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

Defining Monetary Policy at the National Review

One day I just might read something from John Tamny that makes sense, but alas not this week:

A frequent counterargument to the notion that current Federal Reserve policy is inflationary centers on two market indicators: TIPS spreads and the yield on long-term Treasuries. Neither suggests that inflation is a problem.

Well, let’s see. Nominal interest rates are around 4.8% and real interest rates are around 2.3%, so it does seem expected inflation is around 2.5%. Tamny follows his opening with some bizarre statements and his account of monetary policy since 1971. Along his tour through our recent monetary history, he talks about gold prices for some bizarre reason. It was this line that made me stop reading:

Investors today are arguably pricing in deflationary Fed policy from not long ago (1997-2001), not to mention the likelihood that the Fed’s memory is sensitive enough such that no 1970’s redux will be countenanced.

Huh? Yes, monetary policy was restrictive during the latter part of Clinton’s second term, but by what measure would anyone be foolish enough to argue that we had tight monetary policy in 1997 or 1998? Interest rates were generally declining despite a booming economy. And whether one measures the growth rate of monetary aggregates using the monetary base (MB) or M2 measure of the money supply, we did appear to have a somewhat expansionary monetary policy until late 1999 or 2000. As far as 2001, monetary policy turned quite expansionary leading to lower interest rates in the hope of reversing the recession.

Tamny wants us to believe that monetary policy has become too expansionary even though the growth rates in the monetary base and M2 have slowed and interest rates have gone up. And his evidence for his very bizarre view? Oh yea, the nominal price of a certain commodity known as gold.

Update: Reuven Brenner makes it explicit:

Rather than manage short-term living costs, our central bank should simply manage the dollar … In the last decade, during the same years that the CPI hovered in the 2 to 3 percent range, the U.S. dollar was volatile relative to currencies of countries where measured CPI also varied within the same low ranges as in the United States. The measure of the U.S. real effective exchange rate relative to the seven major currencies varied between roughly 80 in 1995, to 120 in 2001, and back to 90 in 2005 … Briefly, the U.S. Federal Reserve should manage monetary policy by first distinguishing between “things” (changes in global demand and the supply of a currency’s liquidity) and the “noises” (serious resource misallocation) these “things” are making.

As long as there are real shocks, pegging the exchange rate and avoiding macroeconomic instability may not be incompatible. But this is precisely why some of us prefer market determined exchange rate.

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Census Report: White House Spinning

As Rick Lyman reports on the latest Census Report, he catches OMB’s Rob Portman doing some major spinning:

“Unemployment is low, wages are rising, and there are more jobs in America today than at any other time in history,” said Rob Portman, director of the Office of Management and Budget.

This reminds me that it has been a while since I updated my graphs on the employment to population (EP) ratio and the labor force participation (LFP) rate. As a percent of the population, less people are employed today as compared to what we witnessed in the late 1990’s. While it is true that the unemployment rate has declined the summer of 2003, we should also note that part of the reason unemployment is now below 5% comes from the decline in the labor force participation rate.

The claim that wages are rising appears to be a claim about nominal wages as the real wage (1982$) reported by the Bureau of Labor Statistics for production or nonsupervisory workers was $8.16 as of July 2006 as compared to $8.30 as of July 2003.

Update: While the White House is spinning happy face numbers, Michael Tanner is spinning a gloomy tale as to LBJ’s War on Poverty:

Despite this government largesse, 37 million Americans continue to live in poverty. In fact, despite nearly $9 trillion in total welfare spending since Lyndon Johnson declared War on Poverty in 1964, the poverty rate is perilously close to where we began more than 40 years ago.

Tanner has his facts flat wrong. In 1964, the poverty rate was 19%. By 1969, it had declined to 12.1%. Two recessions during the early 1970’s pushed the poverty rate back up but by 1978, the poverty rate was down to 11.4%. Then we had the Carter and Reagan recessions followed by a scaling back of anti-poverty efforts and the Bush41 recession, which tended to push the poverty rate up again. However, the poverty rate declined to 11.3% by 2000.
At least Tanner is not trying to spin the premise that the 1996 welfare reform legislation eliminated poverty in America. After all – poverty has been increasing since the 2001 recession.

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Is Taxation of Capital Income Unconstitutional?

Bruce Bartlett reports on a recent appeals court decision:

In the case, a woman named Marrita Murphy was awarded a legal settlement that included compensation for physical injury and emotional distress … Murphy argued that just as compensation for physical injuries only makes one whole after a loss, the same is true of awards for emotional distress. In short, it is not income within the meaning of the 16th Amendment to the Constitution. The appeals court agreed, ruling that Murphy’s award for emotional distress is not income and therefore not taxable.

Bruce then opines:

But because tax analysts implicitly accept the Haig-Simons definition of income, even though it appears nowhere in law, there has been a long-term tendency for the IRS to push the limit of what can be considered taxable income. Now, a federal court has said there is a constitutional limit. I would like to see the court go further in regards to the question of whether interest constitutes income. To economists, some portion of the interest we receive on our savings is merely compensation for loss – loss of the immediate enjoyment we would receive if we consumed our income today instead of saving it.

Conservatives have been pushing for a tax system that does not tax capital income for years with limited success in getting Congress to go along. Of course, the Reagan-Bush43 philosophy seems to be to defer any decisions on how high to push employment taxes. Bruce doubts that the Courts will rule the taxation of capital income to be unconstitutional, but if they do, young workers should expect to be much higher tax rates on their labor income in the future.

Update: Mark Thoma asks the appropriate counter-question:

Why can’t wage income also be viewed as making a person whole for the sacrifice of working all day, or, in the language of the article, as a reward for delaying leisure (you can’t go to the beach today if you work)? Being made whole for giving up consumption is not fundamentally different from being made whole for working, i.e. for giving up leisure.

At the end of the day, as long as we vote for governments that spend what they spend – SOMEONE has to pay the taxes. Given that Bruce is one of the conservatives who recognizes this fact, he has some ‘splaining to do. LUCY!

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Responding to Rumsfeld

Kevin Drum offers an excellent reply to the Rumsfeld rant:

But Rumsfeld’s speech was never meant to be taken seriously. It’s just crude agitprop designed to keep the proles from wondering if the Cheney wing of the Republican Party is actually doing anything to make the world a safer place. The question has never been whether we should open talks with al-Qaeda, it’s been what we should do to stop them from killing us. Should we fight a war in Iraq that’s served primarily as a recruiting bonanza for radical jihadism? Should we refuse to talk to the Middle East’s biggest regional power because we think that merely being in the same room with them is a sign of weakness? Should we encourage Israel to fight a fruitless war against Lebanon while simultaneously egging on American hawks who think a bombing campaign against Iran will fix all our problems? Should we spend homeland defense money on dumb projects in loyal red states instead of taking port security seriously?

Let’s see. How about no, no, no, and no? But those are questions Rumsfeld would prefer not to address since they put the spotlight on the fact that the Bush administration has accomplished nothing over the past five years except to make a bad problem even worse — which is a pretty remarkable record when you consider how bad the problem was to begin with.

But al-Qaeda won’t be beaten by fighting a bunch of aimless proxy wars in the general vicinity of the Middle East. It will, eventually, be beaten when the non-terrorist population of the region decides to turn against al-Qaeda and its jihadist allies and deny them the support and shelter they need in order to function. Encouraging that to happen is the biggest foreign policy challenge of the 21st century, and because they’ve failed so miserably at it, it’s the one thing the Bushies most want to avoid talking about.

Which is, of course, precisely why we should talk about it. Loudly and relentlessly. It’s good policy and good politics.

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Ireland, Argentina, and Transfer Pricing

There seems to be some discussion about why Ireland is growing as quickly as it is.

I am completely ignorant about this, and haven’t even been to Ireland. But I do have a question… Is it possible that part, even a large part, of the Irish boom, is fictional?

By fictional, I don’t mean lacking in physical manifestations such as massive improvements in infrastructure, etc. Consider the effects of something else I’m mostly ignorant about, namely the Menem-and-Cavallo-dollarize-privatize-and-steal plan (as I recall it had a different name, but to me this one captures its essence a little better) in Argentina. For a number of years after it was launched, it looked like Argentina was doing really well. There was all kinds of new investment in infrastructure, the mood in Argentina was upbeat, and many economists (especially the conservative ones) and financial publications such as the Wall Street Journal were breathlessly pointing to Argentina as a country that other developing nations should imitate.

The problem in Argentina was that much of the funding for the short-term but much-hyped prosperity that followed came from the proceeds of the sale of government-owned assets (airline, railroads, etc.), or rather, the portion of the proceeds of the sale of government-owned assets that wasn’t stolen outright. Instead of assuming the proceeds from those sales were a one-time windfall, the Argentine government, foreign economists and the Wall Street Journal acted as if they were recurring sources of funding, leading gullible foreign investors to come running with their money. With so many experts patting them on the back, eventually even the skeptical Argentine public came to believe Argentina had miraculously fixed all its problems. When the windfall ended, the dwindling foreign reserves were not enough to maintain the dollar peg for long, and the whole house of cards came down.

Now… some of the growth in Argentina was real, and both dollarization and privatization may well have created more amenable economic conditions. But not enough to justify all the enthusiasm, or to ignore the very real problems the plan also brought.

So… where does that leave Ireland? Well, the worst year of my life was spent at a Big X (at the time, X was equal to 6) accounting firm, doing transfer pricing. Transfer pricing often amounts to little more than highballing the amount of a company’s activity taking place in low tax jurisdictions and lowballing the amount that takes place in a high tax jurisdiction in order to reduce one’s overall tax burden. It is often done creatively. Say company X transfers ownership of a logo to the subsidiary of company X in the Caymans. Then, every time company X sells a tennis shoe with that logo, it pays a royalty to its subsidiary in the Caymans. If taxes in the Caymans are lower in the US, X hires E&Y or PWC or whoever to argue that most of the value in the shoe sits in the logo (and therefore is income received by the Cayman subsidiary and thus taxable in the Caymans), and not in the shoe itself (which is income received by the parent company and taxable in the US).

So back to Ireland…. Say you’re a pharmaceutical company. You have hundreds of highly paid researchers scattered throughout the globe – in places like the US, Switzerland, Germany, etc. Because taxes are lower in Ireland than in the rest of these locations, when a blockbuster drug is discovered, it is advantageous to play up the contribution of the researchers in Ireland and play down the part of the researchers made elsewhere.

This has at least two obvious effects. The first is the direct artificial boost to Irish GDP (and an artificial reduction elsewhere). Since Ireland is relatively small, if a crumb is taken from the US, another crumb is taken from Switzerland, etc., the effect can be very large in Ireland. The second effect is indirect – in order to pull this stunt off, it is necessary to have at least some facilities in Ireland, leading to more hiring and building in Ireland as more companies get more heavily invested in playing the game. But its in nobody’s interest to say this is being as a tax dodge, so a mythology springs up (as it did in Argentina), and part of that mythology, at least, is self-sustaining.

I would imagine the situation is not quite as artificial as in Argentina – Ireland does have a young, fairly educated population, and a convenient location, whereas the change from hyperinflation to rapid growth in Argentina truly looked like a miracle to those who didn’t look too closely (i.e., almost everyone). The Irish miracle has gone on for at least two decades, and there may well be enough of a solid underpinning for it to continue indefinitely. But, I have no idea how much of the Irish growth is due to these effects, nor a clue how to measure them. Any ideas? Any other thoughts as to why Ireland is growing so rapidly?

update: Some grammatical errors corrected. Sorry about that.

update 2: In comments, PGL reminds me that the topic of transfer pricing has come up many times before on this blog. Even with respect to Ireland .

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Why Are We Worse Off?

One AB reader who thinks I am an Angry Marxist brought our attention to something Llewellyn Rockwell wrote:

wages have declined in real terms by 2 percent in the last three years. The first concern is political. The Democrats, despite their moderating image, carry with them the intellectual baggage of a Marxist morality play in which business skims the excess productivity of labor’s value. This new data is framed in a way that plays right into this model. Productivity is up, the rich are richer, but the workers are losing out. Meanwhile, the Republicans have a very strange response, as typified by the comments of pollster Frank Luntz. The bad economic news would not do serious damage to Republicans, he said, because voters will blame corporate America and not government for their problems … I have my doubts that he is right. Republicans have controlled the White House – Carter and Clinton excepted – for the better part of forty years, and yet somehow they are always able to get away with blaming government for their problems. I can easily imagine that the Republicans will again trot out their anti-government rhetoric this time around. But we shall see.

It seems the folks at the Mises Institute are not happy with the Bush Administration either. And it’s not just the politics of this piece that makes it interesting – although some of the economic claims here could have stood a rewrite:

The reason for the fall in income has nothing to do with corporate profits. The culprit is our old friend inflation. But more than ever, inflation data does not reflect the underlying reality we experience every day. As we all know, there is no such thing as a price level as such. There are only prices, some of which rise and some of which fall. There is no way that the government can collect enough information to make sense of it all. Take a trip to Wal-Mart, for example. You don’t see price increases here. You can buy shirts, jackets, and shoes for a fraction of what you would have paid ten years ago. This is even true for electronics and most other goods you find in so-called department stores.

Prices for certain goods have been falling, but that does not change the fact that the average price for a consumer’s basket of goods has increased. One would hope that nominal wages would have increased by more than the increase in the consumer price index. Rockwell also documents the increase in the prices of gasoline and electricity. Rockwell rightfully praises the market place and international trade for allowing the prices of apparel to decline, but then he loses me when he blames the rise in the price of energy on the government:

Now, here we have the exact opposite pattern, and from a sector of the economy that is heavily regulated, taxed, and beaten to death by interventionist regulations. There is far less supply flexibility in oil and gas because of trade restrictions, stupid wars, and insane and counterproductive environmental controls. When shocks hit, the only market response is to increase rationing via price increases.

Taxes on gasoline have actually declined in real terms. Now if he is blaming the oil shortage on that stupid decision made on March 19, 2003 to invade Iraq, I can’t argue with that at all!

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The Rich Get Richer

Mark Thoma treats us to the CBPP coverage of the latest release of income data from Census:

Overall median household income rose modestly in 2005, while the poverty rate remained unchanged. For the first time on record, poverty was higher in the fourth year of an economic recovery, and median income no better, than when the last recession hit bottom and the recovery began. In addition, the 1.1 percent increase in median income in 2005, which was well below the average gain for a recovery year, was driven by a rise in income among elderly households. Median income for non-elderly households (those headed by someone under 65) fell again in 2005, declining by $275, or 0.5 percent. Median income for non-elderly households was $2,000 (or 3.7 percent) lower in 2005 than in 2001. In a related development, the median earnings of both male and female full-time workers declined in 2005. Median earnings for men working full time throughout the year fell for the second straight year, dropping by $774, or 1.8 percent, after adjusting for inflation. The median earnings of full-time year-round female workers fell for the third straight year, declining by $427, or 1.3 percent.

Kevin Drum picks up on this last point:

The good news is that women are now making 77% as much as men, slightly higher than last year. The bad news is that this is only because the median income of women fell at a slightly lower rate (-1.3%) than the median income of men (-1.8%). Yipee. Needless to say, per capita income increased by 1.5%. In other words, the total money income of the United States increased last year by more than $100 billion, and yet the incomes of the average worker went down. So where do you think that $100 billion went?

Good question! The share of national income received by the highest quintile rose from 50.1% in 2004 to 50.4% in 2005, which pushed the Gini coefficient from 0.466 to 0.469. The Bush economy is indeed great if you are rich.

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Byron York Questions the Integrity of the Hubris Authors

Byron York fires off this NRO post:

But representatives of two central figures in the case, former Cheney chief of staff Lewis Libby and top White House aide Karl Rove, say the authors never got in touch with them, much less interviewed them, for the book.

Biased reporting by David Corn and Michael Isikoff? York later provided Isikoff’s reply to his charges:

I told [Rove lawyer Robert] Luskin I was working on a book late last year on all this and reminded him again in April at the time I was talking to him about Rove’s last grand jury appearance as we went over— yet again — the Rove, Cooper and Novak issues that I was writing about for the magazine. (I have operated under the assumption that he and others didn’t have a different version of the truth for a book than they do for the readers of Newsweek.) Mark [Corallo] was interviewed for the book last December (about a matter he dealt with at the Justice Department) and I spoke to him periodically over the next six months about matters relating to Rove. At one point, he even helped put me in touch with a source for the book. Barbara Comstock certainly knew I was working on a book for at least the last six months and I certainly spoke to her during that period. (The Libby lawyers have consistently no commented me and David, as they have everybody else.) Finally, Dan Bartlett was sent a lengthy email that included questions for the book relating to Rove unrelated to the leak case. He chose not to respond.

While he’s not rushing off to falsely accuse a report of Liberal Bias, Mr. York keeps himself busy suggesting the only wrongdoing in PlameGate came from the State Department. So when does Karl Rove and Scooter Libby get their medals of honor?

Update: CNN runs a story as to how Richard Armitage was Novak’s “original source” according to “sources” who they bother to identify even as the story uses the term “original source” ad nauseam. The story admits we don’t know how Novak learned Valerie Plame was a covert operative and this CNN story does not talk about all those other sources of information.

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Rumsfeld: Courageous or Confused?

Kristin Roberts reports:

U.S. Defense Secretary Donald Rumsfeld warned potential adversaries on Monday that the United States remained capable of responding to military threats at home and abroad, despite its troop commitments in Iraq and Afghanistan. “We are capable of dealing with other problems were they to occur,” he told troops at an airfield in the Nevada desert … Rumsfeld said there was no doubt the United States could win militarily in Iraq if it stayed the course. “The important question is not whether we can win. Of course we can win. We won’t lose a single battle,” he said. “But do we have the will?”

That was yesterday. I wonder if a good night’s sleep brought a fresh perspective to our very confused Defense Secretary? Let’s see what he said today in Salt Lake City:

Defense Secretary Donald H. Rumsfeld on Tuesday accused critics of the Bush administration’s Iraq and counterterrorism policies of lacking the courage to fight terror. In unusually explicit terms, Rumsfeld portrayed the administration’s critics as suffering from “moral and intellectual confusion” about what threatens the nation’s security.

I guess we all know how Karl Rove plans to play the November elections!

Update: Matthew Yglesias fires back at Rumsfeld and later offers us the thoughts of Senator Reid:

Secretary Rumsfeld’s reckless comments show why America is not as safe as it can or should be five years after 9/11. The Bush White House is more interested in lashing out at its political enemies and distracting from its failures than it is in winning the War on Terror and in bringing an end to the war in Iraq. If there’s one person who has failed to learn the lessons of history it’s Donald Rumsfeld. Rumsfeld ignored military experts when he rushed to war without enough troops, without sufficient body armor, and without a plan to succeed. Under this Administration’s watch, terror attacks have increased, Iraq has fallen into civil war, and our military has been stretched thin. We have a choice to make today. Do we trust Secretary Rumsfeld to make the right decisions to keep us safe after he has been so consistently wrong since the start of the Iraq War? Or, do we change course in Iraq and put in place new leadership that will put the safety of the American people ahead of partisan games? For the sake of the safety of this country, it is time to make a change.

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Save Social Security First

When CalculatedRisk criticized the Kerrey-Rudman proposal for long-term fiscal sanity, I may have been too quick to suggest we find someone way to say “yes”. CR was quite clear:

Everyone should agree that the most immediate fiscal problem is the structural General Fund deficit. Excluding future health care costs, the structural deficit is around 4% to 4.5% of GDP. This serious problem has been caused almost exclusively by Bush’s policies. And imagine if the economy slows next year, as many people expect, adding a cyclical deficit on top of the huge Bush structural deficit. So isn’t it reasonable to suggest that Mr. Bush and the GOP fix the structural deficit first, before addressing other long-term issues? Of course.

Andrew Samwick agrees:

the appropriate target for the General Fund deficit is for it to average to zero over a business cycle. A corollary to that is that the General Fund should be in surplus during the non-recessionary parts of that business cycle. (A slightly weaker target that I would also accept is that the Debt/GDP ratio not trend upward over time.) This Administration seems to have no problem submitting budgets that don’t conform to this target. Certainly the Congress doesn’t aspire to a higher standard. So as much as I would like to see the looming financial crises with entitlement programs averted, CR’s requirement of the current leadership in the White House and the Capitol is a reasonable one to impose as a precondition for agreeing to a bipartisan effort to address what will be the most immediate budget issues in a decade or two.

And thanks to Dean Baker for pointing out the Trojan Horse embedded in the Kerrey-Rudman proposal:

In addition to conflating Social Security and Medicare as “entitlements” that will pose problems, the column also has a few other standard scare tactics.

One explanation for President Bush’s fiscal insanity is that he really wishes to impose what I have dubbed backdoor employment tax increases by slashing Social Security benefits by more than any reductions in payroll “contributions”. Dr. Samwick and I have what I think is a basic agreement on the Social Security Trust Fund debate – that we should address its long-term solvency problems but that we should not use the current surpluses to bail out the General Fund mess. If that is the Bush plan, shame of Kerry and Rudman for playing along with it. And shame on me for not getting this right away. My thanks to my fellow Angrybears and especially to the always delightful Dean Baker who unloaded this critique of the Washington Post:

The fact that the Post prints this stuff would not be so bad if they would occasionally allow an opposing view. They don’t. The Taliban Times will run a picture of the prophet Muhammad in a compromising position before the Post ever runs a column explaining that there is no “entitlement crisis,” just a broken U.S. health care system.

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