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They Also Serve Who Only Stand and Graph: A Graphical Response to Paul Krugman on the Effect QE1 and QE2

by Mike Kimel

They Also Serve Who Only Stand and Graph: A Graphical Response to Paul Krugman on the Effect QE1 and QE2

I’ve taken a lot of flak for critiquing two posts by Paul Krugman in two posts of my own (the second one is here).

To summarize the point where people keep telling me I’m wrong, it has to do with quotes from Prof. Krugman’s pieces, and whether or not I’m misinterpreting those quotes. So I’m going to try this again… I’m going to put up the quotes and tell you how I’ve been told I should be interpreting those quotes. Then I’m going to put up a graph.

Before I get started, I want to be clear: Prof. Krugman is often the only voice of reason, particularly on issues like austerity and taxes, among those allowed up onto the platform to speak. What follows is not a polemic against Prof. Krugman. All of us are wrong sometimes. But I’m focusing on this issue precisely because it seems to be one of the factors leading one of the few voices of reason out there astray on an important issue. Anyway, enough with the editorial comment. First, a quote from Prof. Krugman’s first post.

Furthermore, Fed efforts to do this probably tend on average to hurt, not help, bankers. Banks are largely in the business of borrowing short and lending long; anything that compresses the spread between short rates and long rates is likely to be bad for their profits. And the things the Fed is trying to do are in fact largely about compressing that spread, either by persuading investors that it will keep short rates at zero for a longer time or by going out and buying long-term assets. These are actions you would expect to make bankers angry, not happy — and that’s what has actually happened.

Now, from Prof. Krugman’s second post in which he responds directly to me :

Ordinary monetary policy involves cutting short-term rates to fight a slump; it’s not what we’re talking about here, since it’s hard up against the zero lower bound. But the large-scale conventional expansion the Fed engaged in by getting to the zero bound has, of course, widened the spread between short and long term rates, since markets expect short rates to rise above zero eventually. So looking at the raw data on the short-long spread tells you nothing.

The bolding, in both cases, is mine. Now, I’ve had people writing to tell me I’ve interpreted these two paragraphs the wrong way. The way to interpret them, I’m told (and now that it has been pointed out, I can see the logic) is this:

1. The Fed engaged in conventional expansion at the beginning of the financial meltdown, and that widened the spread between the short term rate at which the banks borrow and the long term rates at which the banks lend.

2. During the nonconventional expansions (i.e., QE1 and QE2), the spread narrowed).

3. Banks prefer wider spreads, and thus, we have evidence that banks are actually unhappy with the things the Fed is (or was) trying to do.

Point number 1 is partly consistent with the graph shown in my first post on the topic, or at least kind of. The graph shows the spread between the FF rate and the 30 year mortgage rate. (i.e., the spread between the shortest rate at which banks borrow and the longest rate at which they regularly lend.) As the graph shows, the spreads widened… but best I can tell, they hit a local bottom in December of 2006. That big process of widening of spreads began in early December 2006.

If you think of monetary policy in terms of interest rates, which most people (and not to speak for Prof. Krugman, but based on reading his posts on a daily basis for many years, it is evident he does), there is nothing magical about early December 2006. The Fed Funds rate was about 6.11% at the time. It rose (not quite continuously) through mid June of 2007, but remained above 6.11%. But from early Dec 2006 to mid June of 2007, the spread increased from 0.86 to 1.48, a jump of 72%. Yes, as interest rates tightened, the spread continued rising, but the whole big rise got jumpstarted not with conventional monetary expansion, but rather with conventional monetary tightening, and this happened before anyone was thinking slump.  

Here’s a second graph. It shows the FF rate, the spread between the FF and the 30 year mortgage rate, QE1 and QE2. The QEx periods are represented by the Gray bars. I’ve also labeled the non-QEx periods as C1, C2 and C3 for “conventional 1,” “conventional 2,” and “conventional 3” – not that any of what we’ve seen in this time has been conventional.

As I noted already, the C1 period is not entirely consistent with how I’ve been told I should be interpreting Prof. Krugman’s quotes, though it isn’t inconsistent with the quotes either. Call it a wash.

What about QE1? Well, the spread peaked the weak of Nov 6 2008 (spread of 5.96), and QE1 began on Nov 26 (spread of 5.41). During QE1, the spread got as low as 4.59 in Dec 2009, and then widened out. The spread was at 4.92 at the end of March 2010 when QE1 ended.

I don’t know what to make of this. Was QE1 telegraphed? It sure doesn’t look like it if you at the FF, but I don’t know enough about that market. I will only say that from where I’m standing, it sure likes the compression Prof. Krugman was talking about is due to something other than QE1. I say this because the narrowing of the spread was actually about the same (actually, a smidge greater) over a three week period leading up to the start of QE1 as it was from the beginning of QE1 to the end of QE1. Worse, it seems that the last four months of QE1 show a widening, not a compression of the spread.

Where the story begins coming apart completely, though, comes in period C2. Somehow the spread begins to narrow precisely, and I do mean precisely, at the point where QE1 ends. From March 31, 2010, to November, 2010, we see a narrowing of the spread that looks more like a straight line than anything else in the graph.

And then…. the spreads begin to widen again beginning in early November 2010. But QE2 began November 3, 2010, and, according to what people tell me, QE2 should have led to a narrowing of the spread, not the end of the narrowing of the spread.

In sum, the evidence is neutral when it comes to what Prof. Krugman believes happened to the spread during QE1, and it contradicts his views on QE2. None of this is to knock anyone, not Prof. Krugman, nor any of the folks who wrote me. We’re living in unconventional times, and the old rules don’t apply. I would merely suggest that in the light of this information, people re-evaluate whether unconventional monetary policy really is hurting the banks. As I suggested in my previous two posts, I believe the evidence shows quite the opposite.

  (As always, if anyone wants my spreadsheet, just drop me a line. I’m at my first name (mike), my last name (kimel with one m), at gmail.)

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Conservative or Liberal? One Question to Rule them All

I’m devastated that Christian Rudder hasn’t posted to the OKTrends blog for more than a year.* He did statistical analysis of the monstrous database of OK Cupid — a dating site that asks participants hundreds of often odd and quirky questions about themselves — to draw out conclusions about various, sundry, and often fascinating topics.

I also can’t believe that I never posted about a finding in one of his posts that really caught my eye — from The Best Questions for a First Date:

If you want to know…

Do my date and I have the same politics?

Ask him or her…

Do you prefer the people in your life to be simple or complex?


We were very surprised to find that this one question very strongly predicts a person’s ideas on these divisive issues:

Should burning your country’s flag be illegal?

Should the death penalty be abolished?

Should gay marriage be legal?

Should Evolution and Creationism be taught side-by-side in schools?

In each case, complexity-preferrers are 65-70% likely to give the Liberal answer. And those who prefer simplicity in others are 65-70% likely to give the Conservative one.

This correlation is for a nationwide dataset; it won’t be as useful in places where one ideology is much more prevalent than the other. For example, in New York City there are lots of people who like simplicity and yet have Liberal politics.

This jives perfectly with my own anecdotal observations: that conservatives tend to like simple answers to everything: “Just cut taxes!” or “It all boils down to X.” (Scott Sumner deserves unlimited praise for acknowledging and battling that predilection in this link. That admission — along with the Rudder’s finding here — might also go a long way towards explaining why Steve Randy Waldmann thinks that professedly right-ish Market Monetarists have more in common with generally lefty MMTers and Post-Keynesians than they or others might suspect, or than any of those groups have in common with simplistically delusional freshwater neoclassicals.)

And I would also add: people aren’t simple. Ever. Especially when there’s more than one of them. (Can you name a single family that you know well that doesn’t have all sorts of odd and complicated stuff going on?) So this portrays conservatives wishing for things that don’t exist — like, for instance, prosperous, modern, high-productivity countries that don’t have massive doses of redistribution.

I’ll leave you with that. But I can’t resist sharing another beauty from the same post:

Okay, if you want to know…

Will my date have sex on the first date?


Do you like the taste of beer?


Among all our casual topics, whether someone likes the taste of beer is the single best predictor of if he or she has sex on the first date.

This caused me some difficulty recently. I was out with a friend and his girlfriend. She took a big swallow from her glass, put it down firmly, and announced, “Damn I love the taste of beer.” I almost spewed mine across the room.

Finally, for those who’ve read this far: if you’re thinking that the title of this post is ironic…you’re right.

* Ah. He sold his shop to just over a year go — for $50 mil. Just six days ago a “rumored seven-figure” deal was announced for the book on big data that he’s writing/has written, titled Dataclysm. I’ll be buying it.

Cross-posted at Asymptosis.

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Polling, Progressive Taxation and Bloggers

Suzy Khimm, Kevin Drum and Greg Sargent comment on the series of gallup polls dating back to 1992 in which a solid majority of US adults, ranging from 55% to 77%, say that they think the rich pay less than their fair share of taxes. Please click the link to Drum then come back. I don’t want to excerpt. Oddly the fact stressed by Drum (and the only fact noted by Sargent) is the modest decline in this fraction from 77% to 62%since 1992 not the fact that a major party is totally dedicated to reducing taxes which a solid majority think are too low already. Khim is just describing the data. Drum has a long history of warning liberals not to trust the polls which seem to show our countrypeople are liberal (search for “polling literalism”) and a long record of not knowing about, then downplaying the exact polls under discussion.

The change from 1992 to the present came in two or three phases. The third possible phase (stressed by Drum) was an increase from 55% in 2010 to 62% in 2012. I’m not convinced that anything really changed. I think the 2010 sample just happened to be unusual, since other polls from around then show support of 60% or more for higher taxes on the rich. I won’t discuss this further. If we ignore the 2010 poll, we see a decline from 68% in 1994 to 62% in 2012. The null that this decline is entirely due to sampling error is rejected at the 5% level, the standard deviation of the difference due to sampling error is on the order of [root(2*(1/3)*(2/3)/1000)]100% or about 2.5%. But a change (or difference) of 8% is not usually considered worthy of much discussion. There was also a statistically significant change from 77% in 1992 to 68% in 1994. In this case, I do not suspect the 1992 sample as the extreme number is confirmed by something Brad DeLong said in 1994 about internal Clinton Gore 1992 polling.

I have three problems with Drum’s analysis. First he keeps arguing that US public support for more progressive taxes is low or not high enough or not as high as it was. This is of limited interest to readers. Projecting, I think he is being stubborn. Also, he seems to equate “not high enough to get the job done” with “not high” ignoring the huge gap between public and elite opinion on the issue (and the gap between public opinion and elite opinion about public opinion). Among the elite, it is widely agreed that lower tax rates are better and rates much higher than Clinton era rates are unimaginable. The fact which makes me lose my temper (which I am trying to keep now) is that the elite ascribes this view to the general public, asserting without evidence that Americans oppose taxation much more progressive than current taxation considering it class warfare.

Another more useful complaint is to note the tendency to look at trends and ignore levels. 62% support for something is lower, but it is not low. This temptation is understandable as trends are easy to see without defining units. But it isn’t optimal.

Finally, there is a tendency to assume that things were normal back at the beginning of the time series. OK this is the second complaint re warmed, but in 1992 US public opinion about whether the rich were paying their fair share was not ordinary at all. That level is not discussed by any of the three bloggers. The discussion of the difference between the current level and that level is discussed only in terms of factors which increase the current level. This is an aspect of the general tendency to tread trends as if they were levels, but 1992 opinion on the question was extraordinary.

Again I trust my memory of what Brad DeLong told me 18 years about about internal polls which were 2 years old at that time. He claimed that Clinton’s pollster got so tired of solid majorities answering yes when asked if rich peoples’ taxes should be raised in order to reduce the deficit, spend more on education, spend more on this that or the other thing that, finally, he asked if people thought rich peoples’ taxes should be raised to finance more waste fraud and abuse – and a plurality answered yes.

Also I absolutely trust my memory of the discussion of focus group reaction to a debate between Bush and Clinton. They had Bush supporters, Clinton supporters and undecided voters watching with those dial things which allow people to indicate agreement or disagreement. When Clinton said something to the effect that “only the rich have gotten tax cuts” self identified Bush supporters (on average) dialed in agreement. The TV commentators noted that this was very rare. I’ve never heard of such a thing.

In 1992, a solid majority US public was very angry that the rich weren’t paying what that majority considered considered to be a fair share of taxes. A known Philanderer from Arkansas was elected President replacing the man who lead the US and more allies than the US had ever had before to victory. That burning desire for some class war was very nice, but we can perfectly well make do with rather less.

I think the key thing is to deliver on the promise of tax cuts for the non rich as Obama did and Clinton didn’t. Of course, the vast majority don’t know that Obama kept his promise, but anger over his failure to keep the promise is much diminished by the fact that he kept it. Commentators couldn’t stop talking about how Clinton hadn’t kept his word. They don’t want to display ignorance by claiming that Obama didn’t, so they avoid the topic. This could be enough.

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What is the Question? Responding to Paul Krugman

by Mike Kimel

What is the Question? Responding to Paul Krugman

Paul Krugman has been kind enough to respond to my post which in turn was commenting on an earlier post he had written.

As I noted in my previous post, I’m very leery about writing this, given Prof. Krugman is usually a very perceptive individual and I’ve noticed that Prof. Krugman is usually right when he is in a disagreement with someone. My trepidation is increased quite a bit by the fact that we’re treading on ground that is so much closer to his area of expertise than the two topics I normally write about. That said, I still believe he is wrong, and I will try to make my point a bit more explicit.

Prof. Krugman’s response comes in four paragraphs. The first is merely an introduction. In the second paragraph, Prof. Krugman states:

Ordinary monetary policy involves cutting short-term rates to fight a slump; it’s not what we’re talking about here, since it’s hard up against the zero lower bound. But the large-scale conventional expansion the Fed engaged in by getting to the zero bound has, of course, widened the spread between short and long term rates, since markets expect short rates to rise above zero eventually. So looking at the raw data on the short-long spread tells you nothing.

Now note this from Krugman’s earlier piece (bolding also mine):

Furthermore, Fed efforts to do this probably tend on average to hurt, not help, bankers. Banks are largely in the business of borrowing short and lending long; anything that compresses the spread between short rates and long rates is likely to be bad for their profits. And the things the Fed is trying to do are in fact largely about compressing that spread, either by persuading investors that it will keep short rates at zero for a longer time or by going out and buying long-term assets. These are actions you would expect to make bankers angry, not happy — and that’s what has actually happened.

Notice… in Prof Krugman’s second post, the spread widened. In his first, post, the one to which I objected (and in response to which I showed a graph of the spread), the spread compressed. As I understand it, on that issue to which I objected, we are now on the same page – we both agree the spread widened. But then what Krugman wrote in his first post about banks being made worse off is not correct, all else being equal. 

What I don’t understand in Prof. Krugman’s second post is the last sentence of the paragraph shown above – why does looking at the short long spread tell us nothing? I could be wrong, but I am assuming Prof. Krugman is stating that it wasn’t the Fed’s intent to widen the spread. the widening of the spread was not the intent of the Fed. That may well be correct – Prof. Krugman knows the key players personally and I do not, so he enjoys both greater access to and greater insights into the behavior of the people involved.

In his next paragraph, Prof. Krugman writes:

QE is an attempt to get traction despite those zero short-term rates by buying long-term debt, hopefully narrowing the spread and thereby boosting the economy. I don’t think it’s had a large effect, but that’s the goal.

Again, I don’t dispute what Krugman believes the Fed was trying to do with QE. I also don’t dispute his opinion that it didn’t have much of an effect. Personally, I suspect the positive effect on the economy of QE was very close to zero and I wrote about my expectation that the effect would be very close to zero at the time.

As I recall, Prof. Krugman was also stating the same thing in real time, albeit more rigorously. In fact, I would say Prof. Krugman made the point better than anyone of whom I was aware. He also was, to my knowledge, the first person with a big platform to make the point that the “bond vigilantes” were wrong as QE would not result in inflation. All of which is to say, not only am I in agreement with him on this issue, I have been one of the small voices supporting him on the issue since 2008.

So let us move on to my other objection to Prof. Krugman’s post (the first being the non-existent compression of short and long term interest rates, and how that was negatively impacting banks). My problem, and the one that I share with many others, is with this statement from Prof. Krugman’s earlier post:

The naive (or deliberately misleading) version of Fed policy is the claim that Ben Bernanke is “giving money” to the banks. What it actually does, of course, is buy stuff, usually short-term government debt but nowadays sometimes other stuff. It’s not a gift. 

To claim that it’s effectively a gift you have to claim that the prices the Fed is paying are artificially high, or equivalently that interest rates are being pushed artificially low. And you do in fact see assertions to that effect all the time. But if you think about it for even a minute, that claim is truly bizarre.

Now let me be 100% clear. I do claim it’s a gift. And did so without mentioning interest rates at all (except in the context of checking whether interest rates compressed or not). Regular readers know I virtually never mention interest rates as I don’t think they are particularly important when it comes to the outcomes of monetary policy. (What is important? Well, it is called monetary policy and not interest rate policy for a reason.)

My claim that the Fed gave a gift to a certain very specific subset of banks and similar entities is based on the following:

1. the housing market was tanking, driving down home prices and driving up foreclosures

2. the expectation was that the situation in the housing market was becoming worse and foreclosures were going up with no end in sight

3. the perceptions described 1. and 2. was that derivatives based on mortgages would continue losing value and nobody knew where the process would end

4. as a result of 1., 2., and 3., nobody wanted derivatives based on mortgages… those who had such derivatives on their books wanted them gone, and nobody else would buy them at any price

Whether the perception of the risk associated with holding those assets was correct or not, it was what everyone believed. The Fed stepped in and paid a price that only made sense in a world where there were no such perceptions of risk. And it wasn’t willing to help everyone that had been blindsided by these perceptions of risk, but rather just one group that had made some very poor decisions.

Put another way – the Fed was willing to relieve some (but not all entities) of assets they didn’t want at a price much higher than those entities could have received from anyone else. That is a gift.

Prof Krugman closes his new piece with this:

And as for the other thing: Kimel apparently thinks the Fed is buying privately issued MBS, aka toxic waste; actually it’s only buying agency debt, which already has an implicit federal guarantee and is functionally not much different from long-term Treasuries.

This is sort of correct, but not in a helpful way. First, a quibble – leaving aside principal reinvestment the Fed no longer is buying agency debt. Now, some substance – yes, the agency debt had an implicit federal guarantee. But… let us be very precise about our definition.

Agency debt means debt issued by a US gov’t sponsored agency. A US government sponsored agency is an agency created by the Federal government to engage in particular commercial activities. Fannie Mae, for example, was created by the Federal government to securitize mortgages and thus help increase the size and scope of the secondary mortgage market, which in turn would make mortgages easier for most people to get.

But Fannie Mae became a publicly traded corporation in 1968. It was no longer owned by the Federal government, and it started acting in the best interest of its shareholders. The Federal government no longer backed the debt Fannie Mae issued, but it was in Fannie Mae’s interest to imply that its debt and its operations were, in fact, guaranteed by the Federal government as that allowed it to borrow for less. If that sounds like the same reason why some charlatan goes around pretending be an heir to the Rockefeller fortune, well, it is, and it puts precisely the same obligation on the Rockefeller family as Fannie Mae put on the Federal government.

So, Fannie Mae’s “implicit guarantee” only began to have any real world value at the point where the Federal government took the company over and that really did happen before the Fed started picking up MBS. But if the Treasury was willing to guarantee MBS debt, why had the market for the debt dried up?

The answer has to do with the size of the Treasury’s guarantee. Remember, the size of the MBS problem was, at the time un-knowable, Hank Paulson’s bazooka had $700 billion in it, was rapidly being seen as inadequate to the task, and there was a big fight over increasing the debt ceiling going on. There was no certainty over whether Congress was going to pony up money to keep the Federal government going, much less pay off some recently acquired private obligations run up by a group of companies suddenly being given the gimlet eye.

Even if you forget about the existence of that uncertainty, the mere fact that the Fed had to step in should remind you that uncertainty was there and was big. If the markets believed the Federal government was providing a full and credible guarantee, the markets for the MBSs would have unfrozen. There has been a lot of money sloshing around earning zero in the last few years – why wouldn’t investors on the sidelines take a positive return guaranteed by the Federal government… unless they didn’t believe the guarantee.

All of which is to say, the gift came not just from the Fed. The Federal government, in the form of the Treasury department, took the first crack, but what was sitting in that particular corner of the financial kitty litter box was too big for the Treasury’s scoop alone. That just goes to show how big of a gift public entities gave to a small group of miscreants.

In closing, I’d like to address a final point… something from Paul Krugman’s post that I originally responded to, namely (and I’m paraphrasing) how are these policies are supposed to hurt the rest of us?

The answer is simple… moral hazard. Most of us were pretty sure that when push came to shove, certain entities would be saved from their folly. Now, any doubts are gone. We know with absolute certainty that it’s true. We have seen the lengths to which our government has gone to save these favored few. Those entities, going forward, have the magic guarantee. So not only has competing against them gotten more costly, it has gotten more costly simply not to be them. Because those entities know they can take bigger risks with no penalty, so they will.

There were other, better ways to proceed. None of them are perfect, but I’ll mention three better options that I wrote about back in 2008.

One would be for the Treasury and the Fed to guarantee that during the crisis, a) any financial entities that couldn’t meet their obligations would be taken over the moment they failed to make a payment and b) the moment a financial entity was taken over by the Treasury + Fed, those two would guarantee that entity’s debts. There would still be moral hazard but it wouldn’t be nearly as bad. We wouldn’t be treated to quite the same spectacle of companies on taxpayer life-support giving themselves huge bonuses while mocking the hoi polloi with drivel about the importance of their place in society. More importantly, we the people would be getting a lot more bang for our collective buck.

Another option would be to allow the public to bank with the Federal Reserve. Things have changed in the past 100 years, after all. Financial intermediaries aren’t all that necessary these days, except to the intermediaries themselves. Besides, the Fed can misread someone’s FICO scores just as easily as Bank of America can, and Ben B is paid orders of magnitude less than his counterpart at B of A. If people could bank directly with the Fed, there wouldn’t be a need to save a bunch of entities whose bad decisions periodically “require” some sort of bail-out.

A third option (one I noted at the time was ludicrous, but was less ludicrous than what would eventually transpire) would be for the Fed & Treasury to have simply recognized at the time that a process that relied on banks loaning money to the public to get the economy hopping had no hope of working because there wasn’t a mechanism to get banks to loan money to the public. The Fed could simply have handed each American a menu and said: “pick $X worth of stuff from this menu.”

This gets back to my statement that from where I’m standing, interest rates aren’t something on which monetary policy should focus. Money, and where that money goes, should be the focus. To quote a comment left by a reader called Mark at Professor Krugman’s blog the other day:

If the Fed printed one trillion in cash and gave each American $3000, I have a pretty good understand what the result would be. But purchasing one trillion in long term treasuries seems to just make an already large pile of unused, uncirculated money even larger. I’m not sure how this qualifies as quantitative easing any more than Bill Gates walking into soup kitchen qualifies as quantitative easing.

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2012 Social Security (and Medicare) Reports: due Monday

If past file conventions hold true these links should work immediately on release of the 2012 Social Security and Medicare Reports Monday morning.

This link  SHOULD get you to the CURRENT summary. Which means 2011 until it means 2012. When it does.
Social Security and Medicare Summary Report BTW from all evidence 99% of all Social Security reports found in the lamestream media (because on this one the Snow Queen is right) are cribbed from the Summary which also is much the same as the introduction to the full Report. But the real juice is in the Tables and Figures which among other things show alternate projections besides the standard ‘Intermediate Cost alternative’ always cited.

I haven’t posted at AB for a while and Blogger is all different so the FSM Him/Her/Itself knows how and whether this will render and beyond that whether the links will even work tomorrow. Until then you are pretty much guaranteed a 404 Error either way. Except the first link should get you to the 2011 Summary in the meanwhile.

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Reading the Social Security Report: "What is crisis? In context?"

The first link is to the 2011 Report and is meant as a teaching tool. The Table shows projected income, cost, and balance projections over what the Trustees consider the ‘short term’, which is the same ten years used by OMB and CBO in their scoring. Table IV.A3.—Operations of the Combined OASI and DI Trust Funds, Calendar Years 2006-20 
Traditionally income came in three primary forms: contributions from payroll (FICA), tax on benefits, and interest on Trust Fund principal. In 2011 the loss of income due to the payroll tax holiday was projected to be replaced by General Fund transfers so adding a fourth (offsetting) category. Cost also comes in three forms with benefits constituting more than 99% (including Railroad Retirement Board interchange) and admin just under 1%. In any year when total income including accrued interest exceeds total cost the Table shows a surplus ‘Net increase during year’ and a corresponding addition to the Trust Fund balance ‘Amount at end of year’. And taken ON ITS OWN TERMS, combined OASDI shows continuing surpluses through the ten year window to a total of something over $900 billion in surpluses. Which BTW score as such on the top line number CBO and subsequently the press report as THE Budget Surplus/Deficit. Okay then where is the crisis? What part of ‘near a trillion dollar surplus’ don’t we understand? Well there are a couple of answers to that, which to start with will require some longer range outlook. New table below the fold.
Table VI.F8.—Operations of the Combined OASI and DI Trust Funds, in Current Dollars, Calendar Years 2011-85 This table shows longer term projections under the three different economic and demographic models used by the Trustees of which ‘Intermediate Cost’ is the standard one. Here we can see that under IC projections surpluses vanish soon after the ten year window of Table IV.A3 and that year end balances start shrinking ultimately to vanish in 2036. Now the end of surpluses and even depletion of Trust Fund balances doesn’t mean that there simply are no funds to pay any benefits, even in 2035 ‘Income excluding interest’ STILL will exceed $2.2 trillion a year. On the other hand projected Cost under the scheduled benefit would be a little over $2.8 trillion, leaving a 22% or so gap. And since under current law Social Security has no ability to borrow would require an abrupt drop in benefits to 78% of the schedule. So THAT is the agreed definition of ‘crisis’: ‘sudden immediate drop in benefits by 22% at the point of Trust Fund Depletion’. But that is also the point where agreement stops as a divide arises between what I will call Social Security ‘supporters’, ‘reformers’ and ‘Rosserites’ (a term I just invented). For ‘supporters’, that is for advocates of traditional Social Security crisis focuses on ‘drop’. As a result their range of policy responses mostly revolve around ways to avoid the cut altogether, which given a system where non-benefit costs (i.e. admin) represent 1% of total costs, requires boosts on the income side. Hence approaches ranging from ‘lift the cap’ to Dale Coberly’s ‘good grief, it is just 40 cents a week to start if you gradually boost FICA’. On the other hand while some ‘reformers’ pay at least lip service to ‘drop’ their real concern is the ‘sudden immediate’ part and what they anticipate will be the political reaction: which in their imagination means millions of screaming ‘Greedy Geezer’ Boomers descending on Capitol Hill demanding that all scheduled benefits be paid in full no matter what. So their range of policy responses fall into two basic approaches plus a blend. One approach is to appeal to the Magical Fairy Dust of Equity Markets and claim that private accounts will simply make up the difference. Another approach is just to avoid the ‘sudden’ part by simply phasing in the cut by such things as means testing, retirement age adjustments, changes in CPI whatever that end up with the same 22% (or more) cut but with less drama. And the more cynical ones combine both approaches by pretending (or believing) that Magical Fairy Dust will just offset those gradual cuts and everyone (but especially account managers of private accounts) will live happily ever after. But either way this leaves ‘supporters’ and ‘reformers’ talking past each other with the former focused on avoiding cuts altogether while the latter concentrate on making them imperceptible. But which makes them just not hear solutions that would actually cost them anything, because ‘cuts’ as such are not where they see the problem to start with. Now somewhere between ‘supporters’ and ‘reformers’ are the distinct minority of ‘Rosserites’. And by ‘distinct minority’ I mean Professor Barkley J Rosser and your (not-so) humble blogger. (Although such luminaries as Prof K and Dean Baker at least acknowledge that we exist and have a point). Now Rosserites are opposed by the non-Rosserites (which mostly means AB commenter Dale Coberly, we could have a joint meeting of both sides in a phone booth-if such existed anymore)who I think misjudge us. That is where Rosserites are making an observation, and drawing a theoretical conclusion, we are not in fact ADVOCATING that outcome, just pointing out that the 22% cut at Trust Fund Exhaustion is not in full context a ‘crisis’ at all. And that understanding this allows us to modulate our responses to what all agree is a problem, whether that be defined as ‘cut’ or ‘sudden’. Rosserites, or at least this Rosserite, point to the following 2002 Congressional Budget Office Report: The Future Growth of Social Security: It’s Not Just Society’s Aging and particularly to Figure 2 on page 2. Now in what may be the least known aspect of Social Security it turns out that the scheduled benefit under current law actually results in increased REAL benefits over time. That is measured in terms of actual purchaseable basket of goods the average benefit was projected to rise from $14,000 in 2002 dollars to $26,000 in 2002 dollars between 2002 and the end of the 75 year projection period. Or close to a 85% REAL INCREASE for the retiree of 2077 as opposed to what my Mom got in 2002. Which Rosserites take as an argument to put the 22% cut in 2036 in the context of this upward sloping baseline. That is per CBO benefits at the point of Trust Fund Depletion (using 2002) projections were scheduled to be about 140-150% of then current benefits and a 25% cut to THAT still rendered what I cheekily call ‘Rosser’s Equation’ (Barkley can’t decide whether to be ‘bemused’ or ‘amused’ by this), that is 75% of 150% = 115%. Meaning that the real world consequence of that ‘sudden’ ‘cut’ would still be a check 15% better than my Mom gets today. In real basket of goods terms. Which doesn’t mean we shouldn’t take steps to avoid or at least mitigate that cut, just to point out that it is hard to parse ‘15% better real benefit’ into ‘Boomer Geezers giving Gen-X a bone job’. Or in less crude terms ‘what the heck kind of ‘intergenerational warfare’ are we talking here?’ Well it is getting close to Report release time and I want to leave time for people to do some fact checking and link following. All I ask is that people keep the reality of the current baseline of the scheduled benefit in mind when assessing ‘crisis’ if and when the Trust Fund actually goes to zero balances.

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The Laugher Curve: Romney Etch-A-Sketch Aide Says Romney Thought TARP Unnecessary but Urged Support of It as a Give-Away to Wall Street

Okay.  The subtitle of this post is a loose paraphrase of statements that Romney aide Eric Fehrnstrom made to ABC News on Thursday.  But not all that loose a paraphrase. It’s actually a direct deduction from Fehrnstrom’s comments.

As Washington Post blogger Greg Sargent mentioned on Friday, Fehrnstrom test-drove a new, or rather a newly clarified and perfected, campaign theme.  He claimed that the economic collapse began three years ago, immediately after Obama’s inauguration, rather than during the Bush administration.  Or that the severe economic downturn, which began in late 2007, and the near-collapse of the banking system, which occurred in the last few months of 2008, are unrelated to the deepening of the recession in 2009 and the ongoing high (but decreasing) unemployment rate, and also are unrelated to each other.  I’m not sure which.  Nor apparently is Fehrnstrom. 

He is sure, though, that the jobs created since the beginning of this administration, including the ones generated in, say, the last two years, owe nothing to Obama’s policies. 

Call it the theory of neo-economic severability.  Which occurs when some political hatchet wielder misjudges the level of most people’s credulity.  Or misjudges the public’s memory about major, fairly recent events, or at least about the public’s ability to have its memory refreshed by a few video clips and headlines from, say, the fall of 2008.  

Or just call it the Laugher Curve. 

My instant reaction after reading the first two paragraphs of Sargent’s post was: Ah! I should have known it!  My liberal-Democrat parents and my American History teachers lied to me. The Great Depression started in March 1933, since that was the beginning of the massive job losses that occurred in the last nine months of that year and in the following two years or so. The uptick in employment in ’36-’37 had nothing to do with Roosevelt’s policies and were instead the result of Hoover’s policies—something that should have been obvious all along, since the market crash and the economic collapse beginning in late 1929 were unrelated to each other and to the Great Depression, which started in 1933.  Those people waiting in breadlines during the Hoover administration were just practicing in case a Democrat was elected down the road and caused a Depression.  Unfortunately, one soon was, and he did.

Then I read Sargent’s third paragraph and saw that real pundits had gotten there first with that one.  Oh, well.

Sargent says that while Fehrnstrom’s claim is a step beyond Romney’s routine ones, at least in its clarity, it’s really a rendition of Romney’s main theme: that Obama’s policies caused the economic collapse.  And Sargent’s livid that the media hasn’t called Romney on it, by pointing out the, um, chronology problem.  

I’m not so sure that Fehrnstrom’s claim isn’t really new.  I’ve thought Romney’s just been claiming that Obama’s policies haven’t succeeded in spurring economic growth and hiring and instead have hindered it.  (Especially in Michigan, Ohio, Indiana and elsewhere where GM and Chrysler plants and huge numbers of auto suppliers’ factories shuttered after Obama allowed those two automakers to liquidate back in 2009, despite Romney’s frantic warnings about the dire consequences.)  I think Fehrnstrom’s new iteration is different, not just clearer. 

But as the ABC News story shows, this new theme isn’t just Fehrnstrom’s talking point; it’s also Romney’s.  On Thursday, Romney pretended that a Lorain, Ohio National Gypsum plant where Obama campaigned in January 2008 had closed during Obama’s presidency.  Actually, it closed a few weeks after Obama spoke there in 2008.  The plant, which employed about 70 people, made drywall.  Y’know, for new homes.  The market for which, and therefore the building of which, slowed in 2007 and collapsed in 2008.  It’s a market that can’t exist at all without a healthy credit market. 

Which brings me to … TARP.  A.k.a, the bank-bailout.  Or at least it reminds me that that was the subject of this post’s subtitle. 

Sargent suggests that some member of the press who covers Romney’s campaign stops ask Romney what exactly he would have done as president in 2009 to spur the economy and job creation.  But we already know the answer to that: eliminate all regulation on business and reduce or eliminate taxes on corporations and wealthy individuals. 

Me?  I just want some reporter to ask Romney, in light of Fehrnstrom’s claim, why, if the economy was fine until 2009 and the banking industry wasn’t collapsing back in the fall of 2008, he urged Republican members of Congress to vote for the bailout.  Oh.  Oh, wait.  It must be that TARP worked so well—and so fast—that by January 20, 2009 the economy was healthy again.  But then one of those damn healthcare-legislation death panels intervened and mandated the death of the recovered economy, as practice for some time down the road, after enactment of the Affordable Care Act, when the panel would have to kill nice old ladies instead of the GDP.  Either that or, well, Romney wanted the bailout as a gift to Wall Street, not as the only apparent way to keep the entire financial system from unraveling, his contrary claims notwithstanding; according to Fehrnstrom, Romney thought the financial system and the economy were fine.

But I’d also like a reporter to ask Romney why he’s adopted Fehrnstrom’s modus operandiof misrepresenting the timing of occurrences or misstating who said whatever, by simply cutting out words, or years.  Before his recent Etch-a-Sketch notoriety, Fehrnstrom gained notice as the aide who concocted an ad last fall showing Obama in a news clip saying something like “If we keep talking about the economy, we lose.”  The original clip was from 2008, and Obama was quoting McCain.  

Several commentators have written in recent weeks that a hallmark of Romney’s campaign is shaping up to be bald lies, mostly by Romney himself.  Most of these misrepresentations involve something Romney says falsely that Obama said, but sometimes the misrepresentations are fabricated statistics.  Always though, they are easily disprovable, and the statements that can’t be disproved with a video clip showing what actually was said or what actually happened, or with statistics, eventually will be disproved when Romney is directly asked the basis for the statement.  At least I assume Romney eventually will be asked this, even though Romney assumes otherwise. 

But rather than suggest that Romney regularly makes things up—that he’s a habitual liar—Obama should pretend to take him at his word.  While some voters may decide to abide a presidential candidate who they know is a habitual liar and cockily flaunts it, a majority probably wouldn’t risk voting for one who appears to base important decisions on supposed facts that have not been checked for accuracy.  Everyone knows that Romney is comically malleable.  But, if taken at his word, he’s also easily conned. 

Obama should take him at his word and illustrate the point, incident by incident.  Most voters, after all, probably would rather have a president whom they wouldn’t trust to sell them a used car than a president who they wouldn’t want buying one.  Romney of course would be the former, and most voters will recognize that.  But not before pausing and wondering.


Romney’s speech at the shuttered National Gypsum factory is important for a more substantive reason, too: Statements he made in the speech serve, I think, as a pretty stark argument for Keynesian economics and therefore undermine the Republicans’ anti-stimulus refrains regarding the 2009 stimulus law and their current opposition to use of federal funds to help state and local governments avoid further layoffs of teachers, firefighters and police officers.  And it’s pretty hard not to juxtapose those statements with Romney’s hostility toward the auto-industry bailout, both then and now.  I’ll post a short post on this later today or tomorrow.  A short post is all that’s necessary, because Romney’s words speak for themselves.  Economics isn’t my bailiwick.  But for this it doesn’t have to be.

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Guest post: Greg Mankiw doesn’t understand competitio​n for investment

by Kenneth Thomas of Middle Class Political Economy

Greg Mankiw doesn’t understand competitio​n for investment

Greg Mankiw’s column in Sunday’s New York Times makes the case that competition between governments is a good thing, that it makes them more efficient in the same way that competition among firms does. He paints it as also being about choosing re-distributionist policies or not, with Brad DeLong and Harold Pollack both ably making the case that of course governments should engage in redistribution.

As author of Competing for Capital, however, I am more interested in the question of whether government competition for investment leads to more efficient outcomes. The answer, in short, is that it does not. Indeed, competition for investment leads to economic inefficiency, heightened income inequality, and rent-seeking behavior by firms (a further cause ofinefficiency).

Mankiw claims:

…competition among governments leads to better governance. In choosing where to live, people can compare public services and taxes. They are attracted to towns that use tax dollars wisely….The argument applies not only to people but also to capital. Because capital is more mobile than labor, competition among governments significantly constrains how capital is taxed. Corporations benefit from various government services, including infrastructure, the protection of property rights and the enforcement of contracts. But if taxes vastly exceed these benefits, businesses can – and often – move to places offering a better mix of tax and services.

Mankiw doesn’t stop to think about what this competition looks like in the real world. To attract mobile capital, immobile governments offer a dizzying array of fiscal, financial, and regulatory incentives to companies in sums that have been growing over time for U.S. state and local governments, as I document in Competing for Capital and Investment Incentives and the Global Competition for Capital. His discussion centers on the reduction of corporate income tax rates, which is surely a part of the competition, but which is no longer an issue when an individual firm is negotiating with an individual government.

At that level, the issues then become more concrete: Can we keep our employees’ state withholding tax? Can we get out of paying taxes every other company has to pay? Will you give us a cash grant? The list goes on and on. As governments make varying concessions on these issues, you then begin to see the consequences: discrimination among firms (especially to the detriment of small business); overuse and mis-location of capital as subsidies distort investment decisions; a more unequal post-tax, post-subsidy distribution of income than would have existed in the absence of incentive use (a corollary of the fact noted by Mankiw that “capital is more mobile than labor”); and at times the subsidization of environmentally harmful projects. Moreover, many location incentives are actually relocation incentives, paying companies at times over $100 million to move across a state line while staying in the same metropolitan area, with no economic benefit for the region or the country as a whole (Cerner-OnGoal, now in Kansas rather than Kansas City, is a good case in point).

Once upon a time, about 50 years ago in this country, companies made their investment decisions based on their best estimate of the economic case for various locations without requesting subsidies. On the rare occasion when a company did ask for government support, it was at levels that would appear quaint today. For example, when Chrysler built its Belvidere, Illinois, assembly plant in the early 1960s, it asked for the city to run a sewer line out to the facility–and it even lent the city the money to do it.

Today, companies have learned that the site location decision is a great opportunity to extract rents from immobile governments, and invest considerable resources into doing just that. An entire industry has sprung up to take advantage of businesses’ informational advantages over governments–and, indeed, intensify that asymmetry–to make rent extraction as effective (not “efficient”!) as possible.

Finally, let’s reflect on the force that makes this process happen, capital mobility. The fact that capital has far greater ability to move geographically than labor does, and that governments of course are geographically bound to one place, is a source of power for owners of capital. Modern economists, especially conservatives and libertarians, often have great difficulty acknowledging the role of power in market transactions, though their ostensible hero, Adam Smith, did not. To treat this power as a natural phenomenon rather than a social one, as Mankiw does, is dangerously close to saying that might makes right. But that’s not the way things are supposed to work in a democratic society, or a moral one.

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Beckworth Promotes Platinum Coins as Obama’s "FDR Moment"!

You know things are weird when pretty strongly right-of-center economists are proposing ideas first touted by MMT econocranks (yes, beowulf, I’m talking about you) to bring about the Obama breakout moment that progressives (despairingly) dream of at night.

The world is a very strange place.

And people argue with Steve Randy Waldman when he says that MMTers, post-Keynesians, and Market Monetarists agree on lots of things… Sheesh.

Macro and Other Market Musings: Obama Needs His FDR Moment.

Cross-posted at Asymptosis.

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Mitt Romney, American Parasite, Destroys America’s Mittelstand

Speaking of “extractive elites,” don’t miss Pete Kotz’s cover story in the Village Voice, Mitt Romney, American Parasite. (I read it in their subsidiary Seattle Weekly.)

It details a whole string of Bain purchases under Romney — thriving companies that were saddled with debt so Romney could extract cash in the form of “profits,” leaving the companies to devolve into bankruptcy and dissolution.

Just one example:

“When Bain Capital took over, it seemed like everything was being neglected in our plant,” says Sanderson. “Nothing was being invested in our plant. We didn’t have the necessary time to maintain our equipment. They had people here that didn’t know what they were doing. It was like they were taking money from us and putting it somewhere else.”

History would prove him correct. While Georgetown was beginning its descent to bankruptcy, Romney was helping himself to the company’s treasury.

Be very clear on this: that is the business model of private equity:

Charlie Hallac, a top deputy to Larry Fink at BlackRock and head of the firm’s analytical arm, BlackRock Solutions, distilled it down with precision: “Of every twenty deals, the large aggressive PE firm expects seventeen of the companies to fail under the added debt. Two have to survive and one has to hit big for the firm to have a fairly strong return on its PE fund. So that’s three out of twenty.”

The whole purpose of the private equity industry is to destroy the kind of mittelstand, long-lived, profitable, specialized, often family-owned and -operated companies that The Economist, Business Week, et al keep touting as the backbone of Germany’s remarkable success and resilience — its very “model of success.” Private equity’s model is to extract the expected future value of those companies in cash, while simultaneously, in most cases, destroying that value.

Is that what they mean by “creative destruction”?

But here’s the question that keeps nagging at me: who lends them the money? Presumably savvy financial-system lenders know that a large percentage of these companies are going to go bankrupt and walk away from their creditors. Why do they lend the money? I’m thinking it must be an principal-agent problem, where the individuals approving the loans make out well, while the companies they work for (and their shareholders, and taxpayers) take the hit.

Cross-posted at Asymptosis.

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