Relevant and even prescient commentary on news, politics and the economy.

Science and Technology advice

Via Science magazine, Trump’s White House science office still small and waiting for leadership:

…Trump has yet to nominate an OSTP director, who traditionally also serves as the president’s science adviser. Nor has he announced his choices for as many as four other senior OSTP officials who would need to be confirmed by the Senate.

Still pending is the status of the President’s Council of Advisors on Science and Technology, a body of eminent scientists and high-tech industry leaders that went out of business at the end of the Obama administration.

Via NYT, The Climate Lab That Sits Empty:

There are only a handful of labs in the United States and elsewhere with the equipment to reliably make these measurements at the high precision required for atmospheric research. None has the capacity the Boulder lab would have to run the necessary number of measurements — about 5,000 per year. And the Boulder lab, unlike others with similar equipment, would be fully dedicated to monitoring global greenhouse gas emissions.

The National Oceanic and Atmospheric Administration first sought funding for this program without success in 2012 and is trying yet again this year. But there seems to be little hope that lawmakers will finally provide the roughly $5 million for the machine and attendant research program. Worse, the whole national greenhouse-gas monitoring program may be at risk, if Congress approves President Trump’s proposed cuts to climate science.

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Wisconsin and Foxconn…

Via the New York Times Wisconsin and Foxconn:

Foxconn’s plan for a $10 billion factory in Wisconsin is certainly good news for President Trump and Republican politicians Gov. Scott Walker and Speaker Paul D. Ryan, whose district the plant would call home.

But the deal with Foxconn, the Taiwanese electronics supplier, comes with a heavy price tag for Wisconsin taxpayers: $3 billion in state tax credits that dwarf the typical incentive package companies receive from local governments.

Even as Mr. Walker celebrated the news with Foxconn executives at a rally at the Milwaukee Art Museum on Thursday, experts on the political left and right alike said the rewards were not justified by the cost of the tax breaks.

Over all, the subsidies for the Foxconn plant, which would produce flat-panel display screens for televisions and other consumer electronics, equal $15,000 to $19,000 per job annually.

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FIX THE DEBT WANTS TO SAVE SOCIAL SECURITY BUT WHY?

by Dale Coberly

 

FIX THE DEBT

WANTS TO SAVE SOCIAL SECURITY

BUT WHY?

I received an email a few days ago from Chris Dreibelbis,Fix the Debt, purporting to explain “why the Social Security Trustees urge action.”

“Fix the Debt” is a project of the Committee for a Responsible Federal Budget (CRFB) which is funded in part by Peter Peterson, a very rich person who has made something of a second career writing and saying misleading things about Social Security.  So have CRFB and “Fix the Debt.”

The present email from Dreibelibis looks reasonable enough,  but also misleading enough, that I thought it worth writing this short post.

Dreibelbis quotes the Trustees, “Both Social Security and Medicare face long term shortfalls under currently scheduled benefits and financing….The Trustees recommend that lawmakers take action sooner rather than later to address these shortfalls…”

Dreibelbis says, “The newest report forecasts that Social Security’s combined trust fund will run dry by 2034.  At that point, all recipients will see a 23% cut in benefits.  For example a typical person born in 1990 … will see a cut of over $160,000 dollars in scheduled lifetime benefits.”

To check this, I assumed that person would pay FICA taxes on income equal to 12.4% of the average income each year from 2020 through 2054.  I looked at Table V.C7 (Trustees Report p150} for a person who obtains age 65 in 2055 and retires at age 67 to find a scheduled yearly benefit of $33430.  Since the numbers in the table are given as constant 2017 dollars, I assumed the “real” value of the benefit would not change and multiplied it by the 20 years that person could expect to live in retirement, for a total of 668600 dollars.  Now, if the benefits are cut by 22% that person would lose $158,778 in total benefits over his lifetime. This is close enough to Dreibelbis figure, assuming he may have done the calculation slightly differently.

 

But what Dreibelbis did not do was calculate the cost of avoiding the benefit cut by raising the payroll tax 4%.  This turns out to be $93566 or about 60% of the value of the lost benefits.  Sounds to me like a better deal.  Moreover the tax would be paid out of an income of 2.339,153, leaving him an after the tax total income of $2,245,587, or an average of about $64,159 per year (2017 dollars).   Taking the benefit cut would leave him a total of $509,822 in benefits, or an average of about $25,491 per year to live on when he is old.

There are probably games you can play with “present value”  or “what you could have earned from interest,”   but that does introduce some “if’s.”  In any case, a first look at the numbers suggest that paying the extra tax makes more sense than taking the benefit cut.  It turns out that most workers would only see half the taxes (the other half being paid by the employer:  (i am quite aware of the “employers share is “really” the employees money” argument, but that is a metaphysical argument meant to distract from the payroll facts on the ground.)  Taking that employee’s share only, and phasing in his 2% tax increase one tenth of one percent (about a dollar per week at today’s average wage) per year would leave his total tax cost of avoiding the $153,778 benefit cut at about $35710.  This means every dollar he pays in “extra” taxes would get him $4.31 in saved benefits.

By the way, these numbers are in “real” dollars.  Accounting for inflation would make the benefit of paying the tax look much larger.  Or BE much larger, since any attempt to make up for the SS tax by “personal savings”  would have to first make up for what would be lost to inflation.

Dreibelbis does not address this. He strongly implies we need to cut SS now in order to “know what you can count on in the future.”   He never considers that we could just pay an invisibly larger tax now and keep (earn) the benefits we will will most definitely need in the future.

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Money makes the world…

Even though Angry Bear has as an audience of people who are more than beginners in economic thought,  I think it worthwhile to pursue basic stories about what we demand and value from our way of life, which includes the “economy”.

I had a recent experience where an acquaintance came up to me and asked about Angry Bear and then proceeded to explain what formed the basics of his economic narrative. In rough form and I think my summation accurate enough for casual conversation: Capital is like stocks, debt is like bonds, and rents are had by all…government (I think he meant taxes and ?), companies arbitage?, monopolies (profits and ?). He also asked who I read to get my information (I assume he was asking for a reference or two for Econ 202 information).

I actually wasn’t sure how to respond given his perceptions and also I wasn’t sure how great an interest he had in sorting out his stories or math on economics…I had mine, but there needs to be common ground somewhere. At least we had not begun with the tweet kind of economics spouted by political figures and slogans for PR campaigns.  And he actually might be interested and willing to re-think basics. What might the format be to encourage him to be more thoughtful?

I think this worth pursuing beyond the tired story line of avoiding Uncle so and so at Thanksgiving dinner or the neighbor who has clearly and unequivocally bought into simple political memes.   Barkley Rosser’s Could the US default due to a Complexity Catastrophe? offers another example.

Where does one begin with experience and smart people in one’s circles of activities?

How to think like and economist of that is what you wish by Brad DeLong

I have long had a “thinking like an economist” lecture in the can. But I very rarely give it. It seems to me that it is important stuff—that people really should know it before they begin studying economics, because it would make studying economics much easier. But it also seems to me—usually—that it is pointless to give it at the start of a course to newBs: they just won’t understand it. And it also seems to me—usually—that it is also pointless to give it to students at the end of their college years: they either understand it already, or it is too late.

By continuity that would seem to imply that there is an optimal point in the college curriculum to teach this stuff. But is that true?

What do you think?

(Dan here….also lifted from comments)

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Of the two meanings of “Neoliberalism”

Of the two meanings of “Neoliberalism”

The use of the term “neoliberal” has recently been criticized as a meaningless epithet, a tabula rasa used to disparage anyone deemed unsatisfactorily conservative.

To the contrary, I think the term “neoliberal” is fairly precise, but much like the term “liberal” itself, it has two quite different meanings depending on whether the definition descends from its original European or American incarnation.  The first variety is very right-wing. The second is centrist.

A good description of right-wing neoliberalism can be found in this article in Al Jazeera this past weekend on a right-wing awakening in Latin America:

[N]eoliberalism is … a means to an end. The state is purposefully reduced in its scope of action to a minimum – by way of policies associated with fiscal austerity, financial deregulation, free trade and the privatisation of public assets, among others – so nothing can prevent the market and its profit-oriented agents from reaching a fair point of equilibrium between demand and supply. According to those who advocate such perspective, the state is nothing but a “necessary evil”.

Similarly, Brad DeLong has said:

[R]ight-neoliberalism is the claim that social democracy was one huge mistake–that it created a North Atlantic of takers who mooched off the makers. It holds that if we got rid of social democracy, we would have a utopia because the makers wouldn’t have to carry the takers on their backs and the takers would shape up ….

This right-wing meaning, of “neoliberalism” is a reincarnation of European-style 19th Century laissez-faire liberalism, a belief that the ideal state should operate and be limited by the rule of law, and administered by neutral officials selected on merit, with the economic markets left to themselves without interference by government. Nineteenth century liberals had no problem with, for example, government  promotion of infrastructure, including things like sanitation and education. Right-wing neoliberals, by contrast, see all government bureaucracy as inherently evil — even, as we saw in the case of Flint, Michigan, in the case of basic sanitation.

Note that right-wing neoliberalism is similar to, but not quite the same as, “libertarianism.” Libertarians believe the state also has no business in the private sphere of people’s lives. Thus it should stay out of the bedroom as well as the boardroom.  Not necessarily for right-wing neoliberalism. Right wing liberalism is agnostic as to whether foreign policy is passive or imperialistic, and whether or not government intervenes in the social sphere, so long as it stays out of the economic sphere.

The second type of “neoliberalsim,” centrist neoliberalism, originates from the US meaning of liberalism, and is once again defined pretty  well by Brad DeLong:

1. Most of the time the best way to accomplish social-democratic ends will be to get the money to the people who maximally want those ends accomplished, and then let them spend it.

2. Most of the time the best way to correctly manage the market system so that it doesn’t rain destruction upon the land is to impose the appropriate anti-destruction-raining Pigovian taxes (and subsidies).

3. Most of the time command-and-control is strictly dominated by other modes of government intervention that are less vulnerable to naked rent-seeking by the politically influential.

Elsewhere he quotes John Quiggin:

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Could The US Default Due To A Complexity Catastrophe?

Could The US Default Due To A Complexity Catastrophe?

Definitely.

Front  page story in today’s Washington Post by Damien Paletta reports that “Treasury chief hurtles toward fiasco,” the fiasco being a failure to raise the US debt ceiling in time to avoid a default.  Trump has declared that Sec Mnuchin is responsible for this matter, which he should be, but somehow has not made a sufficiently definitive statement to keep his former Freedom Caucus big cheese OMB director, Mulvaney, from opining that Mnuchin is an out of it New York finance guy (Goldman Sachs even) who is not well connected in Washington, and he, Mulvaney, thinks that the dumb games he played as a Congressman threatening to default are appropriate for  somebody in charge of all this.

The deadline is approaching, although it might be somewhere between early September and mid-October, but at some point if the debt ceiling is not raised, the US will seriously default, something we have not seen, and I doubt that any deal Mulvaney might propose would get through this dysfunctional Congress.  And the article reports that while Mnuchin wants a “clean raise” before  the Congress really shuts down in August, well, according to WaPo, he does not have the “stature in Washington to press through a vote on a measure” supported by all previous Treasury Secretaries.  Indeed, the article is right that he may not be able to do so, and the US may well seriously default on its debt for the first time, something the gang that Mulvaney has belonged to has declared is no big deal. We may be about to find out if that is correct or not.

In thinking about this I have come to realize that part of the problem is that this is a very complicated issue, one that few people understand, and that this lack of understanding is self-propagating: that few understand it means that there are few who can teach those who do not understand it what it is about. The upshot is that an incredibly miniscule proportion of the US population has any remote idea what all this  is about, so are not  putting any pressure on these loud mouthed Congresspeople to behave resonably. If in fact there is a default and it leads to a global financial crisis that puts the world economy back into a serious recession, well, who could have known that, and who will be to blame?

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Foxconn aims to break the bank

Foxconn aims to break the bank

While the head of the illegitimate Trump regime makes multiple headlines telling the New York Times that he is above the law, we have to remember that there are plenty of other issues of concern to the middle class. One of the most striking is the latest huge bidding war for a gigantic Foxconn manufacturing plant (h/t David Haynes), slated to employ a massive 10,000 workers.

The linked article interviews an American consultant based in Beijing, Einar Tangen, who says that Foxconn’s standard procedure is to get as much incentives out of state and local governments as possible; indeed, he says, “You can expect Foxconn to get as close to zero cost as they can. They can do it because they bring so many jobs.” Yes — and no.

Yes, 10,000 jobs is a lot of jobs for a single U.S. investment project. But Foxconn has strong motivations to invest in the United States, most importantly the fear of protectionist trade policies that will keep their iPhones and other electronics out of the country. This mirrors the mid-1980s, when exactly the same fear spurred most Japanese automakers to build at least one assembly plant in the United States. If the company has to have a presence in the U.S. market, especially as competitors were doing during the 1980s, the firm does not actually have that strong a bargaining position vis-à-vis the United States.

The problem, just as in the 1980s, is that as long as individual states do not coordinate their bidding (as happens in the European Union), the dynamic of bidding wars will induce them to offer outrageously high location subsidies, sometimes even in excess of 100% of the cost of the investment. Individual states do not take into effect what happens in other states when they do their cost-benefit analyses of economic development projects. The fact that the new investment will directly or indirectly destroy jobs at competing facilities is of no concern to policymakers in, say, Wisconsin, who will not adjust their cost-per-job estimates to reflect this dynamic.

While the United States has a strong bargaining position, individual states bidding against each other do not have a strong bargaining position. Foxconn believes it *has* to come to the United States, but it does not have to locate its new manufacturing plant in Wisconsin. Nor does it have to put it in Michigan, another state apparently in the hunt for this factory. But we can see that there will be a bidding war with at least two states pursuing the facility, and it will drive up the cost of location subsidies spectacularly. Perhaps we’ll see a new all-time record.

Oddly enough, even the states have a factor increasing their bargaining power, a low unemployment rate. In May 2017, Wisconsin’s unemployment was down to 3.1%, while Michigan’s was 4.2%. For Michigan, this represents a decline of 10.7 percentage points(14.9% to 4.2%) since the peak in July 2009. All other things equal, both states should be less desperate to get these jobs than they would have been in 2009.

Call me cynical, but I’ll believe it when I see it for the states to refrain from a bidding war.

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Another Personal Observation On Privatized Highways

Another Personal Observation On Privatized Highways

Last month I posted a personal observation on Trump’s plan to privatize infrastructure, noting especially how in the long run privately owned turnpikes in Virginia ended up in government ownership.  In the comments on that post there was discussion of the Indiana Toll Road, privatized a few years ago.  I have just ridden on it (yesterday), and I shall recount as an anecdote datum my less than pleasant experience, bad enough to make me want to avoid it entirely in the future.

I was driving west on it from Ohio.  I stopped in one of the new service areas to get some pizza.  Fancy roof, but only two eating places, Lagrange in the east.  OK, but nothing great.  I would say road condition about same as Ohio’s, but tolls higher, although not as high as in Illinois or Pennsylvania.  Anyway, I saw that I had enough gas to make it to the LaPorte service area in the western part of the state, so did not refill there or at the Elkhart one.  Nowhere did I see any signs or information about any problems with any of the upcoming service areas.

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Trump’s presidency is 1/8 done. The economy is still on Obama’s autopilot. Where’s the DOOOM?!?

Trump’s presidency is 1/8 done. The economy is still on Obama’s autopilot. Where’s the DOOOM?!?

Today marks half a year since Donald Trump took the Oath of Office as President.  I just wanted to note that, so far, absolutely nothing of significance has been enacted to affect the economy.  It’s still basically Barack Obama’s expansion.

Of note, where have all the Doomers gone?  Zero Hedge has turned into a Trump + Putin fanboi club. The left-wing purists who were sure that everything stunk and the next crash is right around the corner have moved on to other things.  The writers who had been bleating about imminent recessions – almost every year since 2009 – are now just talking about very slow GDP growth.  I’m almost tempted to become a contrarian!

Basically, everything of note is positive, although much has been or is decelerating.  Over the next 6-12 months, if Washington leaves the economy alone, I expect job growth to continue, the unemployment rate to decline a little, prime age labor force participation to increase, and nominal wage growth to remain steady if participation increases a lot, and maybe increase more if participation only increases a little, although the positivity of most of these things will probably decelerate.

One eighth of the way through Trump’s presidency, Obama’s autopilot is still engaged.

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How Keynesian Policy Led Economic Growth In the New Deal Era: Three Simple Graphs

(Dan here…lifted and reposted)

by Mike Kimel

How Keynesian Policy Led Economic Growth In the New Deal Era: Three Simple Graphs

November 22, 2011

In this post, I will show that during the New Deal era, changes in the real economic growth rate can be explained almost entirely by the earlier changes in federal government’s non-defense spending. There are going to be a lot of words at first – but if you’re the impatient type, feel free to jump ahead to the graphs. There are three of them.

The story I’m going to tell is a very Keynesian story. In broad strokes, when the Great Depression began in 1929, aggregate demand dropped a lot. People stopped buying things leading companies to reduce production and stop hiring, which in turn reduced how much people could buy and so on and so forth in a vicious cycle. Keynes’ approach, and one that FDR bought into, was that somebody had to step in and start buying stuff, and if nobody else would do it, the government would.

So an increase in this federal government spending would lead to an increase in economic growth. Even a relatively small boost in government spending, in theory, could have a big consequences through the multiplier effect – the government hires some construction companies to build a road, those companies in turn purchase material from third parties and hire people, and in the end, if the government spent X, that could lead to an effect on the economy exceeding X.

This increased spending by the Federal government typically came in the form of roads and dams, the CCC and the WPA and the Tennessee Valley Authority, in the Bureau of Economic Analysis’ National Income and Product Accounts (NIPA) tables it falls under the category of nondefense federal spending.

Now, in a time and place like the US in the early 1930s, it could take a while for such nondefense spending by the federal government to work its way through the economy. Commerce moved more slowly back in the day. It was more difficult to spend money at the time than it is now, particularly if you were employed on building a road or a dam out in the boondocks. You might be able to spend some of your earnings at a company store, but presumably the bulk of what you made wouldn’t get spent until you get somewhere close to civilization again.

So let’s make a simple assumption – let’s say that according to this Keynesian theory we’re looking at, growth in any given year a function of nondefense spending in that year and the year before. Let’s keep it very simple and say the effect of nondefense spending in the current year is exactly twice the effect of nondefense spending in the previous year. Thus, restated,

(1) change in economic growth, t =
f[(2/3)*change in nondefense spending t,
(1/3)*change in nondefense spending t-1]

For the change in economic growth, we can simply use Growth Rate of Real GDP at time t less Growth Rate of Real GDP at time t-1. The growth rate of real GDP is provided by the BEA in an easy to use spreadsheet here.

Now, it would seem to make sense that nondefense spending could simply be adjusted for inflation as well. But it isn’t that simple. Our little Keynesian story assumes a multiplier, but we’re not going to estimate that multiplier or this is going to get too complicated very quickly, particularly given the large swing from deflation to inflation that occurred in the period. What we can say is that from the point of view of companies that have gotten a federal contract, or the point of view of people hired to work on that contract who saved what they didn’t spend in their workboots, or storekeepers serving those people, they would have spent more of their discretionary income if they felt richer and would have spent less if they felt poorer.

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