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

Proposed Financial Overhaul Bill


How does Congress keep track of such things, if at all, and again who reads these things except those willing to be wonks or lobbyists?

Sen. Chris Dodds Proposed Financial Overhaul Bill can be found at the link.

Huffington Post notes that de novo is back from Treasury:

Despite bipartisan consensus on Capitol Hill that the size and interconnectedness of major financial institutions poses a grave risk to the system as a whole, Senate banking reform legislation includes a provision that will help them get even bigger. The provision — long desired by the big banks — would allow them to open new branches in states regardless of local laws. This is known as de novo branching. The provision was first put forward by the Treasury Department in the financial regulation reform bill that it sent to Congress. House Financial Services Committee Chairman Barney Frank (D-Mass.) initially included the provision in his bill, but removed it after a Democratic committee member, Rep. Alan Grayson of Florida, asked that it be taken out. […] But weeks later, when Senate Banking Chairman Chris Dodd unveiled his new financial reform package, the de novo language popped up again — a verbatim copy of the Treasury language. That had observers scratching their heads at the resilience of the language. The conformity to Treasury’s wording was no coincidence. “That was just something we pulled straight from the administration’s proposal,” Kirstin Brost, a spokesman for Dodd’s banking committee, told HuffPost. …

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More Cautionary Stuff from Generals

Gen. Anthony Zinni, USMC, (Ret.) Remarks at CDI Board of Directors Dinner, May 12, 2004

And what I thought I would do tonight is go through the ten crucial mistakes to this point that we’ve made. Because I think it helps frame what, in fact, has happened over time … and is going to be the first part of that history. And I will conclude with maybe some thoughts on the way ahead, at least from my point of view.

Gen Zinni was CentCom Commander prior to Tommy Franks and in this days of demanding that we listen to the Commanders no matter what, some wonder why nobody wanted to listen to Tony Zinni in real time. There is a lot of selective memory going on about the period between Sept 11, 2001 and March 20, 2003 and equally about the events in Iraq and Afghanistan prior to the Surge announced in January 2007. There has been a tendency towards triumphalism among war supporters along the lines of “The Surge Worked” which totally ignores that Army Chief of Staff Shinseki was effectively sacked in 2003 because he testified to Congress that more troops would be needed, and that Zinni’s reaction was in point 8 of the linked speech:

The eighth problem was the insufficiency of military forces on the ground. There were a lot more troops in my military plan for operations in Iraq. I know when that plan was presented, the secretary of defense said it was “old and stale.” It sounded pretty new and fresh to me, and looking back at it, now because there were a hell of a lot more troops. It was more the (Eric) Shinseki model that I think might have been a hell of a lot more effective to freeze the situation. Those extra divisions we had in there were not to defeat the Republican Guard, they were in there to freeze the security situation because we knew the chaos that would result once we uprooted an authoritarian regime like Saddam’s.

If Rumsfeld had just listened to his Generals we might not have had to waste four plus years and thousands of Americans dead that were in large part the result of going in too light the first time. Bush/Rumsfeld apologists themselves have a lot to apologize for. You screwed up and trusted the Neo-Cons. Bad move.

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Taxes and the Private Sector, Part 2 Would You Like Some Lags with That?

by cactus

Taxes and the Private Sector, Part 2: Would You Like Some Lags with That?
This post follows up last week’s look at how taxes on the private sector affect growth in the private sector. In that post, the data simply refused to cough up anything that could be construed as an excuse for someone to say “Lower taxes produce faster growth.” (Go figure. This must be the 319th time I’ve looked at the topic, each time with different data, and I still can’t figure out how to justify the free lunch story without some serious sleight of hand.)

In last week’s post, I focused on the “private sector” GDP – that is, GDP subtracting off the government’s contribution to GDP. There are several reasons to do this. Only the private sector pays taxes, so it makes more sense to look at taxes paid as a share of the private sector GDP than it does to look at taxes paid as a share of GDP as a whole. Also, an unscrupulous government can pull a Reagan – that is, it can boost GDP by running up the public debt and spending that money. After all, government spending is a component of GDP, so anything borrowed and spent provides a one-for-one increase in GDP. Focusing on the private sector GDP mitigates this problem.

Thus, last week’s post compared the annual percentage change in taxes paid by the private sector as a share of the private sector’s GDP over the length of each administration (i.e., from the year before it took office to its last year in office) to the annualized growth rate in the private sector GDP over the same period of time, producing this graph:

(Note – links to the data as well as a detailed description of the steps taken are provided in last week’s post. This google spreadsheet also contains links to the data sources, plus the data used in the analysis, all in one place.)

This week, I’m going to account for the possibility of lags. Unfortunately, some of the administrations are pretty short (two of them lasted less than three years) so I took the liberty of doing some merging; I put JFK & LBJ together, and Nixon & Ford together. For the most part, LBJ followed the same policies as JFK and Ford continued the policies of Nixon. (Not entirely true – JFK increased the percentage of private sector income collected in taxes each year of his administration, and LBJ cut it dramatically in his first year in office, but he would follow JFK’s lead on taxes for the rest of his administration.)

The graph below shows the change in the tax rate over the first half of each administration on one axis, and the growth rate in the real private sector GDP on the other axis.

Once again, this isn’t exactly screaming “lower taxes leads to faster economic growth.” In fact, it’s not even whispering.

Another interesting thing we can do – we can look how the real private sector GDP growth compares to the change in taxes in the second half of the previous administration:

The data still refuses to cooperate. Is a nice Austrian story too much to ask? Apparently so.

I’m in a hurry, so let me skip the otherwise obligatory insults to those who would simply make $%& up, and jump straight to a few odds and ends that come out of looking at these last two graphs separately:

1. Based on the second graph, it seems that, evidence or not, the right wing meme of lower taxes produce faster growth has won out in the public mind, even among lefty politicians. Clinton raised the percentage of private sector income it collected in taxes in the first half of his term. Bush Sr. essentially kept it the same. The rest of the administrations all lowered them. (Granted, as stated earlier, JFK raised taxes, but LBJ’s one big reduction means that from 1960 to 1964, tax rates actually fell.) That includes some prominent lefties as Jimmeh Carter. It also includes Obama – hence CEA head Christina Romer, who believes in lower taxes as a cure to who knows what.

2. In the third graph we see that administrations are more likely to raise taxes in the second half of their administration after cutting them in the first half. Call it reality setting in. Everyone walks into the Oval Office believing the magic beans are going to take care of everything, but after a few years they realize the line of bs they fed themselves and the voters ain’t gonna cut it. Think of Reagan – in 1985, he figured out he better do a U-turn on taxes. (Yes, he may have continued cutting marginal rates, but 1985 is when he started increasing the share of people’s incomes that was actually collected. For the millionth time, I’d like to point out that nobody pays the marginal rates, and that in this post, as in most of my other posts, I’m focusing on the actual share of income that goes to taxes.)

3. Ike, Nixon/Ford, and Carter all had much, much faster private sector economic growth in the first half of their terms than in the second. The two Bushes did slightly less dismally in the first half of their terms than in the second half. Growth was about the same in each half of the JFK/LBJ administration. Reagan and Clinton both had faster growth rates in the second half of their terms than in the first half. How any of this squares with the notion of cutting taxes to produce growth, I don’t know.

Well, that’s it for me. Until next week, may your food bowl remain full of kibble, and may your rawhide chew thingie have a meaty center.

Reminder: the spreadsheet with info for graph 1 is here.

The spreadsheet with info for graphs 2 and 3 is here.

Data sources..

Current Tax Receipts: NIPA Table 3.1

GDP and the Gov’t piece of GDP: NIPA Table 1.1.6

CPI – U: BLS Table
by cactus

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Crowding Out, Social Security, and the Military Industrial Complex

by Bruce Webb

In the course of an exchange between me and a fellow Bear, the question arose if social spending had a crowding out effect on other social spending. In particular if we have a small problem in Social Security and a big problem in providing health care would solving the first problem put the solution of the second in danger. I say probably yes, he suggests the answer is no because we get no such effect in military spending. Well feel free to weigh in on this in comments, but my reason for arguing the opposite was summed up by Maj. General Smedley Butler in 1933.


Smedley Butler on Interventionism

— Excerpt from a speech delivered in 1933, by Major General Smedley Butler, USMC.

War is just a racket. A racket is best described, I believe, as something that is not what it seems to the majority of people. Only a small inside group knows what it is about. It is conducted for the benefit of the very few at the expense of the masses.
I believe in adequate defense at the coastline and nothing else. If a nation comes over here to fight, then we’ll fight. The trouble with America is that when the dollar only earns 6 percent over here, then it gets restless and goes overseas to get 100 percent. Then the flag follows the dollar and the soldiers follow the flag.
I wouldn’t go to war again as I have done to protect some lousy investment of the bankers. There are only two things we should fight for. One is the defense of our homes and the other is the Bill of Rights. War for any other reason is simply a racket.
There isn’t a trick in the racketeering bag that the military gang is blind to. It has its “finger men” to point out enemies, its “muscle men” to destroy enemies, its “brain men” to plan war preparations, and a “Big Boss” Super-Nationalistic-Capitalism.
It may seem odd for me, a military man to adopt such a comparison. Truthfulness compels me to. I spent thirty- three years and four months in active military service as a member of this country’s most agile military force, the Marine Corps. I served in all commissioned ranks from Second Lieutenant to Major-General. And during that period, I spent most of my time being a high class muscle- man for Big Business, for Wall Street and for the Bankers. In short, I was a racketeer, a gangster for capitalism.
I suspected I was just part of a racket at the time. Now I am sure of it. Like all the members of the military profession, I never had a thought of my own until I left the service. My mental faculties remained in suspended animation while I obeyed the orders of higher-ups. This is typical with everyone in the military service.
I helped make Mexico, especially Tampico, safe for American oil interests in 1914. I helped make Haiti and Cuba a decent place for the National City Bank boys to collect revenues in. I helped in the raping of half a dozen Central American republics for the benefits of Wall Street. The record of racketeering is long. I helped purify Nicaragua for the international banking house of Brown Brothers in 1909-1912 (where have I heard that name before?). I brought light to the Dominican Republic for American sugar interests in 1916. In China I helped to see to it that Standard Oil went its way unmolested.
During those years, I had, as the boys in the back room would say, a swell racket. Looking back on it, I feel that I could have given Al Capone a few hints. The best he could do was to operate his racket in three districts. I operated on three continents.

The first question you should ask in any economic issue: ‘Cui bono’.

(Not familiar with Brown Brothers? You are probably better off. DON’T click on this link. Nothing to see, move along now.)

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Dubai’s work force…a side note on current events


No Sweat adds another facet to the crisis in Dubai…mobility of labor and wages. I cannot imagine what conditions are like to produce a strike in this city. If the players default in high finance, do they go to debtors’ prison like most everyone else?

An estimated 700,000 Asians, mostly from India, Pakistan and Bangladesh, work as construction workers in the UAE, an oil-rich Gulf country experiencing an economic boom where only some 20 percent of the four million population have citizenship.

Sign of the times for the headlong pursuit of bargains?

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Welfare vs Social Insurance in the USA

Robert Waldmann

Among experts, there is a widespread view that people in the USA support social insurance an oppose welfare. It is a fact that they support social security old age and disability pensions and hated AFDC. It is suspected that describing social security as a pension plan with mandatory participation is part of the explanation of this. Therefore, some (including the Clinton treasuries first assistant secretary for policy analysis Alicia Munnell) argue that it is important to preserve some link between contributions and benefits in the social security system.

I think that we have performed and experiment which refutes this hypothesis.

It is called Medicare. Medicare part A is a social insurance program like social security old age and disability pensions. Medicare part D sure isn’t – it’s an unfunded entitlement. I don’t know about parts B and C (I think they are basically funded from general revenues).

That’s the point. Compared to many angrybears I am very ignorant about Medicare, but I suspect that I know about as much as the median voter. If the form of financing had such an important impact on public opinion, why doesn’t the public know more about the form of financing ?

My reading of the evidence is that Medicare A through D is very popular, that different approaches to financing have so little effect on public opinion that it can’t be detected.

Frankly, I think this is proof that the social insurance hypothesis is false. At least I don’t see how the evidence could possibly conceivably be any stronger.

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Inflation Detour II: Crisis and Recovery across Great "Fluctuations"

We are now almost 24 months into the Great Recession. While many expect NBER will eventually say that The Great Recession ended several months ago, they have not yet.

By contrast, the recession that began The Great Depression, per NBER, lasted 43 months. It seems only fair to compare the two, so I trust I can be forgiven for not yet having declared The Great Recession over.

One of the problems is that of official government data. Many of the statistics we now consider “standard” were first tracked as part of the government funding and jobs created by FDR’s Administration. (The irony of multiple economists and idiots arguing that the data shows that those programs should never have happened should not be lost on the reader.)

For an examination of Wall Street, though, reasonable proxy data is available. With some issues noted, we can use the change in Real Prices as a proxy. Comparing the two periods produces:

Fairly comparable. The market had a better six months prior to the October 1929 crash, which is rather neutralized by the drop about five months after the first Depression Recession begins, which is steeper than the comparable drop in the current period.

In spite of all the support for the banking system, the recovery is fairly comparable to the one from the Great Depression—at least so far.

Below the fold, let’s look at Main Street.

As noted above, most of the data required for measuring Main Street—most especially a reliable measure of unemployment—is not available publicly. (If anyone wants to provide me with a copy of the Haver Analytics data, for instance, I won’t complain. Meanwhile, see this post at CR for a graphic of that data from the Depression Era.)

So let’s take another approach. Accept, for the sake of discussion, the traditional Republican argument that inflation reduces the ability of Main Street to grow business, borrow money, and generally live.

If we therefore take the inverse of the Annual Inflation Rate, we can see the “gain” the consumer makes. (Note that, in most periods, the consumer is deemed to have lost. Reality may be different, as smoothing hides may variances. But that is always true, and likely always shall be.)

So let’s look at how Main Street fares, then and now:

Judging strictly by the two periods, it appears that Main Street did significantly better—speaking in terms of earning power—during the time leading up to and beginning the Great Depression than it has during the Great Recession. Indeed, the two paths track each other rather well.

It would appear—information that will surprise few other than perhaps Larry Summers and Tim Geithner—that all of the efforts of the Federal Reserve Board and the U.S. Treasury have had no positive effect on Main Street, leaving its purchasing power significantly lower than the same period of the Great Depression.

Probably more on this on a future rock. Comments and suggestions are rather welcome.

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The Great Trade Collapse…VoxEU

Richard Baldwin at VoxEU introduces a new book on “great trade collapse” before the WTO meeting occurring shortly.

Re-posted with attribution:

The Great Trade Collapse

World trade experienced a sudden, severe and synchronised collapse in late 2008 – the sharpest in recorded history and deepest since WWII. VoxEU today posts a new Ebook – written for the world’s trade ministers gathering for the WTO’s Trade Ministerial in Geneva – that presents the economics profession’s received wisdom on the collapse. Two dozen chapters, written by leading economists from across the planet, summarise the latest research on the causes of the collapse as well as the consequences and prospects for recovery.

The world’s trade ministers gather at the WTO next week just as the world’s trade is starting to recover from the “great trade collapse” – the sharpest drop in recorded history and deepest since WWII.

Vox has today posted an Ebook “The Great Trade Collapse: Causes, Consequences and Prospects” that aims to tell the world’s trade ministers what economists’ know about the trade collapse.

The Ebook can be downloaded for free from

Hard copies of the book may be ordered by emailing Anil Shamdasani:

Establishing consensus on the cause

The two dozen chapters establish a consensus on what caused the collapse. In a nutshell, it was caused by the sudden postponement of purchases, especially of durable consumer and investment goods. Trade fell far more than GDP, since the demand shock was amplified by “compositional” and “synchronicity” effects.

•“Compositional effect”: In the 4th quarter of 2008 and 1st quarter of 2009, the Lehman-induced ‘fear factor’ caused consumers and firms around the world – but especially in the US and EU – to freeze; expenditures were postponed until things became clearer. The sales/production of “postponeables” plummeted, dragging down GDP growth rates. However, since the composition of GDP places much lower weight on postponeables than the composition of trade, the same shock had a substantially larger impact on trade than it did on GDP; the lion’s share of trade takes place in manufactures, mostly final durable consumer and investment goods, and related parts and components.

•“Synchronicity effect”: National drops in trade were large – many attaining post-war records – but the world trade drop was much larger than previous episodes, since almost every nation’s trade dropped sharply; there was no averaging out this time. The synchronisation was probably due to the global and instantaneous transmission of the ‘fear factor’, and partly due to the development of international supply chains that reacted “just in time” to the collapse in demand for postponeables.

Other factors
Some of the chapters find evidence for supply-side factors, but other do not. The supply shocks considered include: the impact of the credit crunch on the specialised financial instruments that grease the gears of international trade (e.g. letters of credit), bankruptcy-induced disruptions of international supply chains, and protectionism.

The best available evidence suggests that declines in global trade finance have not had a major impact on trade flows. Policy responses aimed at shoring up trade credit were early and massive; these may have prevented credit from being more of a problem than it was.

There is no evidence that protectionism played a direct role so far; there has been plenty of new protection, but is has been applied to small trade flows.

Finally, there is almost no evidence that supply chains have collapsed. Direct evidence from firm-level data shows that the exits of firms from trade relationships (i.e. the extensive margin) has not played an important role in this crisis.

If the global economy recovers, the recovery of global trade – which seems to have started in mid-2009 – is likely to be rapid, with pre-crisis growth rates being reached next year. This could foster growing imbalances.

Several authors warn that the global imbalances are a problem for the trade system as well as for the macro and financial system. As unemployment in many nations is projected to rise, or at least remain high, pressures for a protectionist backlash could grow over the coming year or two. To avoid this, and to prevent laying the foundations for another global crisis down the road, the US, China and other nations with large trade imbalances should undertake the necessary macroeconomic adjustments, such as exchange rate realignments, and designing credible plans for long term fiscal sustainability.

This article may be reproduced with appropriate attribution. See Copyright (below).

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