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Snow Withholds Checks to the Retirement Accounts of Federal Workers

Hat tip tp Charles Patton for pointing out the MarketWatch account of how the Treasury Secretary has dodged the Federal debt ceiling again:

WASHINGTON (MarketWatch) – The U.S. Treasury acted Thursday to avoid hitting the national debt limit and said it’s “imperative” Congress raise the debt ceiling by the middle of March. Treasury is suspending reinvestment in the so-called “G-Fund,” an investment vehicle for a federal employees’ retirement system. The action will free up $65.266 billion, a Treasury spokeswoman said. “Without this action we would reach the debt limit today,” spokeswoman Brookly McLaughlin said Thursday.

Max Sawicky links to Sec. Snow’s letter to Congressman Rangel where the Treas. Sec. claims he has the authority to withhold the checks.

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Low R&D in the UK: Calling Michael Mandel

Michael Mandel and I agree on at least one thing – R&D is an investment:

The factory is a long-lived investment which provides returns not just this year, but years into the future. That’s why Intel’s investment gets added into GDP, separate from the value of today’s production of microprocessors. Similarly, R&D is a long-lived investment, which pays off for years to come. There’s an asset created, the stock of knowledge, which didn’t exist before.

Michael often writes about the expected future return in terms of the benefits from new knowledge. I would only add that there is also a cost to investing, which is why we should check out the New Economist coverage of a paper by Mark Rogers on why the business R&D to GDP ratio is so low in the UK:

the low BERD to GDP ratio appears to reflect low (perceived) opportunities by firms and the inability of firms to manage R&D to generate value. The paper provides some, tentative evidence, that high rates of competition in the science-based sector are associated with low returns to R&D.

One should note that private returns from R&D are limited to expected future profits – and hence are likely to be lower than the social return from R&D investment.

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Advertisers Heart the Bush Administration

Check out the Valentine Day report from Adweek:

DALLAS – The Bush administration spent $1.4 billion in taxpayer dollars on 137 contracts with advertising agencies over the past two-and-a-half years, according to a Government Accountability Office report released by House Democrats Monday. With spending on public relations and other media included, federal agencies spent $1.6 billion on what some Democrats called “spin” … Trends in spending on PR and ad contracts were not documented, but a prior study by the minority staff of the Government Reform Committee found that spending on public relations contracts rose rapidly under the Bush administration … The Department of Defense spent the most on media contracts, with pacts worth $1.1 billion, according to the study.

Using taxpayer money to lie to citizens does not strike me as a conservative value.

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No Wonder the National Review Thinks Spending is Too High

Jonah Goldberg over at The Corner opens with:

Warrantless searches, Katrina fingerpointing, $7.8 trillion budget, Abramoff spin: these were the stories buffetting the White House last week.

Table 3.2 from the Bureau of Economic Analysis reports the Federal spending for 2005 was less than $2.55 trillion. Does Jonah expect this Republican government to triple Federal spending?

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Even the President’s Budget Suggests We Are Below Full Employment

AB reader Fred C. Dobbs directs us to the Economic Assumptions chapter for the President’s budget. Starting on page 171, we see:

When the economy is operating below potential, the unemployment rate exceeds the long-run sustainable average consistent with price stability. As a result, receipts are lower than they would be if resources were more fully employed, and outlays for unemployment sensitive programs (such as unemployment compensation and food stamps) are higher; the deficit is larger (or the surplus is smaller) than would be the case if the unemployment rate were at its sustainable long run average. The portion of the deficit (or surplus) that can be traced to this factor can be called the cyclical component. The portion that would remain if the unemployment rate was at its long-run value is then called the structural deficit (or structural surplus) … Other factors unique to the current economic cycle provide other examples of less-than-complete cyclical adjustment. The extraordinary fall-off in labor force participation, from 67.1 percent of the U.S. population in 1997–2000 to 66.0 percent in 2004–2005, appears to be at least partly cyclical in nature, and most forecasters are assuming some rebound in labor force participation as the expansion continues. Since the official unemployment rate does not include workers who have left the labor force, the conventional measures of potential GDP, incomes, and Government receipts understate the extent to which potential work hours have been under-utilized in the current expansion to date because of the decline in labor force participation. A third example is the fall-off in the wage and salary share of GDP, from 49.2 percent in 2000 to 45.6 percent in the second quarter of 2004. Again, this change is widely suspected to be partly cyclical. Since Federal taxes depend heavily on wage and salary income, the larger-than-predicted decline in the wage share of GDP suggests that the true cyclical component of the deficit is understated for this reason as well.

Who wrote these words of wisdom and why? I wish I could take credit for this discussion, but Karl Rove did not invite me to contribute to this document. Could it be that he has decided to call upon Brad DeLong or perhaps Max Sawicky?

While such a decision would be a welcome change from the usual spin from this White House, I kind of doubt it. After all, these words were not written to finally admit that the labor market is still weak in spite of all those tax cuts over the past couple of years. Besides, the purpose of these paragraphs seems to be to excuse the large and continuing deficits.

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What would Lord Keynes Say about this Division of Dynamic Scoring?

Kash noted the endorsement of the Division of Dynamic Analysis from Bruce Bartlett which had me dusting off my copy of the General Theory as I read this from Bruce:

The great recession of 1973-75 was a severe blow to Keynesian economics because inflation was high while at the same time there was significant unused capacity in the form of unemployment and idle factories. Theoretically, this wasn’t supposed to happen. Also, the failure of traditional Keynesian medicine, especially the tax rebate of 1975, led economists to search for other causes and cures for economic malaise.

I must have missed the chapter where Lord Keynes said prices could not rise during a recession. It just so happens that I took my first course in economics in 1974 and was struck by how the General Theory seemed to capture what was happening in the U.S. economy at the time. And I don’t recall Lord Keynes ever saying that the only remedy for weak aggregate demand was a tax cut. That sounds more like George W. Bush. As Kash notes:

Secondly, is there any reason – any reason at all – to limit this analysis to tax cuts? Being consistent, we should apply exactly the same reasoning to examine the dynamic budgetary effects of changes in spending, which presumably increase economic growth and thus partially pay for themselves. Perhaps the new Division would even be able to discover that one way to eliminate the budget deficit would simply be to dramatically increase government spending

Not to turn classical on Bruce and my fellow Angrybear – I thought the issue was one of long-term growth. This worrying about returning to full employment should be a short-term concern given that we are not yet at full employment – despite all the statements to the contrary coming from the White House and its supporters. But even Lord Keynes would have noted that reducing national savings lowers investment and economic growth in the long-run.

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Bernanke’s Debut

Ben Bernanke has testified before Congress numerous times in the past, but today was the first time that he spoke as the Chairman of the Board of Governors of the Federal Reserve. Overall, Bernanke’s testimony struck me as quite optimistic. He mentioned the potential hazards for the economy in 2006 of growing inflation and a possible economic slowdown, but came down clearly on the side of those who think that growth will continue to be solid and strong both this year and next.

When asked about the inverted yield curve, Bernanke said that he thought that the current inversion would be different from historical experience, and not presage an economic slowdown. The reason this time is different, he argued, was because the level of interest rates matter as well as the slope of the yield curve, and that interest rates are currently still quite low and thus not contractionary.

Bernanke spent a good chunk of his speech talking about the importance of long-term inflationary expectations. He argued that such expectations are currently low and firmly anchored in the US, and that this has beneficial effects on long-term interest rates and on the conduct of monetary policy itself. This is an important point, and he is exactly right, of course. That is something that will make Bernanke’s job much easier than it would have been 25 years ago, just as it did Alan Greenspan’s.

It was interesting to see that Bernanke clearly stated that he still fully believes in the “global savings glut” hypothesis that he advanced a year ago. As evidence, he cited the fall in the premium that investors demand on long-term bonds, which he said suggests that investors around the world see lower real returns on capital persisting well into the future.

One thing that he did not talk much about during his prepared remarks was the federal budget deficit or the long term fiscal problems that the US is facing. During questioning, however, Bernanke did clearly say that he thought it was entirely appropriate for him to talk about fiscal policy as Fed Chair, that he would do so in the future, and that he was indeed concerned about the US’s serious fiscal problems.

Along those lines, one way in which I hope that Bernanke distinguishes himself from Alan Greenspan will be if he refrains from offering his personal opinion about whether the fiscal problems should be addressed through tax increases or spending cuts. Greenspan often abused his position to advocate his personal preference for small government. I’m hopeful, and reasonably confident, that Bernanke will not.

Overall, I liked his testimony. During questioning, Bernanke generally provided answers about numerous topics (e.g. the deficit, the minimum wage, trade protection, the regulation of FNMA, R&D, personal saving) that a large majority of professional economists would probably agree with. In that sense, I think that he will be a good representative of the profession’s consensus, to the degree that there is one. And for the most part, I think that’s probably a good thing in the world’s most powerful central banker.


UPDATE: On further questioning about the budget deficit, Bernanke followed up on my above-expressed desire that he refrain from suggesting how to cut the deficit, and specifically said that it is up to Congress to determine how to adjust taxes and spending. As I wrote above, I think this will be a decided improvement over Greenspan’s tendencies.

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Division on Dynamic Analysis

Bruce Bartlett jumps on the dynamic analysis bandwagon, applauding the creation of the “Division on Dynamic Analysis” at the Treasury Department. Menzie Chinn and PGL have covered the prinicpal problems with this political exercise disguised as economic analysis, so let me just add two small points to what they’ve said.

First, Bartlett is quite wrong when he claims that “few economists today would disagree with the statement that an across-the-board tax-rate reduction would have reflows of about 35 percent.” The best estimates that I’ve seen are from the blue-ribbon panel convened by Congress’ Joint Committee on Taxation, which showed that the “reflow” effects would be generally in the neighborhood of 5-10%, with only one model showing possible effects of over 20%. Furthermore, these effects are temporary, and all of the models generally show that after 5 years or so any positive effect on economic growth is actually reversed. I’ve discussed this extensively in the context of the Bush tax cuts, for example here.

Secondly, is there any reason – any reason at all – to limit this analysis to tax cuts? Being consistent, we should apply exactly the same reasoning to examine the dynamic budgetary effects of changes in spending, which presumably increase economic growth and thus partially pay for themselves.

Perhaps the new Division would even be able to discover that one way to eliminate the budget deficit would simply be to dramatically increase government spending…


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Dead-Eye Dick Does Dynamic Scoring

Expert marksman and Nobel laureate Dick Cheney delighted the Conservative Political Action Conference with the suggestion that free lunch supply-side spin is solid economics:

Cheney touted President Bush’s recently announced proposal to create a tax analysis division as a move toward providing more evidence for the administration’s side of the argument. “The president’s tax policies have strengthened the economy, as we knew they would,” Cheney told the conference, according to a text posted on the White House’s Web site. “And despite forecasts to the contrary, the tax cuts have translated into higher federal revenues.” Cheney said some forecasters have underestimated the degree to which tax cuts would stimulate economic growth and tax revenue. “It’s time to reexamine our assumptions and to consider using more dynamic analysis to measure the true impact of tax cuts on the American economy,” Cheney said, explaining why Bush has proposed the new Treasury Department division. “The evidence is in, it’s time for everyone to admit that sensible tax cuts increase economic growth and add to the federal treasury.” Bush’s proposal, unveiled in his budget plan last week, comes as he is pushing Congress to make permanent the recent tax cuts that are scheduled to expire in coming years. The nonpartisan Congressional Budget Office predicted last month that the budget deficit would swell to $337 billion this year and that the red ink would end in 2012 only if the tax cuts were allowed to expire. Treasury officials said yesterday that the president’s proposed Division on Dynamic Analysis — with a handful of employees and a $513,000 budget — would go beyond the government’s old “static” methods of analyzing proposed changes in tax policy only in terms of their direct effects on certain affected taxpayers. Instead, “dynamic” analysis looks at how tax changes cause consumers and businesses to behave differently in ways that affect the overall economy’s growth. For example, a tax break to encourage business investment might lower some individual companies’ tax bills — looking like a hit to Treasury revenue under a static analysis. But if that tax cut caused businesses to buy more equipment, hire more workers and increase profits, that might contribute to stronger overall economic growth — causing the employees and companies to pay more in income, sales and other taxes over time.

As usual, the GOP spinmeisters have committed the following logical errors: (a) confused a Keynesian movement that inches back to full employment with an increase in potential GDP; (b) falsely suggested that the only event that increases aggregate demand is a tax cut; and (c) pretended that a reduction in national savings translates into more investment.

Most of us pro-growth types – liberal or conservative – would concede that incentives matter so if there were some plan to reduce marginal tax rates in a fiscally neutral way that might encourage a slightly higher labor force participation rate or a shift away from consumption to savings. Of course, this Administration does not do fiscal neutrality as Dead-Eye Dick is convinced deficits do not matter. This Administration does free lunch as in “give people their money back so they can consume more”.

So what are their plans to move to fiscal restraint? I guess the correct answer is they have no such plans, but let’s be generous. They could propose reductions in government consumption, but I don’t see that in their budget. I do see a few ideas of how to reduce transfer payments to the elderly and the poor – after all, the consumption of rich people is a GOP priority. Finally, Michael Mandel notes plans to reduce public spending on what Michael views as highly productive investment. Of course, Michael is correct in suggesting this means for reducing deficits will likely lower economic growth.

Hat tip to Menzie Chinn who is a little more generous to this idea to spend half a million dollars a year to cook up more GOP spin. But rather than use the funds to lie to the public the way this White House often does, couldn’t we spend these funds on pharmaceutical research?

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If the Bubble Bursts

Michael Mandel’s piece in Business Week yesterday ended by posing the following question. Suppose the doomsayers are right, and the housing bubble bursts in 2006. Suppose that the fall in real estate prices is large enough and widespread enough to cause significant economic problems for the US. What should Democrats propose that the US government do in response?

The answer depends on what the scenario actually looks like, of course. I would guess that there would be a surge in the number of people defaulting on mortgages, going into personal bankruptcy, and taking large capital losses. This would certainly slow economic growth a bit, and perhaps by a lot. In the worst-case scenario, this could tip the US economy into recession.

A few possible policy prescriptions come to mind. Here’s the start of a list:

  • If the number and severity of personal bankruptcy cases rises substantially, one thing to consider is a reevaluation of the recently passed Bankruptcy Reform Act, which significantly increased the repayment burden on individuals for unsecured debts in the case of personal bankruptcy. I would have to defer to the experts on the specifics, but I can imagine changes (perhaps temporary) to bankruptcy laws to make it more lenient on people who have fallen into bankruptcy not because of job loss or large medical bills (two of the largest precipitators of personal bankruptcy), but rather simply because their mortgage payments have risen while the value of their house has fallen.
  • Another possibility would be to allow more favorable tax treatment of capital losses for those people who have lost money on their house. For example, one idea might be to increase the maximum amount of a real estate capital loss that one can deduct from one’s income in any particular year.
  • More generally, if the economy-wide repercussions of the housing downturn were severe, other types of tax cuts might be an appropriate response. Needless to say, Democrats could and should advocate tax cuts that would look pretty different from those that Bush would probably want: tax cuts that go directly to the middle class, that are limited in duration, and that do not have a major effect on the long-term budgetary health of the US.
  • Still more generally, a broad-based economic downturn could bolster calls to strengthen the nation’s social safety net. At a minimum, this could take the form of extending the length of time that individuals can claim unemployment insurance, as was done during the previous recession. In an extreme case, a severe recession (which I’m not predicting, by the way) could help build the case for what is one of my favorite policy topics lately: national single-payer health insurance.
  • Finally, it may be appropriate to consider stronger regulation of lending practices. Much of the mortgage activity in recent years has been in “exotic loans”, which may have contributed to the volatility of the real estate market. While some stronger guidance regarding these types of financial products has emerged recently, it may be the case that more is called for.

None of these policy ideas would really prevent a lot of economic hardship from happening in the case of a severe downturn in housing markets. A sharp downturn in housing will hurt, as it must and should. People and firms who have made poor decisions in this housing market will have to live with the consequences, at least to some degree.

But it is also the case that lots of people may suffer from a housing crash through no fault of their own, but simply due to circumstances beyond their control. With them in mind, it is possible to think of ways to cushion the blow, and I agree with Mandel that it’s appropriate to start thinking of ways to do that now.


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