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

Guest post: Shake, Rattle and Roll

by Joseph P. Joyce (is a Professor of Economics at Wellesley College and the Faculty Director of the Madeleine Korbel Albright Institute for Global Affairs )

Guest post:  Shake, Rattle and Roll

The selloff last week of the currencies of many emerging market countries while stock prices also declined can be seen as the result of “known unknowns” and “unknown unknowns.” How these will play out will become evident during the rest of the year. Either set of factors would be unsettling for the emerging market countries, but the combination of the two may lead to a long period of chaotic financial conditions.

The “known unknown” is the magnitude of the increase in U.S. interest rates following the scaling down of asset purchases by the Federal Reserve and the ensuing impact on capital flows to developing economies. A recent analysis at the World Bank of the response established a baseline assumption of an increase of 50 basis points in U.S. long-term interest rates by the end of 2015 and another 50 basis point rise in 2016. The European Central Bank, the Bank of Japan and the Bank of England would also relax their quantitative easing policies. The result, according to their model, would be a slow rise in global interest rates and a gradual tightening in capital flows to developing countries of about 10%, or 0.6% of their GDP. The biggest declines would occur in portfolio flows to these countries.

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Obamacare roundup: Great enrollments for Wellpoint; “Bette from Spokane” debunked

Via Joan McCarter, we learn that Wellpoint, which runs a number of for-profit Blue Cross/Blue Shield insurance plans, reported on an investor’s conference call that it expects to add over one million new policyholders this year and that its enrollments are much better than expectations. Of 500,000 enrolled so far, fully 80% of them came to the company via the exchanges. Of that amount, 2/3 were eligible to receive subsidies for their insurance premiums.

Of course, for those of us who support single payer, giving money to private insurers is a mixed blessing. We’d be better off without them, but under our current political situation, this is the best we will be able to do for the uninsured for a while. As McCarter points out, stories like this mean that Obamacare is going to be unrepealable soon, if it isn’t already.

Meanwhile, if you could stomach listening to the first Republican response to President Obama’s State of the Union address Tuesday, you heard Rep. Cathy McMorris Rodger (R-WA) tell the plight of a woman she called “Bette in Spokane,” who supposedly had to pay “nearly $700 per month” more for her health insurance, after her insurance company canceled her old plan.

As with many other such stories, this one has collapsed under scrutiny. As the linked article shows, Bette Grenier had had a catastrophic plan canceled, and she only compared it to the price of a Gold-level policy her insurer suggested as a replacement. Not only were cheaper policies available, she told the paper she would not go on the state exchange to look for a policy, even though this would likely have saved her even more money compared to the one her insurance company offered. She told the paper she and her husband planned to go without insurance.

As Paul Krugman (who pointed me to the Spokane link) notes, there is a reason why catastrophic plans aren’t allowed: “If you’re allowed to have insurance that barely covers anything, that’s almost the same as not participating at all.” Which appears to be exactly what’s happening in this case.

Cross-posted from Middle Class Political Economist.

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The Progressive Death of the Fed Funds Rate

I started blogging last March. Since then, one of my most visited posts presented a model to show the progressive death of the Fed rate. Basically, the effective zone of the Fed rate is being pushed lower and lower as effective demand declines due to the decline in labor share.

In the following graph, I plot the Fed funds rate on the y-axis and the TFUR on the x-axis. (TFUR, total factor utilization rate = (capacity utilization * (1 – umemployment rate)).

 alarm 5a

The blue line is the actual Fed funds rate since 1988 in relation to the TFUR. You can see that the blue line has moved within a corridor. The Fed rate rises as the economy heats up from more labor and capital being utilized.

The vertical red lines represent the effective demand limit that has been shifting left over the years. The blue line has been shifting left too because it does not cross the vertical red line of the effective demand limit.

What does this mean? As the red line of the effective demand limit shifted left, the Fed funds rate was progressively pushed down the corridor into a zone of non-traction… a zone of the liquidity trap. It is the progressive death of the Fed funds rate.

You can see that the blue line rose up against the middle vertical red line before falling into the crisis of 2008. Then you can also see that the blue line has been tracking along the zero lower bound and is now reaching the lower boundary of the effective demand corridor. Yet the forward guidance of the Fed is saying that they will keep the Fed rate below that lower boundary. The Fed rate has never gone beyond that lower boundary. Why? Well, the TFUR does not go past the effective demand limit. The utilization of labor and capital will not go much beyond labor’s share of income.

If labor share keeps dropping, the Fed rate will completely die. If labor share stays where it is, the Fed rate will face low utilization of labor and capital for years. But if labor share can increase significantly, the Fed rate will resuscitate and rise back to a healthy zone.

The mechanism… a low Fed rate is designed to create more demand liquidity in the economy. But labor share has fallen 10% since the early 2000’s. A lower labor share decreases the potential of liquidity to return to the economy to where it was. So the low Fed rate is fighting a losing battle in trying to get the economy back to where it was. The relative potential of demand liquidity for consumption is just not strong enough anymore. And pushing a low rate to overcome that limit will create some hefty imbalances.

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George Will Comes Out for Single-Payer Healthcare Insurance! Cool!

WASHINGTON — Someone you probably are not familiar with has filed a suit you probably have not heard about concerning a four-word phrase you should know about. The suit could blow to smithereens something everyone has heard altogether too much about, the Patient Protection and Affordable Care Act (hereafter, ACA). …

The four words that threaten disaster for the ACA say the [federal] subsidies shall be available to persons who purchase health insurance in an exchange “established by the state.” But 34 states have chosen not to establish exchanges.

Four words in the ACA could spell its doom, George Will, Washington Post, today*

Ah.  While George Will’s readers don’t know about the lawsuit and others like it, and don’t know about the the four words at issue, my readers, here on AB, are not so in-the-dark.  The problem, of course, is that my readers are, well, not that numerous.  And George Will obviously is not among them.

To refresh your memory, faithful readers, back on Dec. 3, I posted a detailed post, prompted by a New York Times article that day by Sheryl Gay Stolberg.  Stolberg’s article was titled “A New Wave of Challenges to Health Law.” My blog post was titled “The Antidisestablishmentarianism Theory of Obamacare Illegality. (The ACA has a (dis)establishment clause!  Who knew?).”

I began my post, as I often do for the sake of efficiency (I don’t get paid to write these things. Dan???)**, with a quote from the article that discusses the issue I want to write about.  In this instance, the quote was:

A federal judge in the District of Columbia will hear oral arguments on Tuesday in one of several cases brought by states including Indiana and Oklahoma, along with business owners and individual consumers, who say that the law does not grant the Internal Revenue Service authority to provide tax credits or subsidies to people who buy insurance through the federal exchange. …

The subsidy cases, if successful, would strike at the foundation of the law. Subsidies and tax credits, which could be available to millions of low- and middle-income Americans, are central to Mr. Obama’s promise of affordable care. In drafting the law, Congress wrote that such financial help would be available to people enrolled “through an exchange established by the state” under the law.

“ ‘Through an exchange established by the state’ under the law.”  I wrote:

Hmm.  Okay, let me take a crack at this.  The law gives each state the option of running its own exchange or instead allowing the federal government to run an exchange for the state–an operation that must be done separately for each state, because each state has its own insurance companies offering different policies than other states, and subject to state insurance laws and state agency oversight.

The law doesn’t say “through an exchange run by the state” under the law; it says “through an exchange established by the state” under the law.  The states know their options.  Fourteen of them chose to establish an exchange by setting one up and running it.  The rest have chosen to establish an exchange by delegating to the federal government the job of setting up and running the exchange for the state.

The law itself, in other words, by requiring that each state choose one of two mechanisms to establish an exchange–directly or instead by delegation to the federal government–required every state to have (i.e., to establish) an exchange.  The tax credit, or subsidy, provision of the statute does not limit tax credits (subsidies) to people who live in states that choose to physically set up and run the state’s exchange itself.  It provides that benefit to people regardless of their state of residence, because by operation of law–specifically, by operation of that law–states can establish their exchanges by delegating to the federal government the physical setting up and running of the exchange.

Depends, in other words, on what the meaning of established is.  Or, more accurately, on what Congress intended the meaning of “established” to be.  And I’ve just told you what that is.  Surely, the federal courts understand the concept of contracting out a tech job.  Thirty-six states have chosen to contract out this job to the federal government.  Except, of course, that the contract was not negotiated but instead compelled by law.

Voila!  The antidisestablishmentarianism theory is disestablished.  The tax credits/subsidies clause in the ACA applies even to you, Red State denizens who qualify financially.  Congratulations.  I mean, my condolences.

I do not suggest that this is a slam-dunk.  As Will explains, the IRS, charged with enforcing the statute, has interpreted it as “consistent with,” and justified by, the “structure of” the ACA. By which, Will says, “The IRS means that without its rule, the ACA would be unworkable and that Congress could not have meant to allow this.”

Well, no, actually, what the IRS means is that in the 14 states that have established and run their own exchanges, the entirety of the law that remained after the Supreme Court struck down one part of it–more on that part below, because Will doesn’t understand the legal theory that succeeded in that part of the Supreme Court opinion; he should have phoned one of the legal eagles he mentions fondly before he bandied it about near the end of his column–is working reasonably well, thank you very much.

And that in the remaining 36 states, it’s also working fairly well now that the federal website is working fairly well.

And that if the Supreme Court does take the bait in these lawsuits, and strikes down the federal subsidies to lower- and some middle-income folks and families–who by then will be receiving those subsidies and enjoying meaningful healthcare insurance and the resulting relief from fear of economic hardship or calamity, should they need major medical care (or even just a broken ankle set)–the ruling likely will be the final nail in the federal-programs-via-federalism juggernaut so strongly supported by Republicans until Barack Obama became president.

Yes, as those links show, I’ve written extensively here about the death of federal-programs-via-federalism, courtesy of the Tea Party.  In those posts, I’ve also discussed the probable result of this for healthcare insurance: a major push for single-payer coverage, albeit not as a monopoly. This is a.k.a, “the public option.”

Will and his compadres apparently haven’t noticed that, with the exception of the Tea Party, most people who are concerned about Obamacare are not raging about “freedom!”/“liberty”!  Instead, they complain that their provider networks are too narrow or that the healthcare plan that they “liked” has been cancelled but usually are easily replaced by a plan they like better.

Or would like better if they knew of its availability.  Either because, with subsidies, it’s much less expensive, or because for a small additional cost, it’s much more comprehensive.  And because, well, it or something similar will continue to be available even after they actually make a large claim. Many people who have a pre-existing medical condition and who have feared that losing their job and therefore access to healthcare insurance at all, have some strong opinions about this, too.  Many of them agree that the issue is “freedom! liberty!”

As a liberal who would love to see a public option available to all–a system that uses its near-certain bargaining power to significantly lower healthcare costs and broaden provider networks or eliminate the very concept of it–I say to the justices, “Go for it!”  And as a Democrat, I’ll be licking my chops during the following campaign season, if they do.

Will says that some people argue that “the language limiting subsidies to state-run exchanges is a drafting error.” To which he responds: “Well.”  But he also disputes that the drafting-error claim is accurate. The words “established by the state,” were “carefully considered and express Congress’ intent.” “Congress,” he says, “made subsidies available only through state exchanges as a means of coercing states into setting up exchanges.”

Okay. Except that, well, what exactly is the hammer, the gun held to the head, in the coercion equation?  The states can establish and run their own exchanges or instead choose to allow the federal government to establish and run an exchange for the state; each state, remember, needs its own exchange, because the insurance policy options are for each state alone. Coercion? Really? The state saves money by allowing the federal government to establish and run the state’s exchange.  Our money or our life, isn’t all that coercive. “In Senate Finance Committee deliberations on the ACA, Chairman Max Baucus, D-Mont., one of the bill’s primary authors, suggested the possibility of making state-run exchanges the sole source of subsidies because only by doing so could the federal government induce state cooperation with the ACA,” he says.

I’ll take his word for it.  The problem is that there is nothing inherently problematic with the federal government attempting to induce cooperation with the ACA or any other statute, when there is no penalty to the state for refusing the inducement and failing to cooperate.  Will might want to check out how, say, federal transportation funds usually are distributed.  He doesn’t understand this, though, and the last three sentences of that paragraph run off the rails.

Baucus, he says, suggested the possibility of making state-run exchanges the sole source of subsidies because only by doing so could the federal government induce state cooperation with the ACA, because, um, that way “the law’s insurance requirements could be imposed on states without running afoul of constitutional law precedents that prevent the federal government from commandeering state governments.”


The constitutional law precedents he’s referring to are actually, first, a line of dictum in a Supreme Court opinion suggesting that there is a line, not crossed in that case, beyond which the federal government cannot go in trying to obtain a state legislature’s enactment of legislation, and, second, the section of the Supreme Court’s multipart ACA opinion issued in late June 2012. That opinion upheld all but one of the challenged sections of the ACA as constitutionally permissible use of federal fiscal power, and struck down the part of the Medicaid-expansion section that made continued federal Medicaid funds available to each state contingent upon the respective state’s agreement to expand the Medicaid program under the ACA.

The commandeering of state governments, the Court held, occurred because the Medicaid program, a program in which every state voluntarily participates and that is funded jointly by the state and the federal government, is too popular for state legislators to vote to end. Thus, coercion by the federal government, not because of the federal funds that would be provided to the states for the additional Medicaid coverage but because of the state funds, albeit only a small percentage of the costs of the expansion, that the expansion would require beginning a few years into the expansion program.

The success of this argument dismayed scads of legal scholars and other followers of the litigation. But the theory requires something resembling coercion of state legislators.  A huge part of modern conservative-legal-movement constitutional federalism claims do flip the Constitution’s Supremacy clause upside-down. But, really. No one, not even Paul Clement, at least to my knowledge, claims that the absence of a state veto over legitimate federal legislation constitutes the commandeering of state governments by the federal government, and therefore states must approve federal legislation. The federal government is entitled to use its constitutionally “enumerated” spending power to provide subsidies, in the form of tax credits or in some other form, toward the purchase of private healthcare insurance.  Will’s claim to the contrary is ridiculous.

Will says, accurately, that passage of the ACA required the vote of every Democratic senator. He also says that one senator, Ben Nelson of Nebraska, “admirably opposed a federal exchange lest this become a steppingstone toward a single-payer system.”

Nelson, as a longtime lawmaker, probably is aware of the law of unintended consequences.  Will, by contrast, has never been a lawmaker.


*Link is to a non-pay-wall republication titled slightly differently.

**As we Bears know, Dan Crawford has a sense of humor.  Or did have one.

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Republican State of Disunion: Taxes Edition

The Republican response to the President’s State of the Union message was delivered by Washington State Rep. Cathy McMorris Rodgers.  It was personal, platitude-ridden, overtly religious, twee, and devoid of policy content or anything else of relevant substance – other than a naked assertion that BHO’s policies are making life harder in myriad unspecified ways. In other words, it was the most you could expect from an intellectually bankrupt party whose only agenda item is to make the President fail.

To be fair, she did offer one concrete recommendation: to lower taxes.  The concept that lowering taxes would be beneficial at this point is one of those zombie ideas that not only won’t die, but continues to eat peoples’ brains.  For example, in a recent AB comment stream, this idea was put forth: “Substantial tax cuts worked under Kennedy, Reagan, and Bush. Given the much higher level of household debt, a bold tax cut was needed more than ever.”

As I’ve demonstrated before, and shortly will again with actual facts and data, there is no reason to believe that lowering taxes improves the economy.    But first, let’s remember two important details.  First, over 45% of Americans don’t pay any federal income tax.  The Wall Street Journal calls them “Lucky Duckies.”  Imagine the great good fortune of making so little money that you don’t qualify to be taxed on your earnings.  Second, as Bruce Bartlett pointed out 4 years ago, “tax filers with adjusted gross incomes between $40,000 and $50,000 have an average federal income tax burden of just 1.7%. Those with adjusted gross incomes between $50,000 and $75,000 have an average burden of 4.2%.

So the opportunity to have tax cuts do much to promote real economic growth is somewhere between slim and nonexistent.

Let’s look at the actual information we have on tax rates and Real GDP growth.*  Graph 1 shows the top marginal rate in blue and the capital gains rate in green from 1950 through 2011.  Also included in brown [right scale] is the YoY percent change in RGDP [annual data] and a linear RGDP growth trend line.  The major trend in each of these phenomena slants down over time.

Graph 1 – Tax Rates and GDP Growth since 1950

Graph 2 is a scatterplot of RGDP growth vs top marginal tax rate, same annual data as in graph 1.

 Graph 2 – Scatterplot of RGDP Growth vs. Top Marginal Tax Rate

The points are color-coded Red for Republican administrations, and blue for Democratic administrations.  Again, a trend line is included, showing a positive slope.  I find it interesting that the space below the trend line is dominated by red dots.  You might not.  The data arranges itself  in columns because the tax rates tend to remain constant for several years at a time.  There is a great deal of scatter since many things besides the tax rate influence the economy.  The simultaneous general abandonment of a Keynesian approach over the period is notable in this regard.

It might be a bit simplistic to think that a current tax rate influences GDP growth in the immediate year, so I took some long averages and redid the scatterplot.   Graph 3 is a plot of the 8-year averages of both top marginal tax rate and RGDP growth.  This has the additional advantage knocking down the data columns.

Graph 3 – Scatterplot of RGDP Growth vs. Top Rate, 8-Yr Avgs.

The 8th year of each administration that lasted that long is indicated with a red dot for Republican and a bright blue dot for Democrat.  Make of it what you will.  The general trend over time is from the top right to the lower left of the graph, and the highlighted dots appear in strict right to left chronological order, from Ike at the right though Kennedy-Johnson, Nixon-Ford, Reagan and Clinton to G. W. Bush at the left. A similar graph of 13-year averages tells the same story, but with all of the the dots landing closer to the trend line.

It does appear from graph 3 that lowering the top rate from 91% to 70% might have been associated with higher RGDP growth.  But, note from graph 2 that the spread of RGDP values at 91% is far greater, and that the highest individual RGDP values are at the higher tax rates.  The 50’s, when most of the 91% values occurred, were characterized by a series of economic shocks and recessions as the U.S. returned to peace time conditions and absorbed several million WW II veterans into the work force.

Graph 4 is a close-up view of the 8-Yr average graph starting with the Reagan administration.

Graph 4 –  RGDP Growth vs. Top Rate, 8-Yr Avgs.from Reagan on

The eight years of the Reagan administration are indicated with red dots, GHW Bush in orange, Clinton in bright blue, and GW Bush in purple.  The later is most notable for making the 8 year average of RGDP growth dive off a cliff.  And before you get too excited about the transient RGDP increase in the late Reagan years, remember he also ran deficits that dwarfed anything seen up to that time.

The record of the Clinton years not withstanding, I’m not going to get into a post-hoc discussion of higher taxes causing higher growth – though the data up to at least the 70% level is consistent with that assertion.  Correlation is not causation.  On the other hand, the absence of correlation absolutely refutes causation. What one may say with absolute certainty is that in the post WW II United States, tax cuts have never led to a sustainable increase in RGDP growth.  The lone possible exception is the cut in the 60’s from 91% to 70%.  It’s plausible that cutting from an extremely high tax rate might be beneficial, but, due to the extreme volatility of the early post WW II period, the effect in that case is not at all clear.

So if anyone tries to tell you that cutting taxes in the current set of conditions will stimulate growth, feel free to show them this post.


* Top marginal tax rates from Citizens for Tax Justice.

Capital Gains Tax rates from the Tax Policy Center.

RGDP data from FRED




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The Republicans’ Winning Rallying Cry: Bring back the G.W. Bush policies! Yeah, THAT’s the ticket to prosperity for all!

The ticket to the middle class is not higher taxes on the very businesses that must create the jobs… Economic growth will come when we lower taxes for everyone, especially people who own businesses and create jobs.

— Rand Paul, last night

Absolutely.  The G.W. Bush presidency was terrific for economic growth!  It wasn’t a lack of financial-industry regulation; mortgage-backed-securities derivatives and a consequent real estate bubble; almost no wage increases for anyone other than Fortune 500 CEOs, Silicon Valley tech people, and hedge-fund folks; and a mass collapse of manufacturing, that caused the 2008 financial collapse and Great Recession.  Uh-uh.  It was the Dodd-Frank Act. And the return of higher taxes on some of the very wealthy.  And the constant threat of an end to the carried-interest tax machination for hedge fund managers and private equity types.  And of course Obamacare.  Those were what caused wage/salary stagnation for almost everyone other than Fortune 500 CEOs, Silicon Valley tech people, and hedge-fund folks.  And what caused the mass collapse of manufacturing during the Bush presidency.  And caused the 2008 financial collapse and Great Recession.  All of it retroactively.

Emphasizing the importance of a small government approach, he said wryly, “It’s not that the government is inherently stupid — although that’s debatable — it’s that the government” is on a different page than individual citizens when it comes to money.

— Katie Glueck, Politico, summarizing another Paul point from the same interview

Definitely.  Most individual citizens who don’t offshore their income would prefer that those such as Mitt and Ann Romney, who do, be required to pay U.S. income taxes on the income they make in the U.S.  The House and Senate Republicans–who I believe are part of the government–on the other hand, have other priorities when it comes to that money.  Like allowing them to remain in offshore accounts as income from shell corporations, untaxed.

[Sen. Mike] Lee highlighted educational and economic inequality, but argued that government is a root cause of growing disparities.

–Glueck, in that Politico article

Yep.  Right, again.  See the above paragraphs.  These folks are on a roll.*

[Lee] also included issues like abortion, same-sex marriage and National Security Agency surveillance as examples of big-government policies that lead to “real inequality.”

— Glueck

Well, if the National Security Agency is collecting my cellphone and email info but not Mitt Romney’s, the Koch brothers’, Jamie Dimon’s, or Tom Perkins’s, then Lee sure has a point.  And since I’m assuming that he’s right about that, because Tea Partiers are notably meticulous about accuracy in the facts they cite, I’m now even angrier than I was about the NSA stuff.  Is there absolutely nothing that can’t be bought in this country if you’re a zillionaire?  Even exemption from NSA surveillance?

I’m just not quite sure, though, why Lee chose as another example of flagrant, concerted, government-precipitated inequality same-sex marriage rather than, say, access to Supreme Court review of an issue that glaringly needs Supreme Court attention but doesn’t receive it despite desperate requests, year after year after year after year, for decades, until it is, say, Sprint or ExxonMobil rather than ordinary-person-who-cannot-afford-to-retain-John-Roberts’-old-law-firm that is requesting the review.  I guess it’s that same-sex couples are notoriously privileged in our society.  Unlike the Koch brothers.  And really, it’s not fair.

Well, maybe not, after all, unlike the Koch brothers and others like them, who Lee, to his credit, does seem to recognize have insidious political influence.  Glueck writes:

“This inequality crisis presents itself in three principal forms,” Lee (R-Utah) said. “Immobility among the poor, who are being trapped in poverty by big-government programs; insecurity in the middle class, where families are struggling just to get ahead, and they can’t seem to get ahead; and cronyist privilege at the top, where political and economic insiders twist the immense power of the federal government to profit at the expense of everyone else.”

And cronyist privilege at the top, where political and economic insiders twist the immense power of the federal government to profit at the expense of everyone else.  One of the three branches of the federal government is the judicial branch.  Which indeed has immense power and which at its highest level uses its immense power, aggressively and regularly these days, to favor political and economic insiders, in ways mostly not known to most of the public.  And in ways that are.

*Sentence originally said “Lee’s on a roll.”  Corrected 1/30

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The Myth of Maximizing Shareholder Value… INET interview with William Lazonick

Passing along a great video from INET with its interview of William Lazonick. He talks about the ideology changes through the 80’s, stock buy-backs, labor becoming a commodity and lack of real investment for the future.

Yet, he mentions another very important thing… There is an ideology that only shareholders take risk, so therefore they should receive the profits. Yet, even workers have risk by taking an initiative to be creative. As well, regular taxpayers pay taxes as an “investment” with an implicit risk. Taxpayers are then due a return from increased productivity partly due to taxes. Then when the government invests taxes in technology and infrastructure, companies benefit. But regular taxpayers should receive a return on their risk through higher wages. Companies used to understand this Lazonick says, but then through the 80’s… the ideology changed.


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Going past what is sustainable… Another market failure

There are quite a few shifts happening in the global and domestic economy. I have been observing for the past week. So many people are getting confused. Here is a list of concerns…

  1. China is slowing down.
  2. Some emerging markets are facing capital outflows and are tempted to raise their central bank interest rates. Argentina is all over the news now, but we saw in early December here on Angry Bear that there was trouble brewing.
  3. Inflation exists in emerging markets leading to more temptation to raise CB interest rates.
  4. US stocks have sent a psychological message that their is serious concern for further advancement in the economy. I say serious because the “correction” of last week was more than a correction. Barry Ritholtz called it a 90/90 day, when more than 90% of the volume and 90% of the stocks are down.
  5. There are calls for more easing by the Fed. Case in point is this article by David Llewellyn-Smith called Will China stop Taper? There is concern that the economic momentum of the last couple quarters will not continue.
  6. On the other hand, there is pressure building in the US to raise the Fed rate as signs of economic growth appear. But inflation remains muted as rumors spread of its rise.

This is a character defining moment in capitalism, when the majority are not aware that the end of a business cycle is forming. There is asymmetric information, if you will. A few understand it. The majority do not. So what should be a time of seeking a sustainable level of output to establish a stable base for future growth to benefit society, will turn out to be an increasingly unstable game of seeking non-existent profits and protecting self-interests.

Some may simply point to inefficient investments in China as bringing down the economy. Yet China is up against our own effective demand limit, because they rely heavily on our consumption. They saw the writing on the wall. They saw persistently limited demand in the US. They knew they had to start raising wages there. and they have been doing that. But it won’t be enough to keep their over-production from slowing down. Their household consumption as a percentage of GDP is still decreasing.

The low Fed interest rate has been an illusion tempting people to take advantage of all the spare capacity out there. Yet, the spare capacity itself is constrained considering weak effective demand. So people are led like cattle beyond what should be sustainable. The Fed’s forward guidance is producing false delusions of what the economy is capable of in a sustainable way.

Economists seem to live in a world believing that their ideas are complete. Although some have recently mentioned that a revolution in economic thought must happen. It is true. This time IS different. An unnoticed factor in the past is making an appearance… Effective Demand. A poorly understood concept from Keynes. Effective demand is well below full employment for the first time in a long time. The result is that we blindly keep walking past a sustainable state that has higher marginal social benefits than where we are headed.

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