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

Industrial Production

January industrial production rose 0.9%, with the gains with gains across almost all components.

Industrial production has now risen for seven months and is 5.5% above its bottom. This implies that so far industrial production has been rising at a 9.4% annual rate. Compared to previous industrial production recoveries this appears to be about a normal recovery. However, given that this was the most severe drop in industrial production in the post WW II era and that recoveries are typically proportional to the decline, this implies that the recovery is moderate.

The gains were widespread,but perhaps the most important development is that information technology is soaring. Over the last three months it rose 1.8%, 1.2% and 1.7%, respectively.
This translates to about an 18% annual rate, compared to about a 15% growth rate in the 2002-08 expansion.

The other major development is that manufacturing productivity appears to be slowing. Over the last three months estimated manufacturing productivity slowed to only a 1.7% annual rate as compared to an 8.1% rate over the past year. This may imply that the typical early cycle extremely strong rebound in productivity is ending and that we may now start to see stronger employment gains.

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The currency quarrel with China is a dangerous distraction

by Brenda Rosser
crossposted with Econospeak

The currency quarrel with China is a dangerous distraction

In an article in the Washington Post last November entitled ‘The currency quarrel’ [1] there were a number of assertions made about the economic relationship between the US and China that are questionable, to say the least.

The opening sentence begins by pointing out that “it is a cliche that the United States has no more important bilateral relationship than that with China.” Is that true? Steve Dunaway, adjunct senior fellow for international economics at the Council for Foreign Relations says:

“Only roughly 15 percent of U.S. imports come from China. Moreover, all of the basic types of manufactured consumer goods that China exports to the United States (clothing, textiles, footwear, toys, small appliances, etc.) can be imported from other countries or could be produced domestically. The prices for goods that could substitute for products from China would be higher, but the difference in costs would be relatively small.” [2]

It’s Canada – NOT China – that is the U.S.’s largest trading partner. It has been for some considerable time. [3]

The Washington Post article goes on:

“The United States, in fact, consumed more than it produced, but China enabled this by accumulating $2.3 trillion in reserves and plowing much of it back into U.S. government bonds.”

In actual fact, it is clear that the US Government created the conditions under which America consumes more than it produces at home. Successive American Governments have deliberately pursued a policy entailing the embedding of its domestic corporations or their subsidiaries in foreign nations. “Investment abroad is investment in America” has been the slogan of American corporations at least since the late 1960s.

Nowadays the world economy is quite literally dominated by giant transnational global corporations, most of which are owned and controlled by American citizens. In 2002 it was written:

“9 of the top ten companies in the world, 72% of the top 25 global corporations, 70% of the top 50 global corporations. 5 of the top global banks, six of the top 10 pharmaceutical/biotech companies, 4 of the top ten telecommunications, 7 of the top IT corporations, 4 of the top gas and oil corps, 9 of the top ten software companies, 4 of the top ten insurance companies, 9 of the top ten general retail companies.” All call the USA their home. [4]

and these firms tended to enjoy extraordinary levels of dominance in world markets:

“By the early 1990s, five firms controlled more than 50 percent of global market share in consumer durables, steel, aerospace, electronic components, airline, and auto industries. In oil, personal computers, and media, five firms controlled more than 40 percent of the market. In American markets ranging from commercial airlines and aerospace to computer hardware and software to household appliances, three or four firms control up to 90 percent of the market, and market share concentration continues to increase through mergers and targeted growth strategies.” [5]

China’s domestic firms, on the other hand, simply can’t compete with these global giants.

“At the start of the 21st century, not one of China’s leading enterprises had become a globally competitive giant corporation, with a global market, global brand, and a global procurement system…The brutal reality is that after two decade of reform, China’s large firms mostly are still far from being able to compete with the global giants. ” [6]

It seems odd under these conditions that the Washington Post article complains about China’s attempts to protect its export industries by linking its currency to the plunging US dollar. Why is the dollar plunging in value in the first instance?

The American government has pursued economic and military policies whose net effect tended to consistently devalue its domestic currency. Actions such as engaging in decades of avoidable military aggression against a long list of nations, refusing to enforce viable fuel standards for vehicles, failing to use the decades of opportunity since the ‘70s oil crisis to foster and protect an sustainable alternative energy industry, deregulation of financial and commodity markets that have consequently bred inflationary speculative activities on a disastrous scale. And so forth. The list of US government failure is a long one.“U.S. exports are not growing as much as they would otherwise, and neither are those of other countries in Asia.” Says the Washington Post.

Well, the United states is still, by every measure, the world’s largest economy but even the citizens of this wealthy nation are struggling to find the financial resources to sustain the huge markets that the global TNCs would like to see continued indefinitely. Neoliberalism has bred massive inequality:

“Between the mid-1970s and 2006 the Gross Domestic Product of the United States trebled; the level of labour productivity almost doubled; the Dow Jones Index rose from 1000 to 13,000. Yet astonishingly enough, during that entire period, according to several studies, the income of the average American worker and family essentially remained stagnant [whilst] …. from 1980 to 2006, … the wealthiest 10 per cent of Americans increased their share of national income from 35 per cent to 49 per cent.” “By 2006 the wealthiest 1 per cent earned 20 per cent of national income.” [7]

The rich have gained access to virtually unlimited funds in the context of the world economy being on a precipice. People all over the planet have been struggling to pay their bills. When China opened itself up to capitalism the global labour force increased immensely. Consequently, wages could be kept low almost everywhere. Consumption predictably declined and at a time when inflation was being experienced with the rising costs of business inputs. This has occurred in a general situation of global oversupply.

“Corporations had little motivation to increase investment and employment, so no interest in borrowing no matter how low the Fed made the cost of credit. On the contrary, they had every incentive to slow down capital accumulation and reduce costs by way of cutbacks on jobs and plant and machinery, while availing themselves of falling interest rates to pay down their debt. And that is what they did.” [8]

The Washington Post will probably continue to blame China for US’ woes. The US and other nations, however, cannot grow their way out of this slowdown. Governments around the world may try to continue pump-priming aggregate demand but if they do ecological catastrophe and other severe problems will continue to play out. They must stop blocking the urgently needed consolidation and restructuring of our economies.

There is now a dire shortage of energy and minerals and this problem will not be able to be addressed for years to come. The bailing out of big financial institutions is also causing the entrenchment of inflationary expectations.

We need a public media that ceases to point the finger at economic rivals and, instead, looks for real solutions to the whole range of pressing problems we all now face. Or we’ll be inundated by much bigger problems very, very soon. Avoidance is not a strategy.

[1] The currency quarrel
China won’t change on command. America must retake control of its own financial destiny.
Tuesday, November 24, 2009

[2] The U.S.-China Economic Relationship: Separating Facts from Myths
Author: Steven Dunaway, Adjunct Senior Fellow for International Economics
November 16, 2009

[3] Canada, Not China, Is U.S.’s Largest Trade Partner
Sunday, January 03, 2010

[4] Facts on the US Economic Empire
by etra Jaimers. Eat the State. Volume 7, #3 October 9, 2002

[5] ‘Corporation Nation’ by Charles Derber. 1998. ISBN 0-312-19288-6. Pages 59- 62 Chapter three:’The Mouse, Mickey Mouse, and Baby Bells’

[6] (Nolan, P. 12) as quoted in:
The China Factor:Mystery, Myth or Magic?
CTMA Roundtable. Kim Korth and John Cleveland. February 26, 2004
IRN, Inc. 550 Three Mile Rd. Grand Rapids, MI 49544

[7] The Great Recession and neo-liberalism
Extract from Robert Manne’s 2009 QE Lecture in Quarterly Essay 36,
19.01.10 12:24 am

[8] Brenner, Robert. (2009). What is Good for Goldman Sachs is Good for America The Origins of
the Present Crisis. UC Los Angeles: Center for Social Theory and Comparative History. Retrieved

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Further fleshing out the truth regarding Obama and SS and…

by Daniel J. Becker

Back in June of ’08 I asked regarding Jason Furman’s appointment by Obama:

Is this the concession the Clinton/Blue Dog group was looking for? The DLC still keeps control of the money issues?

I asked because of his connection to the Hamilton Project at the Brookings Institute: Hamilton Project, a small think tank created by Robert E. Rubin, Bill Clinton’s Treasury secretary and key economic adviser, and former Treasury deputy secretary Roger C. Altman…

Bruce posted a response by Furman regarding Obama’s SS plans:

As president, he would work with Congress on a bipartisan basis to design the details of such a change, including the tax rate, how it is phased in over time, the linkage between these tax payments and benefits and other critical design elements of this plan.

We have known what Obama’s position is since his campaigning.  Unfortunately, many have ignored it even blaming the victim (the voter) for his lack of left leaning action.   But, just to bolster the smacking up side the head Bruce is offering via NewDealDemocrat, I went digging further on Mr. Furman and found this from 2005 via Center on Budget and Policy Priorities:

By contrast, under traditional reform plans like that proposed by economists Peter Diamond and Peter Orszag, the debt would be reduced immediately, and by 2050, the amount of debt reduction would be substantial.

Mr. NewDeal stated:

In short, only a month into his Administration, Candidate Obama’s insistence on tax hikes as the method of long term Social Security budget balancing was replaced by President Obama’s embrace of the Diamond-Orszag plan

I was certain with Hillary we were getting the DLC and all the Chicago School Econ we could handle. I was resisting the temptation of conspiracy thought when I asked if Furman was a concession to the Clinton power block, but I feel confident now that this is exactly what happened.  Hillary conceded on June 7th, Furman was appointed on June 9th.

Remember the 60’s and the warnings about how the “Man” was messing with our heads? The message wasn’t to be paranoid, the message was to be aware.

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Topical thread: Throw the rascals out 2/16/2010

“The argument that the two parties should represent opposed ideals and policies, one, perhaps, of the Right and the other of the Left, is a foolish idea acceptable only to doctrinaire and academic thinkers. Instead, the two parties should be almost identical, so that the American people can throw the rascals out at any election without leading to any profound or extensive shifts in policy. Then it should be possible to replace it, every four years if necessary, by the other party, which will be none of these things but will still pursue, with new vigor, approximately the same basic policies.” — Carroll Quigley

Comments (15) | |

Obama and Social Security: NewDealDemocrat Tees Off

by Bruce Webb (UPDATE: Digby readers, I want to make it clear that I am not NewDealDemocrat, I just got permission to cross-post this important compilation from NDD.)

Blog friend NewDealDemocrat has a recommended diary up on dKos called Mr. President, No Real Democrat is agnostic about Social Security. NewDeal gave me an advance look and authorized me to cross post it which I am doing below the fold. I don’t entirely endorse the conclusions but think this is an important reference work, NewDeal having tracked down just about every public statement ever made by Obama on Social Security. So this is more an archival post to be added to the Social Security series. Comment here if you like but I would urge everyone registered at dKos to put in a word over there.

And yes as New Deal warns this is very long.

by NewDealDemocrat

Last week President Obama said that he will be “agnostic” as to any changes, including Social Security benefit cuts, that his debt reduction commission recommends. This is a far cry from his constant campaign rhetoric in which he promised to listen to all recommendations, but his plan was to raise the payroll cap on contributions.

This is a sad but necessary piece in which I lay out the evidence, which I believe is compelling, that Barack Obama’s own words and deeds reveal that his real agenda all along has been to use a commission or summit to cut Social Security benefits, and that the campaign rhetoric was just a sop to anesthetize opposition. This for a program that, at worst, faces a shortfall 30 years from now, and that Obama himself called the cornerstone of the American social compact.

(Apologies, this is really long. But to reveal the truth, a truth that has been hiding in plain sight right before our eyes all along, the full record must be laid out.)

Of his Social Security system, FDR bluntly called it:

politics all the way through. We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren’t a matter of economics, they’re straight politics.”

So you would think that a Democratic President would be an ardent supporter of ensuring that workers received the benefits under the system that they had worked for and contributed to their entire lives. Not so. Last week President Obama said that

a presidential commission on the budget needs to consider all options for reducing the deficit, including tax increases and cuts in spending on entitlement programs such as Social Security and Medicare.

“The whole point of it is to make sure that all ideas are on the table,” the president said in the interview with Bloomberg BusinessWeek, which will appear on newsstands Friday. “So what I want to do is to be completely agnostic, in terms of solutions.”

When Barack Obama does not actually support a plan, he offers vague platitudes but nothing more. Such was his “support” for crucial, progressive, popular ideas about Health Care Reform, supposedly his Administration’s signature piece of legislation. In contrast, when Barack Obama has wanted to, he has been relentless and decisive, as he was in September 2008 when he quickly and crucially supported the Wall Street bailout. And just last month, the White House was quick to whip a wavering Senate into line about reconfirming Fed Chair Ben Bernanke with a 50, not 60, vote threshold. More on the significance of that at then end of this article.

So we need to look past Obama’s always-perfect rhetoric to see they are just flaccid platitudes or if his actions show firm resolution. When it comes to Social Security, a comparison of what Obama the candidate said and what Obama the President has done show that his pledges to simply increase payroll taxes fall into the category of platitudes, while changing the program, apparently in part by cutting benefits, is clearly a matter of firm resolve. In essence, Obama’s reasurance that while he would “convene a meeting” to listen to all sides, what he actually would propose would be a small increase in taxes on those earning over $250,000 who could easily afford it, was all along just a sop or a stalking horse to induce voters to overlook what was hiding in plain sight, namely his desire for a “nonpartisan” or “bipartisan” comission that would recommend cuts in Social Security benefits.
The evidence comes right out of Obama’s mouth, and when put together, in my opinion is compelling.

I. Obama the Candidate

Candidate Barack Obama created a small firestorm in November 2007 after he adopted a RW meme and said:

Senator Clinton says that she’s concerned about Social Security but is not willing to say how she would solve the Social Security crisis

and followed that up with a campaign ad in Iowa (no longer online)

“that focused on Social Security[, i]n [which] he [told] a group of Iowans, “I don’t want to just put my finger out to the wind and see what the polls say. I want to bring the country together to solve a problem.”

This RW claim that Social Security was in “crisis” created quite a stir, with Prof. Paul Krugman saying that

Lately, Barack Obama has been saying that major action is needed to avert what he keeps calling a “crisis” in Social Security — most recently in an interview with The National Journal. Progressives who fought hard and successfully against the Bush administration’s attempt to panic America into privatizing the New Deal’s crown jewel are outraged, and rightly so.

That controversy erupted here as well, prompting me to write a diary explaining The Truth about Social Security, in which I pointed out that Social Security is not in “crisis”, and is not a “real problem,” manageable or not, needs no “fix,” nor any intermeddling “Commission.” As stated by the official projections by the Social Security trustees, the program will be solvent without so much as lifting a little finger by anyone old enough to read or write on this blog under the revenue projections which over the last 15 years have almost always proven the most accurate.

Obama soon backtracked, and adopted a much more mainstream democratic position, that he maintained right up until he was elected President. Here is his actual speech in Iowa in which he first set forth his position on Social Security:

In this video (beginning at about 5:40), Obama point-blank states that:
– “Social Security is the cornerstone of the social compact in this country.”
– “We also know that the system has problems.” (later in the video, he says that the items listed below will make Social Security “solvent” indicating that it isn’t now)
– “The underlying system is sound. The actual problem is a projected cash shortfall that can be readily solved. But the longer we wait to solve the problem, the bigger it grows,” “The question is, how to solve this problem” (of the trust fund being depleted in 2040, after which SS turns into a pay as you go system..)
– “On issues as fundamental as how to protect Social Security, a candidate for president owes it to the American people to tell us where they stand,” because you’re not ready to lead if you can’t tell us where you’re going.”
– “I do not believe that we need to cut benefits or raise the retirement age.”
– “The best option, in my view, is to ask the highest income Americans to contribute a little bit more by raising the ceiling on what is currently paid on the amount of earnings subject to the social security tax.”
– “We need to stop borrowing millions from the Social Security trust fund” in the federal budget.

A campaign site that is still up goes into great detail about candidate Obama’s position with regard to Social Security. He emphasized three things:
(1) the belief that in the long run, Social Security was not solvent.
(2) While he would “convene a meeting” to discuss any and all options, forming a commission is exactly the wrong way to deal with the issue, but opposed forming a “binding” commission.
(3) Rising the limit on payroll contributions into the trust fund, beginning with incomre in excess of $250,000 was the best way to rectify the problem.

Here are Candidate Barack Obama’s constant refrains on each of the above three items from that campaign site:

1. Social Security has a “problem”

Good health care and tax reform will save entitlements

Q: How should we fix Social Security and other entitlement programs?
OBAMA: If we get our tax policies right so that they’re good for the middle class, if we reverse the policies of the last eight years that got us into this fix in the first place and that Sen. McCain supported, then we are going to be in a position to deal with Social Security and deal with Medicare….

Source: 2008 second presidential debate against John McCain Oct 7, 2008

Q: We all know that Social Security is running out of money….

A: …. we’ve got to make sure that we preserve Social Security is to do the same thing that Ronald Reagan and Tip O’Neill were able to do back in 1983, which is come up with a bipartisan solution that puts Social Security on a firm footing for a long time.

Source: 2007 YouTube Democratic Primary debate, Charleston SC Jul 23, 2007

2. Obama supported a bipartisan solution to this “problem” including holding a meeting to explore all optionsL

Q: Would you raise the cap for Social Security tax above the current level of the first $97,500 worth of income?
A: I think that lifting the cap is probably going to be the best option. Now we’ve got to have a process [like the one] back in 1983. We need another one. And I think I’ve said before everything should be on the table. My personal view is that lifting the cap is much preferable to the other options that are available. But …we should reject things that will weaken the system, including privatization, which essentially is going to put people’s retirement at the whim of the stock market.

Source: 2007 Democratic primary debate at Dartmouth College Sep 6, 2007

Cutting benefits & raising retirement age are wrong answers

Q: You said earlier this year that everything should be on the table for Social Security, including looking at raising retirement age, indexing benefits, and then suddenly you said, “I’m taking them off the table.”

A: That’s not what I said. I said I will convene a meeting as president where we discuss all of the options that are available. I believe that cutting benefits is not the right answer; and that raising the retirement age is not the best option, particularly when we’ve got people who are still in manufacturing.

Q: But in May you said they would be on the table.

A: Well, I am going to be listening to any ideas that are presented, but I think that the best way to approach this is to adjust the cap on the payroll tax so that people like myself are paying a little bit more and the people who are in need are protected. That is the option that I will be pushing forward.

Q: But the other options would be on the table?

A: Well, I will listen to all arguments and the best options.

Source: Meet the Press: 2007 “Meet the Candidates” series Nov 11, 2007

Commitment…Protect Social Security: Obama will preserve Social Security by stopping any efforts to privatize it and working in a bipartisan way to preserve it for future generations.

Source: Campaign booklet, “Blueprint for Change”, p. 16-19 Feb 2, 2008

(emphasis within paragraphs mine)
But he was against delegating the issue to any appointed commission:

Must capture new revenue; no new Social Security Comission

OBAMA: We’re going to have to capture some revenue in order to stabilize the Social Security system. You can’t get something for nothing. And if we care about Social Security, which I do, and if we are firm in our commitment to make sure that it’s going to be there for the next generation, and not just for our generation, then we have an obligation to figure out how to stabilize the system. I think we should be honest in presenting our ideas in terms of how we’re going to do that and not just say that we’re going to form a commission and try to solve the problem some other way.

Source: 2008 Philadelphia primary debate, on eve of PA primary Apr 16, 2008

(emphasis mine)

3. Obama supported making up the shortfall by raising the cap on payroll taxes.

Raise cap on payroll tax for 3% of earners over $102,000

Q: The Republicans … say for all your promises not to raise taxes on the middle class, that, in fact, you want to raise the cap on the Social Security payroll tax, and you also want to increase capital gains.

A: In terms of raising the cap on the payroll tax, right now everybody who’s making $102,000 or less pays 100% of payroll tax on 100% of their income. There are about 3% to 4% of Americans who are above $102,000 in income every year….

Source: 2008 Fox News interview: presidential series Apr 27, 2008

Raise $97K cap on payroll tax exempting earnings under $250K

OBAMA: What I have proposed is that we raise the cap on the payroll tax, because right now millionaires and billionaires don’t have to pay beyond $97,000 a year….

Q: But that’s a tax on people under $250,000.

OBAMA: That’s why I would look at potentially exempting those who are in between. This is an option that I would strongly consider, because the alternatives, like raising the retirement age, or cutting benefits, or raising the payroll tax on everybody, including people making less than $97,000 a year–those are not good policy options

Source: 2008 Philadelphia primary debate, on eve of PA primary Apr 16, 2008

The wealthy should pay a bit more on the payroll tax

Social Security is not in crisis; it is a fundamentally sound system, but it does have a problem, long-term. We’ve got 78 million baby boomers, who are going to be retiring over the next couple of decades. That means more retirees, fewer workers to support those retirees. We are going to have to do something about it. The best idea is to lift the cap on the payroll tax, potentially exempting middle-class folks, but making sure that the wealthy are paying more of their fair share, a little bit more.

Source: 2007 Democratic debate at Drexel University Oct 30, 2007

What we need to do is to raise the cap on the payroll tax so that wealthy individuals are paying a little bit more into the system, if we are going to deal with this problem specifically.

Source: 2008 Facebook/WMUR-NH Democratic primary debate Jan 6, 2006

In short, Candidate Obama articulated a problem, a process, a preferred result — raising the cap on payroll contributions — and a rejected one — benefit cuts. His campaign reiterated all of those in a closing campaign video in October 2008 that is still posted online:

Then Candidate Obama was elected President. As we will see, while his commitment to “pushing forward” an increase in payroll taxes disappeared, as did his vow not to cut benefits and his denunciation of any “binding commisssion,” his determination that Social Security had a “problem” that was defined exclusively as “rising costs” and the commitment to convene a meeting to push forward “all” (really just GOP and Blue Dog) options to change Social Security was resolute.

II. Obama the President

If his campaign positions were soothing, his words and actions as President, beginning with his very Inauguration speech, were not:

That we are in the midst of crisis is now well understood…. Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age. Homes have been lost; jobs shed; businesses shuttered. Our health care is too costly; our schools fail too many; and each day brings further evidence that the ways we use energy strengthen our adversaries and threaten our planet.

We remain the most prosperous, powerful nation on Earth. Our workers are no less productive than when this crisis began. Our minds are no less inventive, our goods and services no less needed than they were last week or last month or last year. Our capacity remains undiminished. But our time of standing pat, of protecting narrow interests and putting off unpleasant decisions – that time has surely passed. Starting today, we must pick ourselves up, dust ourselves off, and begin again the work of remaking America.

(emphasis mine).
Those were jarring words in an otherwise uplifting speech. If Obama was opposed to raising taxes on the middle/working classes, then what could “hard choices” and “unpleasant decisions” for average Americans possibly mean besides cutting back further on their safety net? News accounts of Obama’s felicitations to conservatives who wanted to destroy Social Security that very same week strongly suggest that is exactly what he meant.

In a speech on January 8, 2009,

President-elect Barack Obama said overhauling entitlement programs such as Medicare and Social Security will be “a central part” of his administration’s efforts to curb federal spending, the New York Times reports. Obama said, “We are beginning consultations with members of Congress around how we expect to approach the deficit,” adding, “We expect that discussion around entitlements will be a part, a central part, of those plans.” Obama said, “If we do nothing, then we will continue to see red ink as far as the eye can see.”

Four days before his Inauguration, he reiterated this theme in a private meeting with the editorial board of the Washington Post during which he

pledged … to shape a new Social Security and Medicare “bargain” with the American people, saying that the nation’s long-term economic recovery cannot be attained unless the government finally gets control over its most costly entitlement programs.

That discussion will begin next month, Obama said, when he convenes a “fiscal responsibility summit” before delivering his first budget to Congress. He said his administration will begin confronting the issues of entitlement reform and long-term budget deficits soon after it jump-starts job growth and the stock market.

And shortly after his Inauguration,

Mr. Obama unexpectedly approached [South Carolina Republican Senator Lindsey] Graham when he was at the White House to meet with Rahm Emanuel, Mr. Obama’s chief of staff. Mr. Graham … said in an interview: “I know he’s sincere about wanting to do something about entitlements generally, health care and Social Security. And I want to help him.”

Despite Mr. Obama’s interest, his political and policy advisers are divided … Within the administration, John D. Podesta … is among those arguing for action sooner rather than later. “What this crisis has proven,” he said, “is that we need to have a basic benefit that keeps people out of poverty, and that we need to work at both ends — toward fiscal sustainability and toward ensuring that people, particularly at the bottom, have an adequate benefit.”

The February 2009 “Fiscal Responsibility Summit”

The above January 15 Washington Post article crowed that

President-elect Barack Obama will convene a “fiscal responsibility summit” in February designed to bring together a variety of voices on solving the long term problems with the economy and with a special focus on entitlements….

Those invited to attend will include Senate Budget Chairman Kent Conrad (N.D.), ranking minority member Judd Gregg (N.H.), the conservative Democratic Blue Dog coalition and a host of outside groups with ideas on the matter, said the president-elect.

Chief among those Blue Dogs was representative Jim Coooper of Tennessee, the only democrat who voted in favor of Bush’s plan to privatize Social Security.

Progressives? Not on the list. At least, not until the last minute. As of February 19:

Yesterday numerous sources in the health care policy world confirmed that the administration told them (again off the record) that Pete Peterson and Laura Tyson would be keynote speakers….

On a conference call today arranged by Campaign for America’s Future that included Roger Hickey, Jamie Galbraith, Nancy Altman and Dean Baker, Roger said that several of them had been told they might be invited to the summit, but no formal invitation had been issued yet (though Pete Peterson has his invitation).

If you didn’t already know, Pete Peterson is the billionaire whose crusade to destroy Social Security and Medicare knows no bounds, and has been well-documented.

While progressives were shut out until the last moment, prior to the “summit,”

Obama met with 44 fiscally conservative “Blue Dog” Democrats this week and gave a nod to legislation that would set up commissions to deal with long-term deficit strains. The commissions would then present plans to Congress for an up-or-down vote.

“We feel like we’ve found a partner in the White House,” said Rep. Charlie Melancon (D., La.), a Blue Dog co-chairman.

So much for “listening to all voices.”

In short, only a month into his Administration, Candidate Obama’s insistence on tax hikes as the method of long term Social Security budget balancing was replaced by President Obama’s embrace of the Diamond-Orszag plan, and a willingness to enforce it by way of a binding commission. That name should be familiar too, because David Orszag is Obama’s budget director, whose

long-running project … has been replacing talk of an “entitlement crisis” with his argument that Social Security requires only modest tax hikes and benefit cuts.

(emphasis mine) Here is a quick partial summary of the “Diamond-Orszag plan”:

Our plan makes the painful choices that are necessary—selecting a combination of benefit and revenue changes to restore long-term balance. In doing so, it focuses on three areas which contribute to the actuarial imbalance: improvements in life expectancy, increases in earnings inequality, and the burden of the legacy debt from Social Security’s early history.

…. For younger workers with average earnings, our proposal involves a gradual reduction in benefits from those scheduled under current law. For example, the reduction in benefits for a 45-year old average earner is less than 1 percent; for a 35-year-old, less than 5 percent; and for a 25-year-old, less than 9 percent. Reductions are smaller for lower earners, and larger for higher ones.

(emphasis mine)

Because of the alarm that reports of the nature of the summit created, it was shrunk to a three hour forum, but the Administrtion let it be known that it was not wavering in its goals:

[T]he administration has tried to tamp down expectations, saying only that the gathering is an opening gambit in a long process toward financial solvency.

Expectations were “tamped down” only because, as the New York Times reported:

Mr. Obama considered announcing the formation of a Social Security task force at a White House “fiscal responsibility summit”…. But several Democrats said that idea had been shelved, partly because of objections from House and Senate leaders….

Liberal Democrats are already serving notice that they will be equally vehement in opposing any reductions in scheduled benefits for future retirees.

The Obama Administration’s continuing targeting of Social Security

If, because of the opposition of Liberal Democrats, particularly in the House, the “summit” went nowhere, the fervor for cutting Social Security benefits never died. Four days later, in a speech before a Joint Session of Congress Obama stated:

“To preserve our long-term fiscal health, we must also address the growing costs in Medicare and Social Security,”

Even more ominously, conservative NY Time columnist David Brooks reported that in early March, “four senior Administration officials” paid him a visit and assured him that

the long-range debt is what matters, and on this subject President Obama is hawkish.

He is extremely committed to entitlement reform and is plotting politically feasible ways to reduce Social Security as well as health spending.

(emphasis mine)

But it turns out that it wasn’t just “senior officials.” We found out later via a column in Newsweek that

after Krugman’s fellow Times op-ed columnist David Brooks wrote a critical column accusing Obama of overreaching, Brooks, a moderate Republican, was cajoled by three different aides and by the president himself, who just happened to drop by.

In other words, one of those four “officials” who assured him that the Administration was looking at ways to “reduce Social Security” was none other than President Barack Obama himself.

Given the relentless and extensive background briefings by Obama himself to the likes of Brooks and the WaPo’s editorial board, the latter’s constant bashing of Social Security denounced by economists Dean Baker and Berkeley Prof. Brad DeLong, among others, does not come out of nowhere. Simply put, the WaPo knows, because he has told them, that despite Candidate Obama’s reassurances, President Obama very much wants to cut Social Security.

For example, Obama had yet another meeting with the WaPo editiorial board in July 2009, as reported by Reuters :

President Barack Obama, under pressure over the ballooning U.S. budget deficit, said on Wednesday he is preparing to launch an effort to rein in the escalating costs of the Social Security retirement fund and other popular government programs.

In an interview with the Washington Post, Obama said a new commission may be needed to examine reforms for addressing the deficit and the huge programs that contribute to the flow of red ink.

“I think we’re in a position to be able to, either at the end of this year or early next year, start laying out a broader picture about how we are going to handle entitlements in a serious way,”
Obama said.

….”The debt and the deficit are deep concerns of mine,” With public opinion polls showing people are nervous about the size of the deficit, Obama added, “I am very worried about federal spending.”

….”Probably what you end up having to do in terms of structural reforms realistically is you probably have to set up some sort of commission or mechanism that reports back with the prospect of maybe locking in a pledge for action, post-election,” he told The Washington Post. “Everything is going to have to be on the table.”

….Obama said the reform effort “may start with Social Security because that’s, frankly, the easier one.” He also said tax reform should be considered.

Once again, note the about face on binding commissions. And instead of focusing on payroll tax increases for those earning over $100,000, Obama says that tax reform should “also” be considered, meaning that the primary “reform” is to be benefit cuts to “rein in costs.”

Obama was true to his word that the matter would be placed on the front burner again at the end of 2009 or beginning of 2010. In November, Politico reported:

President Barack Obama plans to announce in next year’s State of the Union address that he wants to focus extensively on cutting the federal deficit in 2010 – and will downplay other new domestic spending beyond jobs programs, according to top aides involved in the planning.
White House budget director Peter Orszag said in a statement to POLITICO: “The President strongly believes that as the recovery strengthens and job growth returns, we will have to take the tough steps necessary to return our nation to a fiscally disciplined and sustainable path.”

Remember I told you that we would return to the reappointment of Fed Chair Ben Bernanke? If Barack Obama couldn’t be bothered to expend any political capital to ensure that all Americans got reasonable health care, he certainly was able to whip a wavering Senate in line over something he considered important, like Bernanke’s reappointment. Bernanke’s Senate reconfirmation testimony was surely cleared or at least known in advance by the White House and included the following:

Ben Bernanke … arget[ed] nothing less than Social Security:

…. “I think you can’t tackle the problem in the medium term without doing something about getting entitlements under control and reducing the costs, particularly of health care.”

Bernanke reminded Congress that it has the power to repeal Social Security and Medicare. “It’s only mandatory until Congress says it’s not mandatory. And we have no option but to address those costs at some point or else we will have an unsustainable situation,” said Bernanke […]

Sen. Jack Reed (D-R.I.) followed Bennett and pointed out that “there’s only really two ways you can deflect this deficit, and that’s either by cutting expenditures or raising income taxes or other forms of taxes.”

Reed asked him if he could think of other ways, but Bernanke returned to entitlement money as the way to balance the budget.

“Willie Sutton robbed banks because that’s where the money is, as he put it,” Bernanke said. “The money in this case is in entitlements.”

(emphasis mine)

On January 24, 2010, Obama explicitly endorsed the Conrad-Gregg deficit commision, the recommendations of which would be binding. When that failed, he used his State of the Union address to announce that he would appoint a deficit commission of his own via Executive Order.

I ask you: if you are looking for a “neutral, nonpartisan” figure to cite as support for imposing benefit cuts (or perhaps to even spearhead the Commission), then who better than the Chairman of the Federal Reserve?

One final note: remember how Candidate Obama constantly proclaimed that an increase in the ceiling for payment of payroll taxes was the only change that Social Security needed? I searched and searched for any statement by President Barack Obama that that was still his position. After December 2008 there are no such statements to be found anywhere.

In Conclusion, I submit to you that after this long litany of Obama’s own words and actions, there can no longer any doubt that Candidate Obama’s soothing words were a ruse, but that President Obama is relentlessly pushing forward what he said all along he would do: create a commission to examine changes in Social Security, and then enact them. It is not on process but on substance that Candidate Obama lied. Oh, sure, payroll tax increases might “also” be considered — tax increases that surely he will ‘push forward’ with all of the vigor he ‘pushed forward’ critical elements of Health Care Reform.

No real Democrat is “agnostic” about Social Security. As Obama himself solemnly swore, “On issues as fundamental as how to protect Social Security, a candidate for president” does indeed “owe it to the American people to tell us where they stand,” and on the ultimate substance of his stand Candidate Obama lied. So nobody should be surprised if millions of democratic voters become “agnostic” about the re-election of faux “democrats” who do what no Republican has been able to do — to wantonly gut the program which Candidate Obama rightly called “the cornerstone of the social compact in this country.”
(New Deal sent me some updates which I attempted to get inserted correctly. But I’ll just put this in as his alternative conclusion)
That controversy erupted here as well, prompting me to write a diary explaining The Truth about Social Security, in which I pointed out that Social Security is not in “crisis”, and is not a “real problem,” manageable or not, needs no “fix,” nor any intermeddling “Commission.” As stated by the official projections by the Social Security trustees at that time, the program will be solvent without so much as lifting a little finger for decades to come. At worst, even after the “Great Recession”, the problem is several decades away and is hardly an urgent priority. Even then, the core retirement program is not the issue; rather the deficits come from other programs such as Social Security disability.
Two final notes:
(1) Remember how Candidate Obama constantly proclaimed that an increase in the ceiling for payment of payroll taxes was the only change that Social Security needed? I searched and searched for any statement by President Barack Obama that that was still his position. After December 2008 there are no such statements to be found anywhere.
(2) Even if Obama’s assumptions are correct and his plan restores “solvency” to Social Security, the GOP will not cease their campaign to destroy it. They will loot it again the next time they are in power. And Barack Obama will have set the precedent for the “solution” of further benefit cuts.

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Derivatives are useful for Asset-Liability Management. Nu?

I was going to post something a couple of days ago on Greece’s derivatives deal, but knew I was missing a key piece.

It became prominent yesterday, and Felix’s summary today gets it spot on:

So while it’s entirely fair to blame Greece for trying to hide its debt, and to blame Eurostat for letting it do so, I think that blaming Goldman is harder. It was surely not the only bank involved in these transactions, and the swaps were simple enough to be shopped around a few different banks to see which one could provide the best deal. Structuring swaps transactions is one of those things which investment banks do. If countries like Greece buy swaps in order to hide their true fiscal status, then that’s the country’s fault, not the banks’. No self-respecting bank would decline such a transaction because they felt it was unfair to Eurostat.

Yes, I’m sure that Goldman put a team of people onto the Eurostat rules and made that team available to the Greeks. But let’s not blame the advisers here, for structuring something entirely legal and which the Greeks and Italians clearly wanted to be able to do all along. This is a failure of European transparency and coordination; Goldman is a scapegoat. [emphases mine]

In the “good old days,” some corporate treasurers would use swaps because they were an off-balance sheet way to bet on the movement of Treasuries. But the good ones were using them for asset-liability management: reducing their cost of funds and/or the risks associated with that funding.

Greece is Asset-Liability Management Writ Large—and they made certain that the Eurostat agreements specifically permitted them to do it. Only an economist would call the result an unintended consequence; the finance world will be surprised if they were the only ones.

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The Independent Contractor Problem Continues and Grows

Tom aka Rusty Rustbelt

The Independent Contractor Problem Continues and Grows

HT: Associated Press

The IRS and many state governments are stepping up enforcement of the use of “independent contractors” who are actually employees.

While there are plenty of legitimate business-to-business independent contractor arrangements, other businesses sidestep the law by misclassifying employees as ICs. (lay person readable information at the IRS site,,,id=99921,00.html).

Example: Sam the General Contractor needs plumbers to work on new homes. He finds three plumbers, but treats them as “contractors” rather than as employees, although they meet the statutory definition of employees. Sam issues Form 1099 at the end of the year, in an attempt to look legit.

Taxation agencies know there is a lower percentage of income reporting from the ICs, and for those who do report the income there are usually expense deductions not normally useful to a real employee.

Taxation agencies receive less revenue, there are no state and federal unemployment taxes paid, and the ICs are not covered by workers compensation insurance.

This tactic is not limited to small businesses, ten of thousands of engineers and computer programmers have found themselves in similar arrangements (some by choice, some not). Also, millions of undocumented workers fall into this somewhere, with very little reporting by either employer or employee (or reporting with stolen or fictional identities).

Businesses using this dodge derive a huge advantage over legit employers. However, for those needing work, be a phony IC is a lot better than sitting at home. Raising costs is a bad idea right now, but legit employers already have those costs.

This is a game of whack-a-mole with millions of moles, and even I have some empathy for the tax agencies trying to get this under control. But then Sam might decide to get by with only 2 plumbers.

Tom aka Rusty Rustbelt

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What is a Good Approximation ?

What is a good approximation ?
The word good is important but very general. One (long long ago) I pulled a hair out of my scalp and told Elisabetta Addis (we’re married) “look my first white hair.” She replied “you have a very good wife and a very bad mirror.” Odd the same event, failure to point out my many older white hairs, can be both good and bad.
The same thing goes for approximations.
Click the link for my latest anti economic theory diatribe.

What is a good approximation ?
The word good is important but very general. One (long long ago) I pulled a hair out of my scalp and told Elisabetta Addis (we’re married) “look my first white hair.” She replied “you have a very good wife and a very bad mirror.” Odd the same event, failure to point out my many older white hairs, can be both good and bad.
The same thing goes for approximations.
Click the link for my latest anti economic theory diatribe.

Rajiv Sethi: The Invincible Markets Hypothesis: .

There has been a lot of impassioned debate over the efficient markets hypothesis recently, but some of the disagreement has been semantic rather than substantive, based on a failure to distinguish clearly between informational efficiency and allocative efficiency. Roughly speaking, informational efficiency states that active management strategies that seek to identify mispriced securities cannot succeed systematically…. Allocative efficiency requires more… is satisfied when the price of an asset accurately reflects the (appropriately discounted) stream of earnings…. If markets fail to satisfy this latter condition, then resource allocation decisions (such as residential construction or even career choices) that are based on price signals can result in significant economic inefficiencies.
The critics concede that informational efficiency is a reasonable approximation, at least with respect to short-term price forecasts, but deny that prices consistently provide “accurate signals for resource allocation.”

This post is long so I will try to put the punch-line up here. Economists make terrible errors when they say a statement “a reasonable approximation” of reality. Two very different meanings are conflated. One is that direct evaluation of the statement shows that rejection is subtle so the statement is approximately true. The other is that all claims which would be true if the statement were absolutely true are approximately true.

There is a general reliance on a sort of smoothness assumption, so that a model based on approximately true assumptions must have approximately true implications.

It is absolutely known and positively proven that this idea is totally false. The result that it is totally false is old and very well established (google “epsilon equilibrium”) People who study the implications of the assumptions must know this. Yet the idea that there is some general smoothness property in the mapping from assumptions to conclusions absolutely dominates economic theory.

Yes I just said that economic theory is based on assuming something which is known to be a false statement in mathematics. The reason is simple. Without the demonstrably false assumption that approximately true assumptions imply approximately true conclusions, economic theory would lead to no conclusions. The results of theories would be mere hypotheses to be rejected if they didn’t fit the data.

Economists absolutely claim that this is how they use theory. This is absolutely false. Standard models have implications which are rejected by the data and yet they remain standard models.

OK the one and only efficient markets hypothesis.

I’d say that, in a standard general equilibrium model, informational efficiency does imply allocational efficiency. So to the extent that one accepts such models as guides, one should believe that, for practical purposes informational efficiency implies allocational efficiency.

The problem is that approximate informational efficiency does not imply approximate allocational efficiency.

This is a well known theoretical result. When the assumption of informational efficiency is used to draw conclusions (e.g. of allocational efficiency) it is necessary to assume that you can never beat the market. Predictions about the present absolutely require that assumption that the market can be beaten at 10:00 AM EST on March 12 AD 1 million. This hypothesis can’t be tested now obviously.

Anomalies in risk adjusted returns on the order of 1% per year can’t be detected. We can’t be sure of exactly how to adjust for risk. However, they can make the difference between allocative efficiency and gross inefficiency.

For policy makers there is a huge huge difference between “markets are approximately informational efficient” and “markets are informational efficient.” The second claim (plus standard false assumptions) implies that markets are allocatively efficient. The second implies nothing about allocative efficiency.

What does the phrase “a reasonable approximation” mean ? Does it mean A) rejection of the claim is subtle and controversial or B) rejection of all implications of the claim are subtle ?

I think standard usage would be B) a reasonable approximation is one that doesn’t lead us astray. In economics the phrase is used in sense A, that is, only some implications of the claim can be used to test the claim because … because we said so.

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