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

green links

You may have noted that there are green links appearing in posts. This is a mistake on someone’s part and is not a feature Angry Bear endorses nor tolerates. I am in the process of finding out and correcting. It is being done separately from the normal editing function. Please be patient…….

Update: Ah hah. Just a mix up. Green links will be gone. I am told they are very lucrative…any feedback while they are current?

Update 2: Ignore the pop up. It will go away. My apologies.


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We learn why they hate social security

Lifted from an e-mail from coberly

We learn why they hate social security:

NCPSSM e-mail (update)
Apparently, these are the “good-old days” our nation’s fiscal hawks relish. The Peterson Foundation’s David Walker co-hosted CNBC’s Squawk Box this morning (personally, we yearn for the good-old days when so-called “news” shows were hosted by journalists—not partisan advocates—but that’s another debate).

The discussion followed the classic Peterson Foundation talking points—government bad, ‘business’ good—but ultimately led to a nostalgic reminiscence for the good old days when Americans faced debtors prisons and had no sense of “entitlement” (presumably to the Social Security and Medicare benefits workers already paid for their entire working lives):

“The fact of the matter is we have to change how we do things. We are on an imprudent and unsustainable path in a number of ways. You talk about debtors prisons, we used to have debtors prisons, now bankruptcy is no taint. Bankruptcy is an exit strategy. Our society and our culture have changed. We need to get back to opportunity and move away from entitlement. We need to be able to provide reasonable risk but hold people accountable when they do imprudent things…it’s pretty fundamental.”…David Walker, Peterson Foundation, CNBC Jun 10, 2010

Rdan here: I also refer you to Yves Smith’s piece on Peterson, and the part 2 of The Nation’s ‘Looting Social Security’.

Updare 2: And the NCPSSM e-mail.

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Looking at Mitch Daniel’s Single Organizational Goal

by Mike Kimel

Looking at Mitch Daniel’s Single Organizational Goal

So I took a break form useful work and wandered over to a few right wing blogs to see what’s going on at that end of the world. Here’s how the latest post at Betsy’s Page starts:

Andrew Ferguson profiles Governor Mitch Daniels of Indiana. I think I’ve found a politician I could support whole-heartedly. Daniels is described as the un-Obama because “he seems to have sunk into a black hole of personal magnetism and come out the other side, where the very lack of charisma becomes charismatic.” If he’s the un-Obama, it’s because of his understanding of the role of government and his dedication to achieving that goal.

Daniels gathered his agency heads on his first day and told them they were henceforth to pursue a single organizational goal—all successful businesses unite their efforts behind a goal, he said. His was this: “We will do everything we can to raise the net disposable income of individual Hoosiers.”

From here, we get a tour of this and that – things that Daniels has done or supposedly has done or wants to do or whatever. But by then I had tuned out. Because after Betsy’s start, my first thought is: “That’s a fine goal. How is it coming?”

My second thought was how I could check this in a hurry. Now, raising the net disposable income of individual Hoosiers (or anyone else, for that matter) is, to be honest, relatively easy. In general, incomes, net disposable or otherwise, tend to rise. A more useful question is the net disposable incomes of Hoosers are doing relative to the incomes of similarly situated people – say those in neighboring states.

Getting the net disposable income of Indiana and its neighboring states isn’t straightforward – I don’t think its directly reported anywhere, and one has to track down the components separately. But FRED will give you the per capita personal income in Indiana, and each of the other states as well. And the main component of net disposable income is…. income. Data runs through 2009.

Now, my man Mitch became governor on January 10, 2005. FRED reports figures as of January 1 of each year, so we can show incomes in each state over a four year period, indexed to 2005. Its only four years, but that’s a full term. We judge Carter and Bush Sr. on precisely that, right. So here’s what things look like, in Indiana and the surrounding states:

Figure 1

Now, perhaps you’ve spotted the problem with the Daniels hagiography. And as a bonus, I’ll let you on a secret… in the prior four years, from 2001 to 2005, Indiana beat out Ohio. And the difference between Indiana and Michigan was bigger in 2001 than 2005. And the difference between the growth rates in Indiana and Michigan is greater from 2001 to 2005 than from 2005 to 2009.


Now maybe things will change going forward, but so far, on what Daniels considers the the single organizational goal of his administration, Indiana has moved in the wrong direction since he’s taken office.

If by some chance Daniels becomes a more prominent character in national politics, I’ll take a look at some of how he’s done on secondary issues. But I’m not all encouraged, especially since I remember his performance as OMB Director very well.

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Carried Interest: Senate Getting Swayed by Lobbyists

by Linda Beale

Crossposted with Ataxingmatter

Carried Interest: Senate Getting Swayed by Lobbyists

The Senate started discussion of the “extenders” legislation on Tuesday. IN the House version, HR 4213, there is finally a carried interest provision, though it is a weak one. (Recall that carried interest is the amount that managers of hedge, equity and other partnerships charge for managing assets of the partnerships, so it is compensation income but these “profits” partners claim that their allocations of capital gains from sales of partnership assets should retain capital gain treatment as such allocations do to partners who have contributed capital to a partnership, even though it is a payment for the managers’ services. See earlier postings on A Taxing Matter, here and here (JCT reports) and here (Weisbach study). ) After several years of attempts to tax wealthy fund managers on their compensation the same way that others are taxed–i.e., at ordinary income rates–the House included a revenue offset provision in the extenders bill that will eventually tax 75% of the carried interest at ordinary income rates.

Lobbyists responded that they would work on the Senate to make the bill less distasteful to their clients. So they are lobbying for even lower rates in the Senate. And they are focusing on what they think will be a sympathetic case–family partnerships that run family real estate businesses. A substitute amendment is under consideration, which would change the percentages and grant even more favorable preferential treatment to fund managers for their compensation for services–65% generally, with an even more favorable 45-55 split if the assets are held by the partnership for at least seven years. Text of the substitute amendment, a summary and other information is available at the Senate Finance Committee website on HR 4213.

Just a few comments:

1) the purported economic justification for privileged treatment of fund managers–that there won’t be as much management of funds or funds that invest–is absurd. Fund managers were making money head over heels but still will make most of that money even if they pay taxes on their services income the same way ordinary folks do. They won’t stop acting as fund managers if they have to pay ordinary income rates on their income. There will not be any fewer funds if the managers don’t get the special privileged tax rates that they claim for carried interest. There won’t be any less investing activity. There won’t be any great harm to family partnerships or real estate partnerships or hedge funds or private equity funds. None of the managers of any of these funds merit the exceptionally lucrative tax break that they have been claiming in the carried interest mechanism, and none of them will receive so low a return that they will quit the business if they have to pay the same tax rates that ordinary Americans pay on their services income.

2) Any provision that splits the rate structure is arbitrary, makes the tax Code more complex, invites gamesmanship on holding periods, and will be passed only as a way to appease wealthy donors so that they will continue contributing lots of funds (that should have been paid to We the People as taxes) to individual House and Senate campaign chests of those that are holding out for a “softer” bill.

3) there is no justification whatsoever for a half-way measure in which fund managers are privileged to pay low rates on a substantial part of their income from services, while ordinary taxpayers continue to pay ordinary rates. That sort of “compromise” merely proves that the House and Senate are willing to sell out ordinary taxpayers and continue to favor the wealthy and that fairness loses when the House or Senate is thinking about campaign contributions. The split just proves the outsize influence that lobbyists for the shadow banking system still hold over Congress, even though the unregulated shadow banking system (including hedge and private equity funds and real estate partnerships) was a significant cause of the financial crisis.

4) Accordingly, the House compromise, and the Senate substitute, make a mockery of the basic fairness concept in taxation. The problem with carried interest is that it allows a few financial managers a preferential tax break on their compensation income. The entire Congress is now aware of the fairness problem. In spite of their awareness that there is no justification for the tax break that these wealthy fund managers have claimed for years, lobbyists for the privileged few who have enjoyed this tax break are pushing to retain the break. Since we know that the Senate and House understands that this is an unfair tax break that ordinary Americans do not enjoy and that cannot be justified in any way as a necessary tax expenditure to encourage an activity, then it must mean that the House and Senate are too corrupt to pass decent legislation that treats these wealthy fund managers like ordinary people.

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Nick Rowe asks if new Keynsian models make sense

Robert Waldmann

Nick Rowe asks a very interesting question. After the jump I attempt an answer

Please read Rowe’s post first. The following will make no sense at all if you don’t (note reading Rowe’s post is a necessary not a sufficient condition for it to make sense).

The short explanation is that Rowe finds a contradiction. I think he finds a contradiction with new Keynesian models, because he assumes that the central bank can achieve any real interest rate that it wants. I don’t think all real interest rates are achievable in Nash equilibrium in new Keynesian models.

I know nothing about new Keynesian models (well I know about old New Keynesian models from around 20-25 years ago). So consider this a totally fresh look.

In your example, everything is real. How odd since nominal rigidities are central. I think the key is that in new Keynesian models, the central bank can’t set the real interest rate to any level it wants. You quickly moved from setting nominal to real interest rates. Now one might imagine that a central bank can forecast inflation (they have rational expectations too) and then add say 5%. However, since private sector agents have rational expectations, their behavior depends on the central bank’s policy. It’s not like there is an inflation rate which is given no matter what the central bank does. The question becomes, is there a Nash equilibrium in which the Central bank gets r=5% (presumed to be its only goal) and private agents maximize their utility given the monetary policy rule, tastes, technology and nominal rigidities (or menu technology if you insist). I think the answer is that there is one and only one such equilibrium and that is the tinkerbell equilibrium with production equal to production in the flexible price steady state.

Now the economy can be elsewhere with, say, output below that level (because prices are too high because … well I just assumed they are at the beginning of time cause no way am I going to model any uncertainty). I think that, in that case, the central bank can’t achieve r=5% always, that there is no such Nash equilibrium. In other words, for any nominal interest rate rule, the real interest rate will not be 5%.

I think the contradiction is between new Keynesian models and your assumption that the central bank can achieve any real interest rate which it wants.

I will try to invent a simple new Keynesian model on the spot.

Producers are self employed. Their marginal cost in units of consumption is the marginal disutility of work divided by the marginal utility of consumption. T.his declines if they work less and consume less (disutility of work convex utility of consumption concave).

They make different goods with a constant elasticity of substitution (all consumers have Dixit Stiglitz preferences) so their utility is maximized if they set a price equal to one plus a constant markup times their marginal cost.

OK a nominal rigidity. They are on a circle and a clock hand goes around say once a month. When the hand points at me, I can adjust my price. Otherwise it stays the same.

Is there an equilibrium with r = 5% and consumption less than the flexible price consumption (for a steady state with r = 5%) ? It seems that if I am working less and consuming less than in the flexible price steady state, then I want to lower my relative price, that is set a price lower than the average price over the next month. So there can’t be an equilibrium with a constant price level.

I will assume that my loss from having other than the best price is quadratic in log price (just because I want to and new Keynesians always do stuff like that)

How about one with a constant deflation rate of 1% per month ? Well then I forecast the average log(price) will fall 1% over the month so will be on average 0.5% lower than when I set my price. so I set my price *below* the current average price minus 0.5%. Prices as set fall 1% a month, so, when the hand pints at me, my price is 0.5% higher than the average price (I am making a linear approximation to an exponential here). so I cut my price by more than 1% so deflation is more than 1%.

So if I assume that deflation is 1% per month, then it is more than 1% per month. There is no equilibrium with r=5% and consumption below the flexible price steady state.

I haven’t proved it, but it seems to me that this happens for prices being any function of time.

One last example (here the r=5% actually matters). If the deflation rate is
exp(-(constant)t) so it goes to zero exponentially. Then if I lower my price according to the deflation rate it will be lower than the average over the next month (since later price adjustments will be smaller than mine). So I do get a price lower than the average over the month of my average competitor’s price. However, this difference gets smaller and smaller
(it shrinks just like exp(-(constant(t))). This is only optimal if my consumption is getting closer and closer to flexible price steady state consumption. So there are equilibria, but in those equilibria consumption grows till it converges to FPSS consumption (what you call full employment consumption).

This can’t happen if r=5%, because r=5% implies constant consumption. I think this means there is no sticky price equilibrium with consumption below FPSS consumption and r=5% always. There is no way the central bank can make r=5% always no matter what it does with nominal interest rates.

To repeat maybe:
I think this means that if current consumption is below the flexible price steady state, then the central bank can’t keep r=5%. I think it means that the economy has to converge to the flexible price steady state (which means r must be greater than 5% if consumption is now below flexible price steady state consumption)

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Late last month there was a debate among several bloggers over an article by Scott Sumner over US growth after the Reagan revolution. In the debate it was suggested that it would be
helpful to do the analysis by looking at the various components of GDP–consumption, investment, government and trade . I was sidetracked on other projects, but belatedly decided to do exactly that — look to see if there were breaks in the various GDP accounts around 1981, when the Reagan revolution occurred.

Remember, Sumner was defending the position that because of the Reagan revolution the US was able to sustain the trend in real per capita GDP that prevailed from WW II to around 1980. He argued that without the changes Reagan implemented that US real per capita growth was have slowed sharply.

The real break in the data around the time of the Reagan revolution is clear in the trade balance or the current account. Prior to the late 1970s, early 1980s, the US normally ran a small trade surplus year in and year out. This reflected the basics of the supply and demand for savings and investment that prevailed from WW II to about 1980. What the savings and investment data showed in this era was that roughly personal savings financed the housing sector and business savings financed nonresidential fixed investments. Each ran a small surplus that financed the federal deficit and left a small surplus for a net outflow of foreign investment.

Starting around 1980 two factors changed this. One was the creation of a large structural federal deficit. The second was the peaking of the personal savings rate and a contraction of personal savings. I see no need to go into an explanation of the start of the structural federal deficit. But some Republicans claim it was deliberate and called it the starve the beast strategy.

The weakness in personal savings was a real surprise and caught most economists by surprise. Starting around 1980 the US started creating a series of special saving accounts where individuals could shelter their savings from taxes. Essentially all schools of economic though believed this would lead to greater personal savings because savers would realize greater after tax returns. So virtually everyone was surprised when these policies were miserable failures as the personal savings rate fell irregularly to almost zero over the next 30 years. This has to be one of the greatest failures for the economics profession on record even though we still see the advocates of these polices continuing to push them.

Personally, I see two main reasons this policy failed. One was the stagnation of middle class living standards that lead them to use expanded debt to sustain their anticipated standard of living. The other is within the basic theory of tax breaks generating greater returns. Standard theory says this should lead to greater savings. But there is another theory that savers have a goal they want to achieve, having a million dollar stock portfolio at retirement, for example. Remember, in the national accounts the annual contribution each individual makes to their tax free account is what counts as savings as the returns on this portfolio do not count as savings.

But if the objective is to achieve a savings goal — a million dollar portfolio at retirement — realizing greater returns means that the individual contribution each year can be smaller. If this is the savers objective, providing them a tax break and greater returns actually leads to less savings — the individual’s annual contributions — just the opposite of standard theory. Maybe some behavioral economists should look at this.

But anyway, the theory was that it is OK to run a large trade deficit and import capital from abroad if the foreign capital is invested in productive capital that will generate greater output than can be used to raise standards of livings and easily allow the foreign capital to be repaid.

It is like it is OK for you to run up a large credit card balance if you expect a pay increase that will allow you to easily repay the credit card balance.

That is the basic theory that Scott Sumner and most republicans use to justify claims that the Reagan revolution lead to greater investments that sustained the pre-1980 growth of per capita real GDP.

So maybe we need to look at the other component of GDP to see what happened and if their was a break in the series around 1980.

First, look at nonresidential fixed investments. The justification for the cut in taxes on investment income and upper income individuals income taxes is that it leads to greater investments that lifts the boat for everyone and raises everyone’s living standards.

So here is the data on nonresidential fixed investments. Scott Sumner and other are right that there was a sharp break in the series around 1980. The problem is that the break is in exactly the opposite direction that their theory calls for. All through the 1950s, 1960s and 1970s there was a clear trend of business investment rising as a share of GDP. But since the Reagan revolution of the early 1980s that trend has clearly reversed. Just as with the theory on personal savings the results has been just the opposite of what standard economic theory posits.

So where did the influx of foreign capital go, after all it did not just disappear. The data on personal consumption and housing — a form of consumption — also shows a clear break around 1980 just as the investment data does. But what it shows is that the inflow of foreign capital was used to finance an ever expanding share of consumer spending rather than investments as Sumner and the other advocates of the Reagan revolution claim.

This data clearly shows that what Reagan initiated was an era of the American consumer living beyond their means and borrowing abroad to sustain their living standards. Yes, their was no break in real per capita GDP around 1980. But it was not because the Reagan policies generated greater savings and investments. Rather it was because the Reagan policies lead to middle class Americans and the government borrowing abroad to sustain the living standards they had become accustomed to before the Reagan revolution shifted an increasing share of income to the top few percent of the income stream at the expense of the middle class.

To make the analysis complete I’ll also include a chart of government as a share of GDP. This chart will not look familiar because in the national accounts government spending does not include transfer payment. It only shows government consumption. For example, if the government pays a farmer not to raise crops it does not show up in the data on government consumption. Rather, it depends on where the farmer spends the transfer payment. If he buys tractors, etc., it shows up in the investment account. If he uses it to buy a condo in Miami it shows up in housing. Alternatively, if he uses it to give his daughter a three month trip to Paris as a graduation present it shows up as an import. There are exceptions of course.
For example, the government agricultural subsidies use to take the form of government stockpiles of agricultural products. Much of the drop in the federal governments share of GDP in the early 1970s was Nixon selling these stockpiles to the Soviets.

But the bottom line is that the Reagan revolution has been accompanied or followed by a drop in capital spending and an increase in consumption as a share of the economy. Now I know this is not what Larry Kudlow and others keeps telling you, but what can I say– just don’t let the facts confuse you .

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Where Will the Good Jobs Come From?

by Mark Thoma
author for Economist’s View and Maximum Utility

Where Will the Good Jobs Come From?

I have emphasized short-run job creation quite a bit recently, and I have noted, implicitly at least, that we shouldn’t be too picky about the quality of the jobs that are created. Most jobs will do.

But in the long-run the quality of jobs matters a lot, and when the private sector finally begins reabsorbing the unemployed, the underemployed, and the discouraged, we want people to be able to find jobs with decent wages and benefits — jobs that are as good or better than the jobs they had before.

But where, exactly, will those jobs come from? I wish I had the answer.

Education is part of it, better education means better jobs on average, and it’s easy to imagine a substantial fraction of the population benefiting from an educational advantage. So I won’t back off prior calls to improve education at all levels.

But even if we substantially improve education, it won’t fully solve the problem. There will still be a need for quality jobs that are not all that dependent upon knowledge based skills. However, it’s harder to imagine an emerging set of industries that will provide the large number of quality jobs that we need to replace those lost from industries in decline.

If these jobs fail to be created in the next years and decades, the result will be an ever widening gap in the distribution of income with, as now, a group at the top doing relatively well, and everyone else treading water at best.

Is it overly pessimistic to worry that we may be headed in that direction?

(Reposted with author’s permission)

Rdan here…Martin Ford, who has guest posted here, made the front page today of Fortune (CNN money) online with this article.

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Crooked Timber notes from the FT

First, go read Henry on the lambasting of, especially, Turkey by U.S. idiots. Apparently, any U.N. vote is wholly the responsibility of everyone except the people who presented the resolution.

Note also that the editorial page has a much more interesting piece on economics than all those Zogby myths. Maybe more about that later, but for now, let’s pull the appropriate (in more ways than one) quote:

In reality, conflicts of interest abound – between buyers and sellers, short and long terms, equity and debt, taxpayers and shareholders. Context is all-important – the idiosyncrasies of age, financial circumstances and geography. How do we provide a “neutral” framework for such crooked timber?

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The Roberts court…activist is a good word now?

La Dolce Vita blog from Arizona points us to a SCOTUS decision:

Ever since Gore v Bush it has become apparent that the US Supreme Court has taken it upon themselves to occasionally decide the outcome of US elections. Yesterday they demonstrated this ability again when they decided to block funding for three of the top four candidates for Arizona governor. This means these three gubernatorial candidates will not be getting their anticipated $1.4 million in public matching funds beginning in two weeks.

Two weeks! Our Supreme Court justices have given these three candidates two weeks to find alternative funding that would have otherwise been available through the Arizona Citizens Clean Elections Act that has been in existence for twelve years.

As I wrote earlier, the Clean Elections Act “corrected the AzScam problems that made a mockery of the Arizona election process. The corporatist cronies who were the big losers when this law passed have been fighting to overturn (or weaken) it ever since.”

Yesterday they succeeded – thanks to the US Supreme Court.

The Roberts court chose to delay looking at the matter until their next session, meaning no decision will be made on whether they even intend to hear the Clean Elections appeal until after the election. But they did agree to block the existing CLEAN ELECTIONS procedures which have been IN PLACE FOR TWELVE YEARS anyway.

Here is a quick e-mail back from Beverly Mann, The Annarborist and sometime guest on constitutional issues at Angry Bear on this topic:

I think the Fab Five on the Court are playing with major fire here. The First Amendment argument is one that most people, including those who oppose campaign finance laws, will recognize as ridiculous: that the law unconstitutionally limits the free speech of the privately funded candidates because the privately funded candidates are “forced” to limit their own their spending in order to avoid triggering the provision that will entitle their opponents to more public money.

Some commentator, I can’t recall who, described this aptly as pretzel logic. As the 9th Circuit Court of Appeals, which upheld the law, said, the non-public-funded candidates really are arguing not that their own speech is limited but that the law gives their opponents access to the same right of speech that they—the non-public-funded candidates—have.

Most people will recognize that this law does not limit the free speech of the non-public-funded candidates.


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