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A thought for Sunday: the economy is on autopilot. Pray that it stays that way

by New Deal democrat

A thought for Sunday: the economy is on autopilot. Pray that it stays that way

It’s Sunday, so I get to step out from nerdy analysis, and opine as I please.

Back in 2014, when there was another GOP “wave” election in the Congress, I wrote that the silver lining was that we were at the best point in the economic cycle for it to function on autopilot for the next 24 months. In other words, almost all of the long term indicators were positive, so if all the Congress did in 2015-16 was agree to continue to pay the country’s bills, we would probably be OK.  And we were.

So, a little over 3 months into the Trump Administration, what action has it taken to materially change the economic trajectory?

Basically, nothing. Yes, a bunch of executive orders have been signed promising to undo Obama regulations, and the telecoms have gotten the right to sell all of your data, but in terms of actual action, the economy is still on autopilot.

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Waldmann Vs Waldman (finally)

I am generally very very impressed by Paul Waldman at the Plum line blog (for one thing I admire the lack of Ego he demonstrates by writing for a blog subtitled “Greg Sargent’s take from a liberal perspective). Waldman is reliably brilliant (so is Sargent).

Now finally I find something he wrote with which I disagree. In the generally excellent “President Trump Appoints Tax Fairy to Key Economic Post” Waldman wrote

The point isn’t that tax increases help the economy and tax cuts hurt it, but rather that tweaking the tax code has very little effect at all. You might get a modest economic bump from tax cuts, but it won’t ever create enough growth to pay for them, as Republicans always insist their next tax cut will do. Democratic economists know this, which is why they don’t think changing the tax code — even in a progressive direction — is a particularly urgent priority.

He is demonstrably wrong. I am a Democratic economist and I think that changing the tax code in a progressive direction is a particularly urgent priority.

I think this is just a case of sloppy writing (yeah I know, look who’s typing). By “economists” Waldman means “economists thinking about GDP growth”. This is unfair to economists. Very few of us are obsessed with GDP and, I think, almost none of us are sincerely indifferent to the distrubution of national income (I am guessing that people who claim they are do so because they know their view that the rich should be richer is unpopular).

Many economists who work in public finance are obsessed with the income distribution and, obviously consider changing the tax code their life’s work. There are excellent reasons to suspect that a more progressive tax code would cause dramatically higher welfare.

I have another objection (after the jump)

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Tax Justice Network Taxcast, March 2017: Brexit and Tax Havens; Losses to Tax Avoidance

by Kenneth Thomas

Tax Justice Network Taxcast, March 2017: Brexit and Tax Havens; Losses to Tax Avoidance
Will Brexit harm the City of London’s tax haven? With weak regulation, money laundering, and satellites like BVI, Cayman Islands, and Jersey, everyone knows it’s already a tax haven. The UK is threatening to be more of a tax haven if they don’t get their way on other issues in the Brexit negotiations, but the EU will be vigilant on this issue, in John Christensen’s opinion. He notes that the General Agreement on Trade in Services (GATS) does not guarantee trade in most financial services. He says UK suffers from finance curse (like the resource curse increasingly studied in political science). He predicts that the EU will find it easier to regulate financial services after the UK is gone.

The cost of the financial crisis was $6.5-$14.5 trillion, according to calculations by Gerald Epstein, of the University of Massachusetts, Amherst. The bailout enabled finance to make profits far beyond what was justified based on the risk banks took on prior to the bailout. Economic rent has been generated through excess compensation, drawing more top graduates into the sector. Private credit/GDP over 90% or so leads to lower economic growth. The U.S., UK, and Iceland all had been at 200% of GDP.

Overcharged? The High Cost of High Finance” is the name of the report.

Listen to the entire broadcast here.

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The Blood of Christ

I recently saw a rather alarming poster advertizing a blood drive

bloodofchrist

The title is “donate blood and follow your artistic inclinations” which, given the image, I interpreted as “donate blood and faint, so that you are inclined head down just like the recently crucified Christ. You will be resurrected too (by some fluids not the holy spirit).”

Oddly, it seems the advertizing agency didn’t notice the potentially alarming relationship between the image and a (rather rare) side effect of blood donation. They also didn’t consider the literal meaning of “inclinazione” when writing about an extremely inclined figure.

Closer reading reveals that The One True Catholic and Apostolic Church is, in a sense, paying for blood. “Donors” receive discounts on tickets to the vatican museums.

This raises an issue related to economic theory and justifies an AngryBear post. “Tranfused Blood, Serum Hepatitis, and the Coase Theorem” is a fundamentally important article about market failure in the presence of asymmetric information. The authors noted that it is much cheaper to buy blood than to convince people to give it. But the bought blood isn’t as good, being more likely to contain hepatitis virus. The point is that if someone gives with the intent to help, they care about the quality of their gift, and follow instructions to not donate if, for example, they self inject drugs. People who sell include many who care only about the money. Since the donor (or seller) knows more about the donor’s behavior and risk of hepatitis infection than the blood collectors, the market fails.

This is a really important article (or an early cite of an earlier really important article — Google Scholar gets weak going back to 1974).

But, it seems to me, that the One True Catholic and Apostolic Church has found a trick — a way to pay and select. The point is that intravenous drug addicts etc may be desperate for money and eager to sell blood for cash, but they are not so desperately eager to get discounts on tickets to art museums to be willing to lie and endager others to get them. Even the relatively art loving heroin addict will probably want to save the money rather than buy even discounted tickets to an art museum.

So paying with a “merit good” (don’t ask me to define or even type without scare quotes) can be a rational strategy to use the market even in this case of asymmetric information.

I do not have a rationale for bringing up crucifixion, when trying to convince people to let other people stick sharp things into them.

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Real wages and spending: I don’t think consumers will roll over that easily (part 2)

by New Deal democrat

Real wages and spending: I don’t think consumers will roll over that easily

This is the second part of a post about “hard data” and consumer spending. (Dan here…First part here)

Yesterday I noted that self-reported consumer spending, as measured by Gallup, has been running 10% or better YoY since the beginning of February, consistent with Amazon.com’s earnings growth, but in contrast to a small slump in retail sales as reported for the last two months.

In fairness, real personal consumption expenditures have turned down slightly in the last several months:


Since this measures spending, there is clearly a divergence between this measure  and Gallup.

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How wrong is IBD on California? Let us count the ways

by Kenneth Thomas

How wrong is IBD on California? Let us count the ways

Investor’s Business Daily has a hit piece out on California, as you can tell from the headline, “Taxifornia does it again.” Here’s the first paragraph of the editorial*, to give you a good flavor of it:

California’s far-left government has done it again. Not realizing its real problems are excessive spending on misplaced priorities, excessive taxes, too much debt and a far-too generous welfare state, its legislature working in cahoots with Gov. Jerry “tax-and-spend” Brown has pushed through the largest tax hike in state history.

Amazingly, the editorial does not mention regulations once, though it did get around to the “job-killing $15-an-hour minimum wage” recently passed, along with the proposal for a single-payer health insurance system. I guess that counts as massive self-restraint on the editors’ part.

The article calls California “the highest-tax state in the union.” If that’s so, it’s just another example of the false claim (popular also with Arthur Laffer and the conservative American Legislative Exchange Council) that high taxes always mean bad policy outcomes. (FWIW, according to Forbes, California only has the sixth-highest state and local tax burden.)

So what have been the consequences of all of California’s tax increases? According to IBD, “Since 2004, California has lost more than 1 million people, representing a $26 billion net income loss.” Of course, no one has actually been lost. California’s population grew by almost exactly 4 million between 2004 and 2016, from 35.25 million to 39.25 million. What IBD’s editors are referring to is net interstate immigration and even there, the analysis is a little squirrely. From 2004 to 2008, the state had net interstate emigration of over 100,000 per year, with a low point of 288,000 net loss in 2006 (you know, during the housing disaster), but in every year since 2009, the number has been under 100,000 per year. Of course, interstate immigration is only one element of population change, and IBD conveniently omits the rest.

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Turkey And The Trend To Authoritarianism

by  Barkley Rosser

Turkey And The Trend To Authoritarianism

The big surprise in the Turkish referendum to make Turkey a presidential system was not that Erdogan’s side won, but that it was close enough that opponents are charging fraud based on ballots not being counted properly.  It may in fact be that it really did lose by a narrow margin, as some I know said it would.  But, officially it won by a bit more than Hillary beat Trump  and a bit less than Brexit won by. What strikes me is how the voting patterns in all of these three resemble each other, even as they differ in many ways on economic, nationalistic, and religious grounds, not to mention broader historical issues.

So the big similarity is that they all seem to have exhibited a pattern of the winning side (not in pop votes in the US) being rural traditional voters in the heartlands of these countries, this not holding in UK where all counties supported the losing Remain side, against urban and higher educated and more secular or minority laden areas.  Southwestern Wisconsin switched from Obama to Trump, Northern England came in strong for Brexit, and central Turkey aside from Ankara came in for Erdogan’s referendum.  Is there a commonality here, global populism?

It may be, but the differences between the countries on the categories of economics, nationalism, and religion are notable. One should not forecast too far into  the future about future elections based on this, just to  note a more political issue, in the UK the Brexit vote was not obviously authoritarian, with many Brexiteers supporting freedom from supposedly oppressive and undemocratic EU regulators, even if they may have been misled to some degree.  In the US, many see Trump as authoritarianb, but some voting for him think he is bringing freedom of some sort, maybe as the Sons of Liberty in Texas fought for the freedom to own slaves.  In Turkey this matter is pretty unequivocal, with Erdogan declaring a third round of martial law after imprisoning thousands of innocent people on trumped up charges after the failed Gulenist coup attempt last summer.  He is full bore authoritarian, but then he is seeking to replace Ataturk, who was also very authoritarian.

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The Amazon.com effect: retailers say they’re not selling, but consumers report they are buying

by New Deal democrat

The Amazon.com effect: retailers say they’re not selling, but consumers report they are buying

This was originally one post but I think it works better divided into two parts.

One of the issues I keep reading about recently is the (alleged) divergence between “soft” and “hard” data.  For example, consumer sentiment as measured by the University of Michigan (and the Conference Board, and Gallup) has been making new highs since the Presidential election last November (according to Gallup, mainly fueled by a massive gain in optimism among Republicans). while “hard data,” chiefly industrial production but also including consumer spending, has failed to follow suit.

One problem with this thesis has been that manufacturing as measured by the industrial production index, turned up for five months in a row.  It turned down in March, and one good measure of how intellectually honest the commentator is, is whether they have been using a consistent measure for industrial production:


Production as a whole only fell in January and February because of utility production (warm winter in the eastern half of the US).  In March, production only rose because utility production rebounded sharply (March was actually colder than February in much of the East).

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Crises and Coordination

by Joseph Joyce

Crises and Coordination

Policy coordination often receives the same type of response as St. Augustine gave chastity: “Lord, grant me chastity and continence, but not yet.” A new volume from the IMF, edited by Atish R. Ghosh and Mahvash S. Qureshi, includes the papers from a 2015 symposium devoted to this subject. Policymakers in an open economy who take each other’s actions into account should be able to reach higher levels of welfare than they would working in isolation.  But actually engaging in coordination turns out to be harder–and less common– than many may think.

Jeffrey Frankel of Harvard’s Kennedy School of Government uses game theory to illustrate the circumstances that hamper coordination. One factor may be a fundamental divergence in how different policymakers view a situation. Many analysts on this side of the Atlantic, for example, use the “locomotive game” to show that Germany should engage in expansionary fiscal policies that would raise output for all nations. But (most) German policymakers have different views of the external impact of deficit spending. In the case of the Eurozone, a deficit in one country increases the probability that it will need a bailout by the other members of the monetary union. Only rules such as those of the Stability and Growth Pact that limit deficit expenditures can eliminate the moral hazard that would otherwise lead to widespread defaults.

Charles Engel of the University of Wisconsin (working paper here) also examines the recent literature on central bank coordination. He points out that the identifying the source of shocks is necessary to assess the benefits of cooperation to address them, and suggests that financial sector shocks may be most relevant for modeling open-economy coordination. But widespread cooperation could undercut the ability of a central bank to credibly commit to a single target, such as an inflation target.

Policymakers in emerging markets who must deal with the consequences of policies in advanced economies have been particularly mindful of their spillover effects. Raghuram Rajan, for example, who is back at the University of Chicago after serving as head of India’s central bank, has urged the Federal Reserve and other central banks to take into account the impact that their policies have on other nations, particularly when unwinding their Quantitative Easing asset purchases. He pointed out: “Recipient countries are not being irrational when they protest both the initiation of unconventional policy as well as an exit whose pace is driven solely by conditions in the source country.”

If international cooperation is viewed as a bargaining game, what incentives do the advanced economies have for cooperative behavior in light of the asymmetries among nations? Engel points out that in such circumstances, “…the emerging markets may believe that they have too little say in this implicit agreement, which is to say that they may perceives themselves as having too little weight in the bargaining game.” Conversely, central banks in the upper-income countries may in ordinary circumstances see little need to extend the scope of their decision-making outside their borders.

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It was actually quite amusing to see an article in my provincial newspaper a while back where two sides were arguing about a reduction in the work week, and you could play bingo with the excuses the anti-side used. There wasn’t an original idea in the whole article, as the pro-side was almost apologizing and got one paragraph of the six on offer. – “Salty,” comment at AngryBear.

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