interest rates to head off inflation risks (even though its own models showed no such risk). In 2011, Representative Paul Ryan, then the newly installed chairman of the House Budget Committee, raked Ben Bernanke, the Fed chairman, over the coals, warning of looming inflation and intoning solemnly that it was a terrible thing to “debase” the dollar.

And now, sure enough, the Fed really is worried about inflation. You see, it’s getting too low…at barely above 1 percent by the Fed’s favored measure...

Why is low inflation a problem? One answer is that it discourages borrowing and spending and encourages sitting on cash. Since our biggest economic problem is an overall lack of demand, falling inflation makes that problem worse.

Low inflation also makes it harder to pay down debt, worsening the private-sector debt troubles that are a main reason overall demand is too low.

So why is inflation falling? The answer is the economy’s persistent weakness, which keeps workers from bargaining for higher wages and forces many businesses to cut prices. And if you think about it for a minute, you realize that this is a vicious circle, in which a weak economy leads to too-low inflation, which perpetuates the economy’s weakness.

And this brings us to a broader point: the utter folly of not acting to boost the economy, now.

Whenever anyone talks about the need for more stimulus, monetary and fiscal, to reduce unemployment, the response from people who imagine themselves wise is always that we should focus on the long run, not on short-run fixes. The truth, however, is that by failing to deal with our short-run mess, we’re turning it into a long-run, chronic economic malaise...

The end of Ed DeMarco and help for underwater homeowners?

Good discussion of the Federal Housing Finance Administration on "All In W/ Chris Hayes":

Visit NBCNews.com for breaking news, world news, and news about the economy

Visit NBCNews.com for breaking news, world news, and news about the economy

Low inflation isn't necessarily a good thing

Jared Bernstein digs deep into the problems brought by very low inflation:

The Fed announced today that they’ll continue to be the only ones in town trying to do something about the stubbornly high unemployment rate:

The Federal Reserve said Wednesday that its stimulus campaign would press forward at the same pace it has maintained since December, putting to rest for now any suggestion that it was leaning toward doing less.

Another symptom of our demand-weak economy, along with high unemployment and weaker job creation, is the recent deceleration in price growth, shown in the figure below.

The Fed’s “…statement also noted that the pace of inflation had slackened, a potential sign of economic weakness, but it showed little concern about that trend.”

Me, I’m pretty concerned about that trend.  On the one hand, lower price growth means higher real wages, all else equal, and that’s important as slower nominal wage growth is another problem right now.

But on the other hand, low inflation is problematic in ways that are less obvious than the real wage story above.  First off, faster inflation means lower real interest rates, and since the Fed’s already at zero (and can’t go lower), a bit more inflation would help in that regard.  I’d bet we’d see more investment bucks move of the sidelines if that trend in the figure were to reverse course. 

Higher inflation also chips away at nominal debt burdens and thus hastens deleveraging.

But the deeper, and more interesting, reason one worries about too-low inflation right now comes out of the work of Ackerlof et al back in the mid-1990s.  It has to do with sticky wages, something Keynes recognized as contributing to intractably high UK unemployment back in the early 1920s.

Austerity - The beatings continue...

The Economist:

IT IS a car crash of a data release. One simply can't look away. Hard to know precisely which part of the euro area's latest unemployment report is the most grimly compelling. The overall rate, at 12.1%? In the spring of 2010 unemployment rates in America and the euro zone were effectively the same at about 10%. There is now a gap of 4.5 percentage points. Total unemployment? In the first three years of the downturn America did far worse than the euro area, adding some 7.5m workers to the unemployment rolls to Europe's 4.7m. Since then total unemployment in the euro area has risen by another 3.2m while America reduced the ranks of the jobless by 3.5m. The euro area now has some 19.2m unemployed workers.

Individual country numbers inspire their own brand of horror. Greek joblessness topped

27% in January (the most recent month for which data there are available), while Spanish employment has risen to 26.7%. Joblessness in France rose by slightly more in the year to March than it did in Italy. And did you know that Dutch unemployment rose by 1.4 percentage points over the past year? German unemployment, of course, has held steady at 5.4% since last summer.

It is the youth figures that are most remarkable, however: 59.1% of those under 25 are unemployed in Greece, 55.9% in Spain, 38.4% in Italy, 38.3% in Portugal, 26.5% in France—3.6m youths in all.

There is blame to go around for this, but one has to reserve special criticism for the European Central Bank...

The ECB has presided over a wrenching disinflation that has brought inflation well below target, and which is both a consequence of recession and itself an implement of macroeconomic pain. Europe's governments have behaved badly, but American fiscal policy has hardly been better. The ECB faces a more complicated set of political constraints, but it has already proven how adroitly, aggressively, and inventively it can act when necessary.

The ECB meets this week. On Thursday it may announce an interest-rate cut; if it doesn't it is probable that a cut will be made in June. But a rate cut will not be enough, not remotely. As things stand ECB policy is scarcely being transmitted to the periphery, where rates to firms and households are far higher than in Germany. The euro area needs a jolt to expectations, targeted credit easing designed to improve peripheral liquidity, and broad quantitative easing. Mario Draghi has surprised markets before. Hopefully he will do so again. Because at the moment, the ECB is behaving as though the main economic failure in the 1930s was the world's pathetic inability to grit its teeth and endure the costs of tight money.

More fake data promoting deficit hysteria

Ezra Klein:

You’ve heard about all the problems with Reinhart and Rogoff. But how about the problems with Baker, Bloom and Davis?

On Sunday, Bill McNabb, Chairman and CEO of Vanguard, published an op-ed in the Wall Street Journal arguing that “since 2011 the rise in overall policy uncertainty has created a $261 billion cumulative drag on the economy (the equivalent of more than $800 per person in the country).” This is proof, McNabb says, that “developing a credible, long-term solution to the country’s staggering debt is the biggest collective challenge right now.”

Specifically, the policy uncertainty McNabb is looking at comes from “the debt-ceiling debacle in August 2011, the congressional supercommittee failure in November 2011, and the fiscal-cliff crisis at the end of 2012.” There’s no doubt that these episodes hurt the economy.

But the Vanguard study. McNabb says, is based on the “invaluable work” of Stanford University’s Nicholas Bloom and Scott Baker and the University of Chicago’s Steven Davis. The Bloom, Baker and Davis measure of policy uncertainty gets a lot of attention — but it’s shot through with holes.

Policyuncertainty.com

"The drive for austerity has lost its intellectual fig leaf"

 Professor Krugman sees some light @ NYTs:

Those of us who have spent years arguing against premature fiscal austerity have just had a good two weeks. Academic studies that supposedly justified lost credibility; hard-liners in the European Commission and elsewhere have softened their rhetoric. The tone of the conversation has definitely changed.

austerity have

My sense, however, is that many people still don’t understand what this is all about. So this seems like a good time to offer a sort of refresher on the nature of our economic woes, and why this remains a very bad time for spending cuts.

Let’s start with what may be the most crucial thing to understand: the economy is not like an individual family.

Families earn what they can, and spend as much as they think prudent; spending and earning opportunities are two different things. In the economy as a whole, however, income and spending are interdependent: my spending is your income, and your spending is my income. If both of us slash spending at the same time, both of our incomes will fall too.

And that’s what happened after the financial crisis of 2008. Many people suddenly cut spending, either because they chose to or because their creditors forced them to; meanwhile, not many people were able or willing to spend more. The result was a plunge in incomes that also caused a plunge in employment, creating the depression that persists to this day.

America's #1 "Very Serious Person" on the Austerity Imperative

Colbert digs deep into the data:

The Colbert Report
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"The Jobless Trap"

Professor Krugman nails our central and persistent economic problem:

F.D.R. told us that the only thing we had to fear was fear itself. But when future historians look back at our monstrously failed response to economic depression, they probably won’t blame fear, per se. Instead, they’ll castigate our leaders for fearing the wrong things.

For the overriding fear driving economic policy has been debt hysteria, fear

that unless we slash spending we’ll turn into Greece any day now. After all, haven’t economists proved that economic growth collapses once public debt exceeds 90 percent of G.D.P.? 

Well, the famous red line on debt, it turns out, was an artifact of dubious statistics, reinforced by bad arithmetic. And America isn’t and can’t be Greece, because countries that borrow in their own currencies operate under very different rules from those that rely on someone else’s money. After years of repeated warnings that fiscal crisis is just around the corner, the U.S. government can still borrow at incredibly low interest rates. 

But while debt fears were and are misguided, there’s a real danger we’ve

ignored: the corrosive effect, social and economic, of persistent high unemployment. And even as the case for debt hysteria is collapsing, our worst fears about the damage from long-term unemployment are being confirmed.

Now, some unemployment is inevitable in an ever-changing economy. Modern America tends to have an unemployment rate of 5 percent or more even in good times. In these good times, however, spells of unemployment are typically brief. Back in 2007 there were about seven million unemployed Americans — but only a small fraction of this total, around 1.2 million, had been out of work more than six months. 

Then financial crisis struck, leading to a terrifying economic plunge followed by a weak recovery. Five years after the crisis, unemployment remains elevated, with almost 12 million Americans out of work. But what’s really striking is the huge number of long-term unemployed, with 4.6 million unemployed more than six months and more than three million who have been jobless for a year or more. Oh, and these numbers don’t count those who have given up looking for work because there are no jobs to be found.

"Big Problems" in Little Denmark ... or Not!

Dean Baker catches fake journalism at The New York Times:

The NYT appears to be following the pattern of journalism practiced by the diatribe against the Danish welfare state that is headlined, "Danes Rethink a Welfare State Ample to a Fault." There's not much ambiguity in that one. The piece then proceeds to present a state of statistics that are grossly misleading and excluding other data points that are highly relevant.

Washington Post in openly editorializing in its news section. Today the news section features a

The first paragraphs describe the generosity of the welfare state then we get this ominous warning in the 5th paragraph:

"But Denmark’s long-term outlook is troubling. The population is aging, and in many regions of the country people without jobs now outnumber those with them."

oooooh, scary! Yeah people are living longer in Denmark, that's something that's been happening for a couple of hundred years or so. Like every other wealthy country people live longer in Denmark than in the United States. While they are projected to continue to see gains in life expectancy and further aging of the population, the increase is actually going to much slower than in the United States.

From 2012 to 2025 the percentage of the Danish population over age 65 is projected to rise from 17.8% to 21.2%, an increase of 3.4 percentage points. By comparison, in the United States the share of the population over age 65 is projected to rise from 13.6% to 18.1%, an increase of 4.5 percentage points over the same period, from a considerably smaller base. The impact of aging on the economy and the government budget will clearly be much larger in the U.S. than Denmark, especially since the government first starts paying for health care for people after they turn age 65 in the United States. (Like every other wealthy country, Denmark has national health insurance.)

The concern that, "in many regions of the country people without jobs now outnumber those with them," is especially touching. In the United States we have such a region, it's called the "United States." In March, 143.3 million people were employed out of a total population of 323  million for a ratio of workers to population nationwide of roughly 44.4 percent. In many parts of the country it would be much lower.

The piece then goes on to describe the extent of the Danish welfare state with its 56 percent top marginal income tax rate, telling readers:

"But few experts here believe that Denmark can long afford the current perks. So Denmark is retooling itself, tinkering with corporate tax rates, considering new public sector investments and, for the long term, trying to wean more people — the young and the old — off government benefits."

Hmmm, it would be interesting to know what data the experts are looking at.

"A Tax System Stacked Against the 99 Percent"

Reflections on tax day by Joseph Stiglitz @ NYTs:

No one enjoys paying taxes, and yet all but the extreme libertarians agree, as Oliver Wendell Holmes said, that taxes are the price we pay for civilized society. But in recent decades, the burden for paying that price has been distributed in increasingly unfair ways.

About 6 in 10 of us believe that the tax system is unfair — and they’re right: put simply, the very rich don’t pay their fair share. The richest 400 individual taxpayers, with an average income of more than $200 million, pay less than 20 percent of their income in taxes — far lower than mere millionaires, who pay about 25 percent of their income in taxes, and about the same as those earning a mere $200,000 to $500,000. And in 2009, 116 of the top 400 earners — almost a third — paid less than 15 percent of their income in taxes.

Conservatives like to point out that the richest Americans’ tax payments make up a large portion of total receipts. This is true, as well it should be in any tax system that is progressive — that is, a system that taxes the affluent at higher rates than those of modest means. It’s also true that as the wealthiest Americans’ incomes have skyrocketed in recent years, their total tax payments have grown. This would be so even if we had a single flat income-tax rate across the board.

What should shock and outrage us is that as the top 1 percent has grown extremely rich, the effective tax rates they pay have markedly decreased. Our tax system is much less progressive than it was for much of the 20th century. The top marginal income tax rate peaked at 94 percent during World War II and remained at 70 percent through the 1960s and 1970s; it is now 39.6 percent. Tax fairness has gotten much worse in the 30 years since the Reagan “revolution” of the 1980s.

Foreclosures - A National Crime Scene

From "All In with Chris Hayes:

Visit NBCNews.com for breaking news, world news, and news about the economy

"With a thousand lawyers on your payroll..."

He Who Makes the Rules - A long but very worthwhile piece in the Washington Monthly details how the banks are chipping away at Dodd-Frank:

In late 2010, Bart Chilton, one of three Democratic commissioners at the U.S. Commodity Futures Trading Commission (CFTC), walked into an upper-floor suite of an executive office building to meet with four top muckety-mucks at one of the biggest financial institutions in the world.
There were a handful of staff members present, but it was a pretty small gathering—one, it turns out, that Chilton would never forget.

The main topic Chilton hoped to discuss that day was the CFTC’s pending rule on what are known as “position limits.” If implemented properly, position limits would put a leash on speculation in the commodities market by making it harder for heavyweight traders at places like Goldman Sachs and JPMorgan Chase to corner a market, make a killing for themselves, and screw up prices for the rest of us. Position limits are also one of many ways to tamp down the amount of risk big institutions can take on, which keeps them from going belly up and minimizes the chance taxpayers will have to bail them out.

The financial institution Chilton was meeting with that day was a big commodities exchange, which is like a stock exchange except that instead of trading stocks they trade derivatives based on the value of actual products, like oil and gas. Chilton wouldn’t say which major commodities exchange he was meeting with that day, but suffice it to say two of the biggest—the Chicago Mercantile Exchange and Intercontinental Exchange—have a lot to lose from federally administered position limits. To them, the more derivatives traded, the better. They’ve been fighting the CFTC’s attempts to establish position limits for years.

The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010 seemed to promise meaningful reform on this front. The law includes Section 737, which explicitly directs the CFTC to establish position limits and lays out detailed guidelines on how they should do so. “The Commission shall by rule, regulation or order establish limits on the amount of positions, as appropriate,” it reads.

Still, even with the strength of the law behind him, Chilton waited until the end of the meeting to broach what he knew would be a tense subject. He began diplomatically. Now that the CFTC was required by law to establish position limits, his commission wanted to do so “in a fashion that made sense—one that was sensitive to, but not necessarily reflective of, the views of the exchange,” he told the executives.

Chilton’s gracious overture fell flat. His hosts, who had been openly discussing other topics moments before, were suddenly silent. They deferred instead to their top lawyer, who explained that the exchange’s interpretation of Section 737 was that the CFTC was not required to establish position limits at all.

Chilton was blindsided. While other parts of Dodd-Frank were, admittedly, vague and ambiguous and otherwise frustrating to those, like him, who were tasked with writing the hundreds of rules associated with the act, Section 737 didn’t exactly pull any punches. The Commission shall establish limits on the amount of positions, as appropriate.
 
“You gotta be kidding,” Chilton told the executives. “The law is very clear here. The congressional intent is clear.”

California Comeback - Lessons for the Country?

Krugman @ New York Times looks West:

Modern movement conservatism, which transformed the G.O.P. from the moderate party of Dwight Eisenhower into the radical right-wing organization we see today, was largely born in California. The Golden State, even more than the South, created today’s religious conservatism; it elected Ronald Reagan governor; it’s where the tax revolt of the 1970s began. But that was then. In the decades since, the state has grown ever more liberal, thanks in large part to an ever-growing nonwhite share of the electorate.

As a result, the reign of the Governator aside, California has been solidly Democratic

since the late 1990s. And ever since the the political balance shifted, conservatives have declared the state doomed. Their specifics keep changing, but the moral is always the same: liberal do-gooders are bringing California to its knees.

A dozen years ago, the state was supposedly doomed by all its environmentalists. You see, the eco-freaks were blocking power plants, and the result was crippling blackouts and soaring power prices. “The country’s showcase state,” gloated The Wall Street Journal, “has come to look like a hapless banana republic.” 

But a funny thing happened on the road to collapse: it turned out that the main culprit in the electricity crisis was deregulation, which opened the door for ruthless market manipulation. When the market manipulation went away, so did the blackouts. 

Undeterred, a few years later conservatives found another line of attack. This time they said that liberal big spending and overpaid public employees were bringing on collapse. 

The Great (Income) Depression

Catherine Rampell @ NYT's Economix:

February’s median annual household income was 5.6 percent lower than it was in June 2009, the month the recovery technically began; 7.3 percent lower than in December 2007, when the most recent recession officially started; and 8.4 percent lower than in January 2000, the earliest date that this statistical series became available...

 

Source: Sentier Research analysis of Labor Department data. Note that vertical axis does not start at zero to better show the change...

Corporate Profits Soar As Unemployment Persists

Lawrence Mishel @ Economic Policy Institute:

Newly released data on corporate profitability for 2012 show the continuation of historic levels of profitability despite excessive unemployment and stagnant wages for most workers. Specifically, the share of capital income (such as profits and interest, which are hereafter referred to as ‘profits’) in the corporate sector increased to 25.6 percent in 2012, the highest in any year since 1950-1951 and far higher than the 19.9 percent share prevailing over 1969-2007, the five business cycles preceding the financial crisis.

""Hot Money Blues"

Paul Krugman wonders whether the era of unrestricted movement of global capital - which contributed to a financial crisis that hasn't ended - is beginning to fade:

Whatever the final outcome in the Cyprus crisis — we know it’s going to be ugly; we just don’t know exactly what form the ugliness will take — one thing seems certain: for the time being, and probably for years to come, the island nation will have to maintain fairly draconian controls on the movement of capital in and out of the country. In fact, controls may well be in place by the time you read this. And that’s not all: Depending on exactly how this plays out, Cypriot capital controls may well have the blessing of the International Monetary Fund, which has already supported such controls in Iceland.

That’s quite a remarkable development. It will mark the end of an era for Cyprus, which has in effect spent the past decade advertising itself as a place where wealthy individuals who want to avoid taxes and scrutiny can safely park their money, no questions asked. But it may also mark at least the beginning of the end for something much bigger: the era when unrestricted movement of capital was taken as a desirable norm around the world.

It wasn’t always thus. In the first couple of decades after World War II, limits on cross-border money flows were widely considered good policy; they were more or less universal in poorer nations, and present in a majority of richer countries too. Britain, for example, limited overseas investments by its residents until 1979; other advanced countries maintained restrictions into the 1980s. Even the United States briefly limited capital outflows during the 1960s. 

Is a Medicare Cost Slowdown Closing the Budget Gap?

Peter Orzag, former White House budget analyst, points @ Bloomberg to a possible breakthrough in health care costs that could dramatically impact the debate over deficits - at least that part of the debate which is based on honest, informed analysis (which often appears, at least among our elites, to be the terrain amidst this brouhaha that is the smallest and least often heard):

Past Increases in Health Care Costs

New evidence that the slowdown in health care costs over the past five years is happening not only because of a weak economy comes from the Economic Report of the President, released last week by the President’s Council of Economic Advisers. If the slowdown were to continue in the future, the report shows, Medicare spending would basically remain flat as a share of the economy.

Nevertheless, new data suggest Medicare spending growth may be picking up a bit. So it’s important to take more aggressive action to improve value in health care.

"America's Latest Phony Fiscal Crisis"

Former chief economist for the IMF, Simon Johnson @ Bloomberg:

In most countries that experience a fiscal crisis, there is no ambiguity about the situation. 

The government is unable to sell debt at a reasonable interest rate. This probably coincides with a broader shift out of domestic assets, as smart investors read the writing on the wall or in the newspapers. The currency collapses and, often, inflation accelerates. The government is forced to slash spending and, cap in hand, asks for help from the world’s least popular ambulance service: the International Monetary Fund.

British burn White House - War of 1812

No part of this description fits the modern U.S. Rates on government debt are very low, the currency isn’t depreciating rapidly and inflation seems stable. There is no imaginable circumstance under which the U.S. would need to borrow from the IMF. Yet this great land of innovation has undeniably invented its unique kind of fiscal crisis.

Or, to be more precise, we have reinvented the uniquely American way of ruining our fiscal affairs. At the beginning of the 19th century, Thomas Jefferson was obsessed with the idea that debt was bad and that the U.S.’s obligations -- inherited mostly from the War of Independence -- must be eliminated at all costs. (Jefferson himself had had some bad personal experiences with debt.)

Budget Wars: House Progressive Caucus v. Paul Ryan

Click "Read More" below for the complete PDF from National Priorities Project of the House Progressive Caucus budget analysis v. Paul Ryan's GOPers and the Senate Dems.