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

Advice on Greg Mankiw’s Blog

By Spencer,

In the 1990s Greg Mankiw said that the Clinton tax increases would cause a major recession.

In fact, the tax increases were followed by a major boom.

In the early 2000s Greg Mankiw said the Bush tax cuts would cause an economic boom.

In fact, the tax cut was followed by the weakest economic expansion on record where the GDP Gap was never closed and for the first time in over 50 years the share of the working age population employed failed to surpass the previous peak.

Now, Greg Mankiw tells us to ignore our lying eyes and act on some obscure academic research that finds that Keynesian fiscal stimulus does not work.

I always believed in the old Samuelson statement that any economic concept you can not explain to your father-in-law will eventually be proved wrong. My father-in -law was a truck driver with an 8th grade education. I wonder if Mankiw, or others taking the same position, would care to explain in ways my father-in-law would understand why we should ignore the last 20 year history and follow his advice.

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A new shopper at the Pentagon

by divorced one like Bush

Via Multi Medium comes a link to for an article regarding another Obama appointment.

President Obama late this afternoon nominated Harvard professor Ashton B. Carter, a leading authority on arms control, to take on a surprising new role, according to top administration officials — as the Pentagon’s chief weapons buyer.

Instead, from his perch at Harvard’s Kennedy School, Carter has been criticizing the Pentagon for buying too many armaments it doesn’t need, decrying what he calls a lack of discipline and “failure to take account of cost growth in weapons systems and defense services.”

Of course the battle lines are being drawn.

There is a brief on Professor Carter’s qualifications. He has worked to clean up the nuclear proliferation, establishing relations with old Russian countries and involving Russia in the Bosnia Peace Plan, not to mention experience with the issue of terrorism.

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Stimulus, Bank Reform…and Trade

By Stormy

One of the few economists who have kept a consistent eye on trade, Professor Peter Morici, properly observes that if the U.S. relies only on a stimulus package and banking reform, then

the economy will fall back into recession once the spending has run its course. A pattern of false recoveries, much as occurred during the Great Depression, will likely emerge.

As the present crisis was picking up steam in April, 2008, a number of commentators ventured their predictions as to the course of the “recession.” Disagreeing with Nouriel Roubini prediction of a prolonged “U” recession, Calculated Risk suggested a double dip recession:

And a double dip is very possible.
But to say this will be the “most severe recession” in decades suggests job losses – and a corresponding increase in the unemployment rate – that I don’t see on the horizon. The good news is that manufacturing employment is holding up better than usual in a recession due to a combination of a weak dollar (strong exports) and relatively strong global growth.

My view at the time was something a bit worse than either a W, a U, or an L.

I suggest we may be in for something worse. No letter in the alphabet quite captures it. The only image that comes to mind is that of a slinky sliding down stairs, each deeper fall accompanied by a short rise.

At the time, I asked: “What will be the engine of our recovery?” Or to put the horse before the cart, I asked:

What is it that we can trade? In order to compete globally, we must have something to offer the rest of the world, something to trade.

The latest surge in the trade deficit was a result of computers, pharmaceuticals, and foreign cars. Slowly but surely we have less and less to trade in terms of finished goods. Agriculture is not enough.

As the crisis deepened, all eyes turned to stimulating aggregate demand. Then it turned to rescuing the financial system.

But, as I said, at some time a horse must draw this cart. To date, there is no horse, no engine of recovery. Like sheep, we follow the latest tinkling bell as we struggle to fix and restore an old order.

Peter Morici is one of the few world-class economists that has repeatedly kept an eye closely on trade.

In 2008, the United States had a $144.1 billion surplus on trade in services. This was hardly enough to offset the massive $821.2 billion deficit on trade in goods.

The deficit on petroleum products was $386.3 billion, up from $293.2 billion in 2007. The average price for imported crude oil rose to $95.23 from $64.28 percent from 2007, while the volume of petroleum imports fell 4.0 percent.

Also, the American appetite for inexpensive imported consumer goods and cars is a huge factor driving up the trade deficit. The trade deficit with China was $266.3 billion, a new record and up from $256.2 billion in 2007.

The deficit on motor vehicle products was $107.1 billion. Ford and GM continue to push their procurement offshore and cede market share to Japanese and Korean companies. However, the automotive trade deficit was down from $120.9, as Asian automakers continued to expand production in North America and demand for autos fell with the recession.

The trade deficit should ease in 2009 with lower oil prices and as the recession bears down on consumer spending. However, China is not permitting its currency to rise in value, despite its trade surplus and has beefed up subsidies on its exports in an effort to export its unemployment to the United States and other industrialized countries. China’s beggar-thy-neighbor protectionism threatens to ignite a global trade war of devastating proportions.

When everyone’s back is to the wall, expect trade to rise to the top of the agenda. The global pie is shrinking; everyone will fight for keeping or improving his share. That Hillary went first to Japan and China is no accident. That she asked the China to continue to purchase U.S. bonds confirms that fact that the U.S. is now China’s impoverished Siamese twin.

Even if China continues that game, a consequence of its burgeoning trade surplus, China and much of Asia is protecting its share of the global pie:

The dollar remains at least 40 to 50 percent overvalued against the Chinese yuan and other Asian currencies. Although China adjusted the yuan from 8.28 per dollar to 8.11 in July 2005 and permitted it to rise gradually to 6.84 by July 2008, the value of the yuan has not changed since.

To sustain an undervalued currency in 2008, China purchased approximately $600 billion in U.S. and other foreign securities, creating a 40 percent subsidy on its exports of goods and services. Other Asian governments align their currency policies with China to avoid losing competitiveness to Chinese products in lucrative U.S. and EU markets.

Another aspect of this disturbing game is the quiet, resigned acceptance that he who has the cash can now find fire sale prices everywhere. Sovereign wealth funds, flush with the wealth only lucrative trade can bring, now prowl among distressed companies. While I have noted many of these sales–especially in resources–, you should take note of how they are being greeted. I watch CTV commentators wrestle with the sale of NOVA chemicals to Abu Dhabi for $499 million (U.S. dollars).

The price is reasonable, analyst Hassan Ahmed of HSBC Holdings PLC told Bloomberg News.
“It’s a bit on the lower side, but keeping in mind the current economic environment and their debt situation, I think this was the right thing to do,” he said.

A profound malaise now blankets many companies. They are ripe for the taking. Take the cash and let the credit go. Do not heed the rumble of a distant hope.

Unfortunately, in the final analysis, we are all in this boat together. For the past ten years, I have watched various players wrestle to see who could put a bigger hole in the global boat. Most economists have merely sat back and admired the handiwork.

I think we need a new boat.

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Fiscal Responsibility Summit: Guest List

Fiscal Responsibility Summit Attendees: (noted without comment. Except for those of us who follow
Social Security-Dean Baker made the cut)

Secretary of the Treasury, Tim Geithner
Secretary of Transportation, Ray LaHood
Secretary of Homeland Security, Janet Napolitano
Deputy Secretary of State, Jack Lew
Treasury Department, Gene Sperling

White House Chief of Staff, Rahm Emanuel
OMB Director, Peter Orszag
National Economic Council, Larry Summers
Domestic Policy Council, Melody Barnes
Council on Economic Advisors, Christina Romer
Deputy OMB Director, Rob Nabors


Senator Mitch McConnell (R), Minority Leader – will not join break-out sessions
Senator Dick Durbin (D), Assistant Majority Leader
Senator Jon Kyl (R), Assistant Minority Leader – arriving at 2:30
Senator Lamar Alexander (R), Republican Conference Chairman
Senator John Cornyn (R), Chairman, National Republican Senatorial Committee

Other Senators (in alphabetical order with Chairs and Ranking Members noted)
Senator Evan Bayh (D)
Senator Max Baucus (D), Chairman of Committee on Finance
Senator Tom Carper (D)
Senator Thad Cochran (R), Ranking Member of Committee on Appropriations
Senator Susan Collins (R), Ranking Member of Committee on Homeland Security
Senator Kent Conrad (D), Chairman of Committee on the Budget
Senator Chris Dodd (D), Chairman of Committee on Banking, Ranking Democrat on HELP
Senator Mike Enzi (R), Ranking Member of Committee on HELP
Senator Lindsey Graham (R)
Senator Judd Gregg (R), Ranking Member of Committee on Budget
Senator Daniel Inouye (D), Chairman of Committee on Appropriations
Senator Amy Klobuchar (D)
Senator Carl Levin (D), Chairman of Committee on Armed Services
Senator Joseph Lieberman (D), Chairman of Committee on Homeland Security
Senator John McCain (R), Ranking Member of Committee on Armed Services
Senator Claire McCaskill (D)
Senator Ben Nelson (D)
Senator Olympia Snowe (R), Ranking Member of Small Business Committee
Senator Arlen Specter (R), Ranking Member of Judiciary Committee


The Honorable Nancy Pelosi (D), Speaker of the House of Representatives (will not join breakout sessions)
The Honorable Steny H. Hoyer (D), Majority Leader
The Honorable John A. Boehner (R), Minority Leader
The Honorable James E. Clyburn (D), Majority Whip
The Honorable Eric Cantor (R), Minority Whip
The Honorable Thaddeus G. McCotter (R), Chairman of the Republican Policy Committee
The Honorable Chris Van Hollen (D), Chairman of the Democratic Congressional Campaign Committee

Other Members (in alphabetical order with Chairs and Ranking Members noted)
The Honorable Joe Barton (R), Ranking Member of the Committee on Energy and Commerce
The Honorable Allen Boyd (D)
The Honorable Dave Camp (R), Ranking Member of the Committee on Ways and Means
The Honorable Michael N. Castle (R)
The Honorable Raúl M. Grijalva (D)
The Honorable Darrell E. Issa (R), Ranking Member the Committee on Oversight and Government Reform
The Honorable Ron Kind (D)
The Honorable Barbara Lee (D), Chairwoman of the Congressional Black Caucus,
The Honorable Jim Matheson (D)
The Honorable George Miller (D), Chairman of the Committee on Education and Labor
The Honorable David R. Obey (D), Chairman of the Committee on Appropriations
The Honorable David E. Price (D) – late arrival – approx 1:30/2:00 PM
The Honorable Tom Price (R), Chairman of the Republican Study Committee
The Honorable Charles B. Rangel (D), Chairman of the Committee on Ways and Means
The Honorable Paul Ryan (R), Ranking Member of the Committee on the Budget
The Honorable Stephanie Herseth Sandlin (D), Chairwoman of the Blue Dog Coalition
The Honorable John M. Spratt (D), Chairman of Committee on the Budget
The Honorable John S. Tanner (D)
The Honorable Ellen O. Tauscher (D)
The Honorable Edolphus Towns (D), Chairman of the Committee on Oversight and Government Reform
The Honorable Nydia M. Velazquez (D), Chairwoman of the Committee on Small Business
The Honorable Henry A. Waxman (D), Chairman of the Committee on Energy and Commerce

Community Leaders and Stakeholders Also Attending

(in alphabetical order by organization name)

Bill Novelli, AARP
John Gage, AFGE
John Sweeney, AFL-CIO
Gerry McEntee, AFSCME
Randi Weingarten, AFT
Ed Coyle, Alliance for Retired Americans
Kevin Hassitt, American Enterprise Institute
Richard Umbdenstock, American Hospital Association
Nancy Neilson , American Medical Association
Becky Patton, American Nurses Association
Karen Narasaki, Asian American Justice Center (AAJC)
Dr. Ho Tran, Asian Pacific Islanders American Health Forum (APIAHF)
Gary Flowers, Black Leadership Forum
Eleanor Hinton Hoytt, Black Women’s Health Imperative
Alice Rivlin, Brookings Institution
John Castellani, Business Roundtable
Roger Hickey, Campaign for America’s Future
John Podesta, Center for American Progress
Larry Korb, Center for American Progress
Dean Baker, Center for Economic and Policy Research
Joe Minarek, Center for Economic Development
Robert Greenstein, Center on Budget and Policy Priorities
Anna Burger, Change to Win
Maya MacGuinneas, Committee for a Responsible Federal Budget
Karen Davis, Common Wealth Fund
Bob Bixby, Concord Coalition
Maya Rockeymoore, Congressional Black Caucus Foundation
Doug Elmendorf, Congressional Budget Office
Marty Ford, Consortium for Citizens with Disabilities
Lawrence Mishel, Economic Policy Institute
Ron Pollack, Families USA
Ellie Smeal, Feminist Majority
Stewart Butler, Heritage Foundation
Bill Spriggs, Howard University
Joe Salomonese, Human Rights Campaign
John Cavanagh, Institue for Policy Studies
Heidi Hartmann, Institute for Women’s Policy
Drew Altman, Kaiser Family Foundation
Douglas Holtz-Eakin, McCain Economic Advisor
Hilary Shelton, NAACP
Todd Stottlemyer, National Association of Independent Businesses
Barbara B. Kennelly, National Committee to Preserve Social Security and Medicare
Jackie Johnson Pata, National Congress of American Indians
Janet Murguia, National Council of La Raza
Marc Morial, National Urban League (NY)
Dennis Van Roekel, NEA
David Walker, Peter G. Peterson Foundation
Peter Peterson, Peter G. Peterson Foundation
Al From, Progressive Policy Institute
Andy Stern, SEIU
Fred Goldberg, Skadden
Roger Ferguson, TIAA-CREF CEO
Martin Regalia, U.S. Chamber of Commerce
Fernando Torres-Gil, UCLA
Robert Reischauer, Urban Institute
Michael Graetz, Yale

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Foreclosures Are Not the Problem. Those Who Build Financial Time Bombs, and Those Who Pick Them Up, Are the Problem

by cactus

Foreclosures Are Not the Problem. Those Who Build Financial Time Bombs, and Those Who Pick Them Up, Are the Problem

I hesitate to disagree with Hilzoy – she may not be an economist but she’s very smart is usually right – but she has two posts (here and here) which I think are based on a faulty premise. This is the last paragraph from the first one:

Under normal circumstances, I’d be opposed to the government stepping in to encourage banks to modify these loans, except in cases of fraud. But these are not normal circumstances. The economy is melting down, and foreclosures are a big part of the reason why. Foreclosures always impact people other than the people foreclosed on, for instance by driving down neighborhood property values. But now, of all times, they are having massive impacts on the rest of us. And the Obama plan, which does not just wave a magic wand and make people’s excess debt disappear, seems to me like a good start on addressing them.

cactus says
Foreclosures are not a big part of the reason the economy is melting down. Foreclosures are a symptom on the one hand, and part of the necessary cure on the other. Home prices are simply too high right now. My wife and are in a position to buy a house. There are, in fact, a few homes for sale in the neighborhood my wife and I want to buy in, and we have enough money squirreled away to pay cash for any of ’em if we chose. I hasten to add that we’re not rolling in the dough – assuming we wanted any of those houses, we’d be stupid to pay cash. Right now we’re down to one source of income, and my wife is starting a new business (for a long time, I expect 0
But we’ve done the analysis… Where we live, its still cheaper to rent than to buy, and that’s before you add a premium to take into account the fact that buying increasing your risk and reduces your mobility relative to renting. That little detail means that either rents have to rise, or home prices have to fall.

But wait, there’s more! You can get a nice summary factsheet for anyplace in the US from the Census. In our area, homes are considered affordable, but when I look at the median household income and the median value of a home in the area, it occurs to me that most households would have a hard time making ends meet. Given incomes in this area, and assuming a 20% (responsible) downpayment, throw in income and property taxes, and assuming a 4% interest rate, and I have a hard time seeing how all that many people could afford the payments on a house. They certainly can’t simultaneously pay the mortgage and save money for a rainy day, and they probably have to forego niceties like health insurance or dental work or any expenses at all on maintenance of the house along the way.

And there’s part of the problem – people bought homes they couldn’t afford. Debt was easy for a while, and home prices were assumed to be going to infinity (“buy now or be forever priced out of the market!”) but those days have come to an end, so fewer people are willing (or allowed to) buy homes they can’t afford now.

All of that means – either home prices are going to have to drop more, or incomes in the area are going to have to rise, or we’re going to institute a permanent class of homeowners and a permanent class of renters. I’m betting on the first option right now. And I’m also betting that Obama’s plan is just going to drag out the day that prices become affordable.

But the real problem, the cause of this whole mess, is simple: every few decades, our economic system morphs into a structure that rewards making things less than it rewards creating financial time bombs with multi-year fuses. We’ve been rewarding the financial time bomb makers more and more since Reagan took office. And this is also the second time since Reagan took office we’ve been bailing out the financial time bomb makers at great cost to the rest of us – the previous time was during the S&L crisis.

Things have now evolved to the point where for some reason, when the market for time bombs disappears its considered some sort of a tragedy. This time around, we’ve already helped out the grifters, including many investment banks, commercial banks, derivatives traders, and now we’ve moved on to helping the marks. And rewarding any of them, the grifters or the marks, is a problem for several reasons. It rewards the bad behavior of the financial time bomb makers and reduces the incentives the rest of us have to watch out for the crooks. (And yes, I know, people living next to foreclosed homes suffer too. But externalities come in both positive and negative varieties, and folks who benefited from home prices rising for no reason don’t have a complaint when the home prices drop back in value because people found out the rise happened shouldn’t have happened in the first place.) It also keeps an unviable system going, and it does so at great cost.

But there’s one more thing. Since this whole thought process, this current iteration of the art of rewarding of the financial time bomb makers, dates back to Reagan, it pays to go back to Reagan… And when Reagan conjured up images of the Cadillac-driving welfare queen, it pissed people off not because there were people who needed help, but because supposedly many people who were getting help were, according Reagan, living better than the people being taxed to help them. And while I for one have never had a problem with seeing some of my tax money go toward helping the unfortunate, and I’ve never had a problem with welfare, at this moment in time, I know with absolute certainty that more most of the new-fangled welfare from the last six months is directed to helping people who are better off than I or have lived much better than I in recent years (investment banks, commercial banks, derivatives traders, and now homeowners) than the poor. I resent it. Does Obama really want a country where the folks who make and pick up time bombs are rewarded at the expense of those who are too honest to make time bombs or were smart enough (and in some cases, lucky enough) not to pick them up?

In closing, I do have a suggestion – if for some reason its considered necessary to dump big piles of money into the economy, why not give it to folks who are neither grifters nor marks? After all, the goal seems to be to get people to spend. And those who are neither grifters nor marks are more likely to spend extra funds than the marks are, given the hole so many marks are in. They’re also less likely to spend the money figuring out how to build the next generation of time-bomb.
by cactus

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Health care is 20% by volume of the stim bill…no discussion?

cross posted by Rusty

Health Care Think Tank

Stimulus Bill Part II
Why is the stimulus bill (H.R. 1) more than 1000 pages?

More than 200 of those pages are health care reform, including a massive health care IT plan.

How much time was spent debating the largest health care reform plan of the past two decades?


Also included are updates on HIPAA security and privacy, and perhaps the provisions that will shape the future of U.S. health care, the “effectiveness review” plan. I just reread Tom Daschle’s book, and his brief stint as almost-Secretary allowed him to have immense influence.

In front of me is a full 3″ ring binder, perhaps containing the future of our health care system, perhaps not.

First, a few days with the grandchildren. Then, the work continues in earnest.

Update: I was curious. Printed in pieces from the Thomas site, I have 261 pages.

Vtcodger says in update: I take the main points — and they are good ones — to be:

1. Hardly anyone actually read the stimulus package.
2. We have somehow possibly restructured US Healthcare with no discussion or debate

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