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

Supreme Court faces pressure to reconsider Citizens United

Lifted from an e-mail by Beverly Mann in response to an inquiry of mine on a Washington Post article:

Hi Dan. The key paragraphs in a Washington Post article earlier this week, called Supreme Court faces pressure to reconsider Citizens United ruling say:

The Supreme Court has already blocked the Montana decision, and the justices may simply set their counterparts in Helena straight by summarily reversing the finding. But pressure is being applied — by members of Congress and nearly half the states, not to mention Justices Ruth Bader Ginsburg and Stephen G. Breyer — to at least let Montana make its argument.

The Montana Supreme Court acknowledged a conflict when it voted 5 to 2 to uphold the state law, created by voters in 1912 to combat the power of the so-called Copper Kings who controlled state politics. It said the state’s characteristics, including a dependence on agriculture and mining and low campaign costs, made it “especially vulnerable” to corporate control.

Those urging the court to grant a full hearing of the Montana case take aim at the most important finding of Citizens United. That was the declaration in Justice Anthony M. Kennedy’s majority opinion that “we now conclude that independent expenditures, including those made by corporations, do not give rise to corruption or the appearance of corruption.”

“That cannot be so,” the new bipartisan team of Sens. John McCain (R-Ariz.) and Sheldon Whitehouse (D-R.I.) told the court. “Whether independent expenditures pose dangers of corruption or apparent corruption depends on the actual workings of the electoral system; it is a factual question, not a legal syllogism.”

The court under Chief Justice John G. Roberts Jr. has incrementally undermined McCain’s landmark campaign finance act by saying it doesn’t meet First Amendment requirements. McCain has in turn been dismissive of a court — without a single member who has ever run for public office — that he says is hopelessly naive about how campaign finance affects the political process.

The most stunning part of the Citizens United opinion was that declaration of fact was made out-of-the-blue and that most people recognize is plainly false. I wrote about this a couple of times on AB, including last January, shortly after the Montana Supreme Court issued its opinion.

I think that, although the rightwing majority would love to just summarily reverse the Montana Supreme Court on the basis of that declaration of purported fact in Citizens United, they’re under enough pressure now to not do that; the dissents from any such opinion would be devastatingly scathing and would get a lot of attention. I think they’ll agree to hear the case, and will schedule the oral argument for after the election. I think that, when they do decide the case, the wingnut majority probably will say that, whether or not “independent expenditures pose dangers of corruption or apparent corruption depends on the actual workings of the electoral system,” the First Amendment interest in “free speech” outweighs it.

But, who knows? Another possibility is that they’ll say that their opinion in Citizens United stated that it was based on the presumption of transparency about who is actually funding these Super PACs, and on the basis that, supposedly, these Super PACs do operate independently of the candidates’ campaigns, and that unless both of these presumptions actually are true, laws like Montana’s are constitutional.

And Beverly added later:

In my opinion, the only newsworthy part is the amicus brief from McCain and Whitehouse, because of MCain’s participation and because these two senators are saying that as a matter of fact the Citizens United opinion’s declaration of fact is erroneous, and that they, not the justices, have the actual facts. That’s the argument made by Montana’s attorney general, but having two senators say outright that in their experience, the Supreme Court’s statement of fact is flatly wrong is a big deal. But I don’t have any more insight into what will happen than what I wrote in the email and what’s in the Washington Post article.  

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All in one day of reporting…

This is just one days reporting from various sources. I thought I would pass them along. On the face of it perhaps the story line is clearer to even regular folk:

JPMorgan Said to Hire Ex-SEC Enforcement Chief McLucas for Loss Probe
By Joshua Gallu and Dawn Kopecki

JPMorgan Chase & Co., the biggest U.S. bank, has hired former U.S. Securities and Exchange Commission enforcement chief William McLucas to help respond to regulatory probes of the firm’s $2 billion trading loss, according to two people with knowledge of the assignment.

The lender’s May 10 announcement of the “self-inflicted” loss spurred reviews by the SEC, Commodity Futures Trading Commission, Office of the Comptroller of the Currency and Federal Bureau of Investigation. JPMorgan has said the losses may increase. Kristin Lemkau , a company spokeswoman, didn’t have an immediate comment on the hiring. The people requested anonymity because the appointment hasn’t been made public.

Via the Real News comes this headline J.P. Morgan Funds Senate Finance Chair, Even Bigger Problem in the Wings

ome and testify and explain how they lost $2 billion. There’s a problem here. Who is Senator Tim Johnson’s largest campaign contributor? Well, that’s people associated with JPMorgan. So file this under the category as you can’t make this stuff up, as Tom Ferguson said to me…

Bloomberg reports a change in the way the SEC and businesses relate:

+ The U.S. Securities and Exchange Commission, long known for settling enforcement actions without having to prove its case in court, is struggling to cope with a surge in the number of executives and companies willing to go to trial to defend themselves.

+The SEC’s office in Washington is actively litigating about 90 cases, up more than 50 percent in the past year, Matthew Martens, the SEC’s chief litigation counsel, said in an interview. At the same time, Martens’ trial unit staff has stayed relatively flat at about 36. He recently added three more lawyers to his group and is looking to hire more.

+The wave of litigation has two main sources: more complex cases stemming from the 2008 financial crisis and a related increase in lawsuits filed against individual executives.

+Martens said it’s critical that his unit present a credible threat. “At the end of the day, if we can’t win cases, then people don’t settle. That’s the reality,” he said.

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Letting the Fox Guard the Henhouse…not a metaphor!

Cost savings?  I don’t know much about this industry except for the press, but I am thinking switching to vegan style, except Monsanto comes to mind. (Turn on being flip switch).  Instead of an answer. I would ask two beginning questions:  Is this a trend?  Should I be increasingly concerned about our supply chain?

From OMB Watch alert Letting the Fox Guard the Hen house:

The U.S. Department of Agriculture’s (USDA) Food Safety and Inspection Service (FSIS) made the front page of The New York Times this week for its proposal to change the way chickens and other poultry are inspected in processing plants before they are sent to supermarkets and butcher shops all across the country. In January, the agency published a controversial new proposal that would shift responsibility for inspections away from agency inspectors and allow employees of the slaughtering plants to judge their own handiwork. We’re not the only ones who think asking chicken producers to police themselves might be a bad idea.

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The Crux of the Problem in the Financial Industry

by Mike Kimel

The Crux of the Problem in the Financial Industry

A great set of lines from William Black posted at Barry Ritholtz’s Big Picture:

The Jamie Dimons of the world know that if they win the gambles they will be made immensely wealthy and that when they lose the gambles massively the federal government will bail them out. Every gamble a federally insured bank (or an implicitly guaranteed SDI) takes is a gamble with government money. Bank leverage is always extreme in the modern era; it vastly exceeds the reported (and often inflated) capital. The government is the true creditor through its explicit and implicit guarantees of the bank’s creditors.

Now, that isn’t necessarily a prescription for failure. Expectations of behavior, and public shame, make a big difference when it comes to determining whether people whose instinct are to act in their own best interests no matter how much harm it will cause to others will act on those instincts. 

In general, the Jamie Dimons of the world (to use Black’s phrase), if they somehow found themselves and a small child the only survivors of an accident, would protect the child until help arrived, though it might profit them to loot the child’s belongings and jettison the child as dead weight. But it isn’t merely personalizing a potential victim that keeps them from, well, making them into a victim. In general, the Jamie Dimons of the world, if told to charge a hill during a war, will charge said hill, even if the opportunities to profit are greater by staying behind. 

So what makes finance different? Or is that the wrong question, and if so, what is the right question?

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David Cay Johnson and taxed by the boss

Reuters brings us a post from David Cay Johnson on a less well known funding mechanism from state coffers to private businesses. Granted there are a lot of others as well. See this post by Kenneth Thomas    (link repaired) on how competition between government is different than between private businesses:

Across the United States more than 2,700 companies are collecting state income taxes from hundreds of thousands of workers – and are keeping the money with the states’ approval, says an eye-opening report published on Thursday.

The report from Good Jobs First, a nonprofit taxpayer watchdog organization funded by Ford, Surdna and other major foundations, identifies 16 states that let companies divert some or all of the state income taxes deducted from workers’ paychecks. None of the states requires notifying the workers, whose withholdings are treated as taxes they paid.

General Electric, Goldman Sachs, Procter & Gamble, Chrysler, Ford, General Motors and AMC Theatres enjoy deals to keep state taxes deducted from their workers’ paychecks, the report shows. Foreign companies also enjoy such arrangements, including Electrolux, Nissan, Toyota and a host of Canadian, Japanese and European banks, Good Jobs First says.

Why do state governments do this? Public records show that large companies often pay little or no state income tax in states where they have large operations, as this column has documented. Some companies get discounts on property, sales and other taxes. So how to provide even more subsidies without writing a check? Simple. Let corporations keep the state income taxes deducted from their workers’ paychecks for up to 25 years.

The snappier You tube version is here.

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Bain Capital vs. Berkshire Hathaway**

Matthew Yglesias channels … me!

Yep, that’s right.  And now that, as Yglesias discusses, Newark Mayor Cory Booker has given the Obama campaign permission to explain the differences between the various types of venture capital “models” (as Yglesias calls them), conceding that, yes, that may really be more relevant to the key issues in the campaign than Obama’s earlier relationship with Jeremiah Wright, I strongly urge the Obama campaign to do that—in detail, with as much specificity as is necessary to illustrate it. 

In my earlier post, I mentioned the distinction between, say, the funding-of-Silicon-Valley-startups venture capital model and the leveraged-buyout-to-extract-value-and-then-close-the-company model that Bain engaged in (apparently) regularly when Romney headed it.  Yglesias doesn’t mention the former but contrasts the latter with the genuine-turnaround model, which is the model that Bain and Romney claim was (and Bain claims, is)** theirs. 

Yglesias is right to point out that the genuine-turnaround model is distinct from the extract-value-and-then-close-the-company one.  But I think there’s also a distinction between the leveraged-buyout-to-extract-value-and-then-close-the-company model that Bain engaged (and, I assume, still engages) in, in which the intent is to “flip” the company as soon as possible, and the (to my knowledge) Berkshire Hathaway model, in which the venture capital firm, fund or holding company invests in companies, long-term, including buying some companies outright with the intent to actually own them for the foreseeable future.  (From Wikipedia: “Berkshire Hathaway Inc. … is an American multinational conglomerate holding company headquartered in Omaha, Nebraska, United States, that oversees and manages a number of subsidiary companies.”)
Surely there are differences between the decisions a Bain-like company makes vis-à-vis the businesses it acquires in order to flip quickly for large profits and a Berkshire Hathaway-like firm whose interest in the acquired business is long-term, because the very purpose of the investment is different.  Those differences matter.  A lot, I would think.

As for Booker, his short-term interest seems analogous to the Bain venture-capital model.  Yglesias says he’s receiving quite a bit of campaign funding from finance types. Including, presumably, those of the Bain model.  (Or maybe Booker just doesn’t recognize the distinction.)*

*This parenthetical was added after the original posting.

**This parenthetical was corrected for clarity.

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Did Samuelson and Solow claim that the Phillips Curve was a structural relationship ?

Did they claim that it showed a permanent tradeoff between inflation and unemployment.

James Forder says no.

Is the intellectual history and self image of modern macro based entirely on the critique of the legend to a figure which can be read out of context deliberately ?

Serious people don’t put it that way, but I do.

Update: in a comment at Kevin Donoghue provided a link to a free version of the paper which I have (finally) read. Samuelson and Solow repeatedly stress the importance of expectations and the difficulty of identifying causal relationships. The conventional view of the paper is closer to being the opposite of what they wrote than to being fair. They give equal weight to the conjecture that high inflation will be persistent due to changes in expected inflation and that high unemployment will be persistent as the long term unemployed are effectively excluded from the labor market. The data are equally kind to each conjecture, yet the first is held to be a known fact which proves the author’s who conjectured it to have been fundamentally wrong in a very important way, while the second is discussed only when the data make it unavoidable and is excluded from the models used for forecasting and policy analysis. Also Solow stressed the endogeneity of technological progress. Finally, they are very puzzled by the data from the depression and don’t discuss the possibility that employees of the WPA might have been counted as unemployed as they were.

Paul Krugman, John Quiggin and others (including me) have argued that the one success of the critics of old Keynesian economics is the prediction that high inflation would become persistent and lead to stagflation. The old Keynesian error was to assume that the reduced form Phillips curve was a structural equation — an economic law not a coincidence.

Quiggin and many others including me have noted that Keynes did not make this old Keynesian error and instead explicitly argued that the relationship between inflation, employment and output was not stable and no equation asserting that it was should be introduced into macroeconmic models.

The old Keynesian error, if it occured, was made later. I have claimed (in a lecture to surprised students) that it was made by Samuelson and Solow. Was it ?

This is an important question in the history of economic thought, because the alleged error serves as a demonstration of the necessity of basing macroeconomics on microeconomic foundations. For a decade or two (roughly 1980 through roughly 1990 something) it was widely accepted that, to avoid such errors, macroeconomists had to assume that agents have rational expectations even though we don’t.

The pattern of a gross error by two economists with impressive track records and an important success based on an approach which has had difficultly forecasting or even dealing with real events ever since made me suspect that the actual claims of Samuelson and Solow have been distorted by their critics. To be frank. this guess is also based on a strong sense that the approach of Friedman and Lucas to rhetoric and debate is more brilliant than fair.

I am very lazy, so I have been planning to google some for months. I finally did. I find that I would have to pay for Samuelson’s collected papers. That the Wikipedia argues that a large fraction of Riksbank Nobel Memorial prizes in economics have been awarded to critics of the old Phillips curve and that many people assert that Samuelson and Solow presented an un expectations augmented Phillips curve as a structural equation. Then I googled
samuelson solow phillips curve

The third hit is the 2010 paper by Forder which discusses Samuelson and Solow (1960) (which I have never read).

Use the google.

This isn’t very hard (one just has to read the paper). Forder quotes p 189

‘What is most interesting is the strong suggestion that the relation, such as it is,
has shifted upward slightly but noticeably in the forties and fifties’

So in the paper which allegedly claimed that the Phillips curve is stable, Solow and Samuelson said it had shifted up. Rather sooner than Friedman and Phelps no ?

So how has it become an accepted fact that Samuelson and Solow said the Phillips curve was stable ? This fact is held to be vitally centrally important to the debate about macroeconomic methodology and it is obviously not a fact at all. How can it be that a claim about what was written in one short clear paper is so central to the debate and that no one checks it ?

They did caption a figure with a Phillips curve “a menu of policy choices” but (OK this is a paraphrase not a quote)

After this they emphasized – again – that these ‘guesses’ related only to the ‘next few
years’, and suggested that a low-demand policy might either improve the tradeoff by
affecting expectations, or worsen it by generating greater structural unemployment.
Then, considering the even longer run, they suggest that a low-demand policy might
improve the efficiency of allocation and thereby speed growth, or, rather more
graphically, that the result might be that it ‘produced class warfare and social conflict
and depress the level of research and technical progress’ with the result that the rate of
growth would fall.

So, finally after months of procrastinating, I spent a few minutes (at home without access to JStore) checking the claim that is central to the debate on macroeconomic methodology and found a very convincing argument that it is nonsense.

If that were possible, this experience would lower my opinion of macroeconomists (as always Robert Waldmann explicitly included).

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Why Does Y Equal Real GDP?

I hesitate to post this while Nick Rowe is on vacation, because he’s always so generous with his replies and explanations. Here’s hoping he gets back to this.

But he does get me thinking. I’ve spent several days re-reading and pondering his Identity Economics post and (his) related others, which post begins [my brackets]:

Here are two macroeconomic identities:

1. Y=C+I+G+NX [the National Income Identity]

2. MV=PY [the Identity of Exchange]

Both are true by definition.

Without (for the moment) burdening you with all my thinking, here’s the question that I’m left with:

By convention and practice — “by definition” — Y in these identities equals real GDP. Y means ”real GDP”.

Here’s why that doesn’t make sense to me:

Say that in Year 1, U.S. GDP (IOW, Y) is $14 trillion. That’s the total dollars spent on real-world, newly-produced goods and services. This quantity is necessarily counted in dollars, because that’s how the measurement is done (at least in the expenditure approach) — adding up all the dollar-denominated purchases/sales.

Assume: in Year 2, the economy produces that same quantity of real goods and services, and their aggregate human utility is unchanged. Real output is unchanged.

But in Year 2, the prices are 10% higher (for whatever reasons). Measured, counted GDP (a.k.a. “Y,” total dollar transactions) increases by 10%.

If Y is real GDP, then real GDP just went up by 10%. Even though real output didn’t.

This doesn’t make any sense to me. Shouldn’t Y mean nominal GDP?

Even: mustn’t it? Because it’s always counted in nominal dollars.

This would give us:

MV = Y


Y/P = Real GDP

This seems much more tractable and conceptually coherent to me. The “real” definition keeps running me into (what seem like) conceptual/arithmetic contradictions.

I was going to stop here, hoping to keep this discussion focused, but as I’m about to post I find that Saturos has given me a very nice response to my comment over at Nick’s place. The confusion expressed here fully explains the more profound confusion in that earlier comment; I simply assumed therein, based on the fundamental construction of the National Income Identity (and the methods of national accounting), that Y means nominal GDP.

Saturos sez:

Talk to any Keynesian and you’ll find that they’re far more inclined to interpret Y = C + I + G + NX as referring to real (CPI or GDP deflator adjusted) quantities. Of course P is here assumed to equal 1, because “prices don’t matter in the short run”. But I agree that it makes far more sense, and is far more consistent with the Keynesian approach, to talk about nominal spending flows. (Really, you should use lowercase for real variables, and uppercase for nominal – and the identity is true in either case, as it’s just a listing of the different categories that any spending or output must fall into.) Matt Yglesias ( has a new post in which he takes Scott Sumner’s version: MV = C + I + G + NX. That might be the best approach of all – it shows you that all the changes in “income accounting” variables that get reported on the news must all be manifestations of fluctuations in the overall volume of spending, MV. If we’re talking about fiscal policy or “exogenous shocks” to NGDP, then this must be a fluctuation in V (base velocity).

My responses:

1. Are you telling me that economists don’t even agree on what Y means? Not sure if that’s what you’re saying. If so, doesn’t Nick’s “by definition” start this whole discussion (even: the whole discipline of national-accounting-based and monetary economics) on a bed of quicksand?

2. Is it really standard practice to “use lowercase for real variables, and uppercase for nominal”? Seems like a great convention. Do economists adhere to this convention consistently? They don’t seem to. (If Y equals real GDP, shouldn’t it always be lowercase?) Nick uses uppercase throughout in his post, except here in his #3:

If I re-wrote the first identity in nominal terms, as PY=PC+PI+PG+PNX, it might invite the same question. Or if I re-wrote the second identity in real terms, as Y=Vm (where m is the real money stock), I could hide that question.

I presume that m = M/P. So Y = VM/P. This says rather explicitly that Y is real GDP. (So it should be lowercase, no?) So, also: is Nick a Keynesian? Sometimes, sort of…

3. Mediocre philosophical minds obviously think alike. Matthew’s (and Scott’s) MV = C + I + G + NX is exactly where I went in my first stab at this post, which I’ve discarded or at least put aside for the moment.

4. I’ve been coming to the same conclusions about NGDP and velocity. Cf. the subtitle to this post.

I’m going to add one last thought here, to thoroughly muddle the waters: Somebody could presumably argue that price can’t increase by 10% unless the utility derived from produced goods — real output — also increases by 10%. That would resolve the apparent contradiction inherent in the Y = real GDP definition. (At least as that contradiction seems to arise in my example above re: the National Account Identity.) But I can’t really conceive a very convincing empirical and/or theoretical basis for that assertion.

Cross-posted at Asymptosis.

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Guest post: Kabuki Theater Probably Won’t Shake Up NY Fed

by Kenneth Thomas

Kabuki Theater Probably Won’t Shake Up NY Fed

Via @MarkThoma, Simon Johnson reports that Treasury Secretary Tim Geithner has called (very diplomatically, of course) for JP Morgan Chase CEO to resign from his position with the New York Federal Reserve Bank in the wake of risk control failures that have already led to $3 billion in losses for the bank.. Johnson comments:

Mr. Geithner’s call is a major and perhaps unprecedented development which can go in one of two ways.

If Mr. Dimon resigns, that is a major humiliation and recognition – at the highest levels of government – that even the country’s best connected banker has overstepped his limits. This would be a major victory for democracy and a step towards reopening the debate on financial reform, including introducing more restrictions on what global megabanks can do.

Alternatively, Johnson says, if Dimon manages to stay on to the end of his term December 31, it will mean a defeat for democracy and a victory for the big banks.

Of course, there would be nothing new about this: one of the striking developments since the 2008 financial meltdown is that not a single major bank executive in the United States has gone to jail for their wrecking of the global economy. Moreover, the five largest banks in the country have seen their assets increase from $6.1 trillion in 2008 to $8.5 trillion today. By contrast, in Iceland, 200 bank officials, including the CEOs of the country’s three largest banks, are all facing criminal charges for their actions leading up to the crisis. To use Richard Fields’ terms, Iceland followed the Swedish model (make the banks take charges against profits immediately: bad for the banks, good for the economy) while the U.S. has followed the Japanese model (good for the banks, bad for the economy).

While I have no special insight into the kabuki theater of high official pronouncements, I tend to agree with Johnson’s assessment that Dimon will probably remain on the New York Fed board. I say this for no other reason than the fact that, as the NY Fed’s website points out, commercial banks who are members of the Federal Reserve System appoint 2/3 of the Board members. Three are appointed by the banks to represent themselves; Dimon is one of these. Another three are appointed by the banks ostensibly to represent the public. The banks selected the co-founder of a technology investment company, the CEO of HealthNow New York, and the CEO of Macy’s to represent “the public.” Hmm. The final three members are selected by the Fed’s Board of Governors to represent the public, but all are presidents of major institutions: Columbia University, the Metropolitan Museum of Art, and the Partnership for New York City. So, 2/3 of the Board is selected to represent the public, but I feel pretty safe in saying that all nine Board members are in the 1%.

Readers, what do you think? Will Jamie Dimon resign from the New York Fed? Take our poll and let us know.

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