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Too big to fail

Reader rjs points us to:

Everyone’s Missing the Bigger Picture in the Reinhart-Rogoff Debate

But whether you believe that the errors in the RR study are fatal or minor, there is a bigger picture that everyone is ignoring. Initially, RR never pushed an austerity-only prescription. As they wrote yesterday: The only way to break this feedback loop is to have dramatic write-downs of debt. Early on in the financial crisis, in a February 2009 Op-Ed, we concluded that “authorities should be prepared to allow financial institutions to be restructured through accelerated bankruptcy, if necessary placing them under temporary receivership.” Significant debt restructurings and write-downs have always been at the core of our proposal for the periphery European Union countries, where it seems to us unlikely that a mix of structural reform and austerity will work. Indeed, the nation’s top economists have said that breaking up the big banks and forcing bondholders to write down debt are essential prerequisites to an economic recovery.


Additionally, economist Steve Keen has shown that “a sustainable level of bank profits appears to be about 1% of GDP”, and that higher bank profits leads to a ponzi economy and a depression. Unless we shrink the financial sector, we will continue to have economic instability.

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Seniors and chained cpi

by Linda Beale

Robert Reich: Chained CPI Makes No Sense For Seniors

With, Robert Reich has produced a new video on the proposed change to Social Security that would REDUCE BENEFITS for seniors and wreak the most havoc on the most vulnerable.  As he notes in the video, the proposed change–which the Obama Administration has supported, presumably as a way to win favor with the radical right in the GOP that wants to significantly reduce Social Security and Medicare benefits–isn’t necessary since Social Security isn’t hurting for cash, won’t be fair to elderly recipients who already face increased medical costs and decreased income to pay for them, and won’t do a thing about the deficit (which is the wrong focus, anyway).


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Tax increases

Joseph Rosenberg of Tax Policy Center notes that the chained cpi changes taxes for ppeople as well:

Obama Budget Plan Results In ‘Back Door’ Tax Increase For Middle-Class Households: Analysis:

For those looking to put the woes of Tax Day behind them, we have some bad news: It’s probably only going to get worse. President Obama’s budget proposal, released earlier this month, includes a provision that would steadily boost taxes for middle-class households over the next 10 years, according to an analysis from the nonpartisan Tax Policy Center….Adjustments in income tax brackets are currently tied to the headline inflation measure. By tying the definition of income tax brackets to a different measure of inflation, called the chained consumer price index, Obama’s budget creates a “back door” tax increase, Joseph Rosenberg, a research associate at the Tax Policy Center, told The Huffington Post. With Obama’s budget change, taxpayers would move into higher income tax brackets and face higher tax rates more quickly than they would have before, Rosenberg said. Since growth in real wages tends to outpace inflation, Americans will have to pay more in taxes before their money is worth more.

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Michael Ash and Bob Pollin

Robert Walmann and Kenneth Thomas have traded e=mails with Michael Ash. Michael Ash and Bob Pollin, two economists at PERI, respond to Carmen Reinhart and Kenneth Rogoff in the New York Times:

THE debate over government debt and its relationship to economic growth is at the forefront of policy debates across the industrialized world. The role of the economics profession in shaping the debate has always come under scrutiny.

In particular, attention has focused on the findings of the Harvard economists Carmen M. Reinhart and Kenneth S. Rogoff, whose 2009 book, “This Time Is Different: Eight Centuries of Financial Folly,” received acclaim for its use of hard-to-find historical data to draw conclusions about the origins and nature of financial crises and how long it takes to recover from them.

Ms. Reinhart and Mr. Rogoff have published several other papers, including a 2010 academic article, “Growth in a Time of Debt.” It found that economic growth was notably lower when a country’s gross public debt equaled or exceeded 90 percent of its gross domestic product.

Earlier this month, we posted a working paper, co-written with Thomas Herndon, finding fault with this conclusion. We identified a spreadsheet coding error — which Ms. Reinhart and Mr. Rogoff promptly acknowledged — that affected their calculations of growth rates for big economies since World War II. We also asserted that the two of them erred by omitting some data and improperly weighting other statistics. In an Op-Ed essay and appendix last week, Ms. Reinhart and Mr. Rogoff denied those accusations.

They referred to this debate as an “academic kerfuffle,” but we believe the debate has been constructive, because it has brought greater clarity over the ideas shaping austerity policies in both the United States and Europe

The entire piece can be read here

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Baucus Will Not Run in 2014 (yay!)

by Linda Beale

Baucus Will Not Run in 2014 (yay!)

Max Baucus announced to his fellow Senators today that he will not seek re-election to the Senate in 2014.  He has been the top Democrat on the Finance Committee since 2001.  See Senate Finance Chairman Max Baucus Won’t Run Again in 2014, (Apr. 23, 2013).

As someone who thinks that Baucus has been a hindrance to progressive reform of the tax code and financial regulation, I must admit that I do not find his retirement a loss.  His chairmanship of the Finance Committee has been marked by a failure to understand the most important issues related to federal income and estate taxation and by adoption of positions that are too favorable to Big Money and Big Business (especially Big Banks).  He has been tone-deaf, in other words, to the class warfare waged by the right against the middle class and the resulting growth in inequality in the country that has been worsened by the current tax provisions that support redistribution upwards to the very wealthiest owners of financial assets and businesses.  In particular, he has failed to use his position to push for reasonable reform of the capital gains preference and the wealth-favoring versions of the estate tax passed by the Bush administration.  He has refused to consider a reasonable financial transactions tax. In fact, Baucus was too willing to go along with the initial passage of the Bush tax agenda in 2001-2004, and he did nothing to ensure that the Bush tax cuts would fade into oblivion on the sunset date.  In fact, he worked to make permanent almost all the Bush tax cuts and supported the corporate-friendly “extension” of the broad menu of corporate tax cut provisions (including a retroactive extension of the R&D credit, which cannot possibly serve the purpose it is claimed to serve when enacted retroactively).  The tradeoff provided only token items on the progressive menu.

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GW is a Smart Man

by Mike Kimel

GW is a Smart Man

A few days ago, Keith Hennessey, who worked in GW Bush’s administration, wrote that the former president is a very smart man.

Now, a smart person doesn’t have to be smart at everything. There are plenty of examples of very smart people doing very stupid things, particularly outside their field. However, since living creatures don’t like negative outcomes, smart people, people capable of reasoning out the consequences of their actions, will tend to minimize the number of things they do that have negative outcomes. Sure, sometimes choices are limited, as many circumstances might remain outside a person’s control.

But GW was President of the United States. For much of his term, he had a supportive Congress behind him. For his entire term, he had a supportive Supreme Court behind him. And he had a very compliant Federal Reserve at his side. By definition, he was the most powerful person in the world, and he had very few constraints on his actions.

Which raises the question… why were outcomes so negative during the Bush administration? One doesn’t have to be a political supporter of say, Ronald Reagan or Bill Clinton to point to notable successes that occurred in those administrations. But I’m having a hard time coming up with nontrivial things that went as well or better than the GW administration expected or promised.

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Yowza. Now Even AEI is Dissing Austerity.

Fiscal austerity–or deficit cutting–is the subject of much current debate. As Europe proves, severe austerity can slow growth or lead to recession.

Despite periodic slowdowns, the US economy is on a sustainable fiscal path. The deficit is projected to drop below 2.5 percent of GDP by 2017, below its 30-year average, helped partially by the sequestration budget cuts.

Instead of pursuing short-term fiscal reform, as suggested in the president’s recently released budget, Congress should focus on working toward long-term tax and entitlement reform.

via Austerity undone – Economics – AEI.

Cross-posted at Asymptosis.

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“Yes, the government must pay its bills in the long run.” (Every few centuries?) Questions for Krugman.

I’d like to push back on Paul Krugman a bit, on this bit in particular:

Yes, the government must pay its bills in the long run

You hear this from him a lot. And I want to ask him:

Paul, are you letting yourself be sucked into the very syndrome that you so bemoan and berate? Are you saying this because you feel the need to cast yourself as being sensible, responsible, moderate, and somewhat centrist — in short, as a Very Serious Person?

I ask because over four centuries and two centuries respectively (six hundred years combined), the U.K. and the U.S. governments have paid off their debts exactly once: the U.S. in 1836.

This happy event was followed, in 1837, by one of the most catastrophic depressions in either country’s centuries-long history. Likewise, the one other time that the U.S. got close to paying off its debt (the U.K. never has), in 1893, a disastrous depression followed immediately thereon.

Every depression in U.S. history has been preceded by a major decline in nominal Federal debt. It’s not a sufficient condition for, or reliable predictor of, depression (many declines have not been followed by depressions), but it does seem to be a necessary condition.

So we haven’t had to pay off our debt, and the one time we did (plus one time we got close), we were not happy with what ensued. From that history, how can you conclude that, now, “the government must pay its bills in the long run”?

To quote Chris Cook (HT Izabella Kaminska; emphasis mine), the national debt:

is a national equity

At least two-thirds … came into existence as mortgage loans, and are therefore backed by claims over the productive value of the US land and buildings which they fund. Much of the rest consists of claims over the value of US assets which fund the productive capacity of US corporations. The remainder – which provides the credit necessary to finance the circulation of goods and services in the US – is based upon the magnificent productive capacity of the US people.

Only by liquidating US Incorporated could this National Equity [read: Debt] ever be redeemed.

Such a liquidation, of course, would involve liquidating our overwhelmingly largest real asset: the ability of the American people to work. (Something your ideological opponents seem intent on doing.)

Of course you might well mean that we can’t increase deficits faster than GDP growth forever. But in today’s monetary world you have to at least question even that. Since 1971, when the U.S. stopped promising to redeem its dollar for anything besides…dollars (perhaps in some other “dollar” form, like Fed reserves), that proposition has become at least questionable. Dollars really might be like points issued by a bowling alley, and we may be able to issue a lot of them before we see problems with inflation.

I don’t think we really know; we don’t have any comparable situation to look back on (except maybe Japan, and that’s a glass, darkly). For a decade or so after the ’71 sea change, monetary authorities and markets flailed to adjust their reaction functions to the brave new world. Then those interacting functions settled down and we saw twenty years of steady inflation and steadily-declining interest rates. That may have been the inevitable emergent path for the world’s dominant economy and currency issuer, resulting inexorably from the game rules put into place in ’71/’73.

The place we are now — where Japan landed two or three decades earlier — may be the inevitable (and perhaps enduring) result.

Yes, rising globalization and the political rise of neoliberal Reaganomics may have contributed, but it seems possible that even absent those trends, we would have ended up in this place, perhaps sooner perhaps later.

So now, having arrived at this point, reaction functions are getting rejiggered again, and in a big way. (The institution of IOR was a big change, for both the Fed’s and the markets’ reaction functions.) One key element of those reaction functions is the belief that “we can’t keep running deficits forever.” But at least some parts of the market are acting as if we (and certainly Japan) can. And they may very well be right.

All of which is to say, think again. Think deeply. I’m not sure you’re thinking in your usual clear-eyed manner about a belief that may not be true. At least, given the new rules of the game, we might be a very long way — decades? centuries? — from a point where large government deficits or debt might pose any danger to our economy.

All my tentative language above should make clear that I’m not at all certain of this. I’d sure like to hear what you think.

Cross-posted at Asymptosis.


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Fixing Sequestration (for the rich only)

by Linda Beale
Fixing Sequestration (for the rich only)

Once again, Congress has demonstrated that it notices mostly what affects rich people and can’t quite identify with ordinary Americans.  And that it will not pass either spending laws or tax laws (which include a wealth of spending laws through the tax expenditure mechanism) that equitably deal with the misallocation of resources between the wealthy few and the rest of us.  Tax policies operate for the high and mighty:  once again, inequality is the real characteristic that matters.

The sequestration–a response to the GOP-led desire for austerity, shrinking government, and otherwise ensuring that rich people and major businesses don’t have to pay much in taxes–was ridiculous from the outset because it cut programs across the board, at a time of significant unemployment, without prioritizing programs that support the safety net or ensure education (like Head Start) or protect critical infrastructure or other needs.  The only reasons it made some sense was that (1) it would finally lead to some cuts in our engorged military spending and (2) it should have permitted Congress to develop enough spine to refuse to make the Bush tax cuts permanent for anybody but those ordinary Americans making $100,000 or less.

But we all know that latter wise move didn’t happen.  Congress made the ridiculous-when-they-were-enacted and more-ridiculous-still-when-they-were-made-permanent Bush tax cuts permanent for the vast majority of Americans, leaving only a smattering of wealthy Americans subject to imperceptibly higher taxes.  Businesses got another extension of the equally wasteful Bush tax cuts enacted in the Bush Administration’s giveaway mode–the R&D credit (often enacted retroactively like this extension was, whose ostensible purpose is to incentivize US-based research, which a retroactive credit by definition cannot do), the active financing exception for the Banksters that got us into the Great Recession to start with, and all the rest.


So we ended up with across-the-board cuts that could not reasonably be expected to work out well for the economy–especially when Keynesian theory (the only kind of economic theory that hasn’t been roundly disproven by actual facts) suggested that we should be continuing to increase government spending to make up for the gaps in the economy from MNE hoarding of their cash offshore and consumers drawing back because of the steady decline of their spending power from job cuts and real salary decreases.  IN fact, these damaging cuts were never actually expected to go into effect–Dems hoped (rather naively) that the sequester would force Republicans to support more reasonable tax increases.  Repubs hoped (rather reasonably, in retrospect) that they could blame any problems on the Dems and claim credit for protecting ordinary Americans by not increasing taxes, and of course they’ve been claiming for the last months that any complaints about the problematic impact of the sequestration cuts are “exaggerated,” and “they have relished the success of forcing visible spending cuts on a Democratic administration.”    Alex Pareene, Senate fixes the (part of the) sequesteration (that affects rich people)!, (Apr. 26, 2013).

Few in Congress were ever willing to stop the gravy trains for the rich–carried interest for private equity, publicly traded “master limited partnerships” for oil and gas pipeline companies that are excepted from the ordinary treatment of publicly traded partnerships conducting businesses as corporations subject to an entity level tax; so many tax expenditures that favor Big Business that very few companies actually pay any tax on their huge profits; the assignment of income benefit of a stuck in the last century transfer pricing tax system that allows some of today’s biggest companies (Google, Microsoft, etc.) to transfer their indispensable intangible properties offshore to avoid US taxation of profits attributable to the support provided by this country, while nonetheless retaining 100% ownership and control; and of course the biggest boondoggle of them all, the preferential rate for capital gains coupled with an absurdly lenient estate tax, that together allow the rich to live richly during their lifetimes and then pass their estates with negligible tax cost and substantial tax benefits (from the “step up in basis at death” that, for example, allows heirs of master limited partnership interests to restart the perpetual tax-free profits machine).

But hark, what is this?  The reductions caused by the sequester affected the ease with which rich people can get on a plane and fly to their business and vacation destinations!  Such suffering.  So incomprehensible how we could allow it.  The Senate swiftly moves into action–this was something they hadn’t anticipated–that the sequester could actually bother some of their own class.  Suddenly, They acted.  In just a short time last night, with unanimous consent, the Senate voted to “let the FAA transfer some money from the Transportation Department to pay air traffic controllers.”  See Alex Pareene, Senate fixes the (part of the) sequesteration (that affects rich people)!, (Apr. 26, 2013).  The House was expected to act today.

At the beginning of the sequester, most of the Republican politicians who had pressed for even much larger cuts, insisting there was much dross in the federal government, pooh-poohed any complaints that the sequester was leading to real pain for ordinary Americans.  That story changes only when the rich feel any squeeze at all.  As Pareene implies in his story, the media is too much of the time an unquestioning go-along in this conning of the American people:

the story of Congress hurriedly making sure the well-off minority of Americans who fly regularly don’t get briefly inconvenienced — while ignoring the costs of brutal cuts on programs for low-income Americans facing housing or hunger crises — is treated as a wonderful and encouraging display of bipartisanship.

cross posted with ataxingmatter111

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Yves Smith will be on Harry Shearer’s Le Show today (Sunday)

Yves Smith will be on Harry Shearer’s Le Show today (Sunday), originating at 1 pm ET live on many public radio stations, and aired on many others throughout the day. Good streams are available all day, each hour, at The topic is the Independent Foreclosure Review fiasco.

(check local listings here…)

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