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

Is the the policy for the ‘Long Depression’ in place?

Paul Krugman is direct and to the point this morning:

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners’ medicine.

So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.

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If higher unemployment is the tradeoff to fear of inflation, what does that mean for you and I?

Hat tip Rebecca for this link to the Curious Capitalist

Invariably, when we start debating jobs programs and stimulus spending, people start talking about the long-term problem of government spending. It raises our national debt, and could cause inflation down the road. But what is often overlooked when inflation is brought up, is that not doing anything about high unemployment can have really bad long-term ramifications for the economy, perhaps even worse than inflation. Here’s why:

First of all, it’s not just upward mobility that is at risk. I wrote a story back in January about high teen unemployment and that what is at risk is not just whether teens will have to cut out trips to the mall. Without entry-level jobs, young workers can’t gain work experience. The result is a lower skilled workforce that results in longer-term productivity for the US economy in general.

And what the Journal and I pointed out is just the tip of the iceberg in terms of the problem the high unemployment rate creates. The Atlantic had a story in their March issue about the much broader effects that high unemployment will have on American society.

Read more here

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Why austerity now?

Michael Hudson at New Economic Perspectives points us to the difference between the overall economy and the financial sector:

When politicians let the financial sector run the show, their natural preference is to turn the economy into a grab bag. And they usually come out ahead. That’s what the words “foreclosure,” “forfeiture” and “liquidate” mean – along with “sound money,” “business confidence” and the usual consequences, “debt deflation” and “debt peonage.”

Somebody must take a loss on the economy’s bad loans – and bankers want the economy to take the loss, to “save the financial system.” From the financial sector’s vantage point, the economy is to be managed to preserve bank liquidity, rather than the financial system run to serve the economy. Government social spending (on everything apart from bank bailouts and financial subsidies) and disposable personal income are to be cut back to keep the debt overhead from being written down. Corporate cash flow is to be used to pay creditors, not employ more labor and make long-term capital investment.

The economy is to be sacrificed to subsidize the fantasy that debts can be paid, if only banks can be “made whole” to begin lending again – that is, to resume loading the economy down with even more debt, causing yet more intrusive debt deflation.

This is not the familiar old 19th-century class war of industrial employers against labor, although that is part of what is happening. It is above all a war of the financial sector against the “real” economy: industry as well as labor.

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In Linda’s post on the budget deficit in the comments it was claimed that the budget deficit was Obama’s fault and a chart was cited that showed the deficit in someone’s estimate of real dollars.

The standard way of comparing deficits across time and across different countries is to show the deficit — past and projected future — as a share of GDP. There are good reasons for this standard practice, as it is the only valid way to make meaningful comparisons over long periods of time when the dollar values change so much. Using other approache makes it too easy for readers to be mislead.

But here are the latest CBO data and projections. The CBO data is the gold standard for making budget comparisons and any other projections are automatically suspect.

The data shows that the budget deficit peaked just as Obama took office. If CBO actually published seasonally adjusted quarterly data it would show that the deficit was over 10% of
GDP before Obama took office and that Obama has actually reduced the deficit since taking office. Moreover, the CBO projections show that in the out years the federal deficit will actually be smaller — as a share of GDP — than it was in the final years of the Reagan administration.

Yes, the federal deficit is a serious problem. But much of what you hear and see about it is pure republican propaganda that massively exaggerates the scope and scale of the problem.
As with most propaganda it depends on the ignorance and/or gullibility of the reader for it to work.

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What caused the Budget Deficit (Before the Financial Crisis)?

by Linda Beale
crossposted with Ataxingmatter

What caused the Budget Deficit (Before the Financial Crisis)?

Kash on Angry Bear put together a really good graph in 2006 comparing where we might have been if Clinton policies (bad as they were in many cases) had stayed in place compared to where we were and expected to be with the Bush tax cut and spend policies. Responsibility for the Federal Budget Deficit, Angry Bear 2006. Deficits under Bush were projected for more than $500 billion annually. Of course, that was before the greedy, reckless banks threw the financial system into a tizzy with too much credit invested in too many houses by people with too little income to pay for them. Add the costs of backstopping the Big Banks, and we end up with the trillion dollar hole we are currently in.

Answer would seem to be–1) make the banks pay with a tax based on leverage and 2) end the tax cuts or at least a goodly share of them and 3) reinstate an estate tax that has some bite, so that those at the top who can afford to pay do pay.

Seems like there are at least a few in Congress realizing that item 3 makes some sense. Sanders, Harkin and Whitehouse have proposed that the estate tax should have a $3.5 million exemption and a graduated rate, with those at the top paying a rate of 65% (a base rate of 55% and a surtax of 10% on the amount above $500 million or above $1 billion for a couple). The surtax would mean that the estate tax would hit the 403 billionaires who have a net worth of $1.3 trillion harder than it hits the smaller estates. See Janet Novack, Three Senators Call for Billionaires Estate Tax,, June 24, 2010. Now that makes some sense.

Senators Kyl and Lincoln are pushing the so-called “compromise” that would eviscerate the estate tax by creating a $5 million exemption and lowering the rate to 35%. That is a step in the wrong direction. Especially when Congress is making such big noises about the deficit that it is unwilling to pass stimulus funding for unemployment benefits to support Americans hard hit by the Great Recession.

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You Are A Carrot

Look at this lovely old drawing. Fernlike leaves, flower heads like old fashioned crochet embroidery. This is Daucus carota ssp sativa, originally native to temperate regions of Europe and southwest Asia. Now print this picture out and go to the supermarket and try to find it in the produce section.

If you are lucky, you might spot some by their leaves. But mostly you will find only the bare, leafless root, or even stubby vegetable batons identifiable only by their colour.

Carrots themselves don’t want to be stubby batons of pure edibility. In fact, that kind of carrot can’t exist as a living thing – it’s just what’s left when most of the living parts of the carrot are shaved and chopped away.

Now, no grocery shopper would choose the whole carrot (leaves, stems, flowers, taproot, feeder roots and a bit of dirt) over the bagged orange cudgels when planning to make a stew. But would a sane grocery shopper deny that all those bits need to exist? Would they demand to pay “only for the carrot” and not pay for the other bits?

And how long would carrots last if they were “paid” only by root-weight, not on a whole-life basis? As a wholly domesticated species, they wouldn’t. They’d be gone in a generation, if they even came to exist in the first place. Only the wild ones would still live, of a low quality from the shopper’s viewpoint, but surviving.

This is why business, worldwide, needs to pay fairly, and provide benefits and pensions.

Woah! Where did THAT unsignaled left turn come from?

I’m a carrot too. So are you. We need our lacy finery, our crocheted flowers. We need to set seed and droop into a shabby graceful old age. We need our feeder roots. And our taproot is not there for some shopper to chomp – it’s there to nourish the plant while it engenders seed, and dower those seeds with enough stored food to get their own proper start.

Business only exists because we exist, yet like other critters it tries its best to get all the candy and none of the wrappers. It isn’t intelligent enough, overall, to realize that if it slices out the taproot and starves the rest of the plant, carrots will disappear, immediately followed by the businesses who depend on them.

At present, business has managed to interpose itself between many of us carrots and our sustenance, collecting a toll each time something of value crosses through the toll gate. This can work very well for us and for them, provided the toll is low enough and enough of the profit is returned to nourish the carrots. But over the past couple decades less and less has been returned to the carrots. The taproots have been tapped out.

Luckily for business, people aren’t like carrots, are not fully domesticated. In the poorest nations you see this in a pure form. We’re still a wild species, we continue to raise our kids, save and build and flower and set seed even in the bleakest situations. People don’t stop living, and the reason for living is living.

Business flourishes when people flourish, but many businesses don’t know this, or are content to get most of a shrunken root rather than part of a plump one. Will they ever grasp this? The incentives seem to go the other way, with the short-term spoils going to the greediest..

That’s why someone besides business needs to regulate business, and why great profitability in business should be viewed with suspicion, not placid satisfaction.

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Another blow to the US labor force

The Senate voted down the American Workers, State, and Business Relief Act of 2010, 57 to 41 (see an earlier version of the CBO’s estimate here for a breakdown of the Bill). The emergency extensions to weekly unemployment benefits will now expire, leaving many without government support as the labor market improves at snail speed.

Those who support the Bill claim that benefits prop up consumer spending. It is true, that unemployment benefits payments are more likely to be spent rather than saved. However, the latest version of the Bill allocated about $35 billion to benefits, just 0.34% of consumer spending in Q1 2010. Consequently, the direct impact on consumer spending of extending the benefits would have been small. (The provisions of the Bill in full would have quickened the recovery, according to David Resler at Nomura.)

Those who oppose the Bill claim that extending the benefits only increases the duration of unemployment – in May 2010 median duration was 23.2 weeks, its highest level since 1967. This is a weak argument when 7.4 million jobs, near 6% of the current payroll, have been lost since the onset of the recession (this is a cumulative number, which includes the gains since January 2010). The bulk of the unemployed would likely jump at an opportunity to work rather than live on benefits.

One way or another the government will plug the hole that is private spending. And the government will find this out the easy way (expansionary fiscal policy) or the hard way (perpetual deficits that result from weak private-sector tax revenue). Apparently it’s going to be the hard way.

At 9.7% unemployment, isn’t it obvious that Congress is not “spending” enough?

The chart illustrates the Nairu-implied level of unemployment (NAIRU, or the nonaccelerating inflation rate of unemployment) versus the measured rate of unemployment. The concept of NAIRU is limiting in that it inherently binds fiscal policy and is a theoretical notion at best; but it does present a baseline for comparison. The Nairu-implied level of unemployment is simply the CBO’s estimate of NAIRU multiplied by the current labor force. Let’s call points when the current level of unemployment is above the NAIRU-implied level as cyclical surplus of workers.

According to this measure of worker surplus, the state of the labor market is obvious: depressed. The NAIRU-implied level of unemployment is half of that currently measured by the BLS with a record wedge between the two. Furthermore, the cyclical surplus of workers in ’82-’83 – the last time the unemployment rate peaked above 10% – was relatively mild compared to current conditions.

By failing to pass this Bill, the Senate reiterated its unwillingness to support the US labor market. Of course benefits are not the answer – we need a comprehensive jobs Bill to mitigate the consequences of such a depressed labor market. (There was a good article on the longer term unemployment problem at the Curious Capitalist some months back.)

Rebecca Wilder

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Bank Tax: France, Germany and UK, but where’s the USA?

by Linda Beale
cross posted with Ataxingmatter

Bank Tax: France, Germany and UK, but where’s the USA?

On June 23, the big three Euro countries–France, Germany, and Britain–agreed to tax banks directly, “to ensure that banks make a fair contribution to reflect the risks they pose to the financial system and wider economy, and to encourage banks to adjust their balance sheets to reduce this risk.” See Saltmarsh, France, Germany and UK Support Bank Tax, NY Times, Jun 22, 2010; Eddy, Germany, France, UK commit to bank tax,, Jun 22, 2010; Cf Berlin approves bank levy plan to fund future bailouts, Deutsche Welle, Mar. 31, 2010.

The tax in the UK (which is also increasing its capital gains tax) will be imposed on banks with liabilities in excess of $20 billion pounds and should raise about $3 billion a year. Saltmarsh op cit. It will be based on the aggregate amount of riskier liabilities (i.e., liabilities other than Tier 1 capital and insured deposits). Berlin’s Finance Ministry noted that “All three levies will aim to ensure that banks make a fair contribution to reflect the risks they pose to the financial system and wider economy, and to encourage banks to adjust their balance sheets to reduce this risk.” IdahoStatesman op cit.

Although the US has ostensibly supported such a tax, we have been notoriously reluctant to impose any real constraints on banks. The financial reform legislation wending its way through Congress has been watered down, so that both consumer protection and protection of the national fisc have given way to the desire of banks to continue to grow in size so that they can compete globally. Geithner has indicated that big banks are essential so they can lend to big multinational corporations and so that US banks can “be competitive” with foreign banks.

This competitiveness stuff is nonsense. What good is it to have a competitive monster that we have to stand behind and whose costs of funds depend in part on an implicit guarantee that the government will backstop its losses? Why can’t a bevy of smaller banks serve big multinationals banking needs? Sure, it means that funds may be more costly to the banks and that big multinationals may not have as big an advantage compared to smaller firms. Both of those are GOOD results–we need to think about ways to downsize banks. I’d prefer Merkel & Levin’s proposal for limiting size by setting liability and asset caps but surely we should not continue to refuse to enact good reforms for the sole purpose of letting banks continue to be too big to fail! A bank tax based on risky liabilities is an excellent way to recoup some funds from banks that benefit from the cost of funds advantage of an implicit government guarantee and at the same time incentivize banks to hold less of such risky liabilities.

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Joe Barton: the Indispensable Man

by Bruce Webb

Mostly lost in the furor over whether BP Apologist Joe Barton should remain as Ranking Member of the House Energy Committee and so potentially the Chairman should the Republicans take over the House is the fact that under Republican caucus rules he is term-limited out. Something high-lighted in this Feb article focused on Barton and obviously prior to the blowout event itself.

Politico: Term limits rule rankles ranking GOP

Even if House Republicans regain the majority this year, they’ll have to live with an old rule from their 1994 revolution: term limits atop key committees.

Some longtime lawmakers were none too pleased with the Steering Committee’s decision, which was announced Wednesday by Minority Leader John Boehner (R-Ohio).

Texas Rep. Joe Barton, the top Republican on the Energy and Commerce Committee who would be term-limited out of a chairmanship, called the limits that apply to ranking members “counterproductive.”

“Don’t ask me to do a good job in the minority and make a rule that says you can’t continue to do a good job as chairman,” said Barton, who is a member of the steering committee that decided to keep the policy.

Are Republicans so beholden to Big Oil that they will actually override rules they reaffirmed four months ago explicitly to keep Joe as Ranking Member/Chairman in Waiting?

In say Baseball it is one thing to let your Manager stay on even if the team is having an off-year. But to actually renew the Contract?

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