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

The Strongest Deal Possible?

“The president should listen to and work with his allies in Congress, starting with Nancy Pelosi, who have expressed their concerns about the impact that a weak [Trans-Pacific Partnership] agreement would have on our workers to make sure we get the best, strongest deal possible.  And if we don’t get it, there should be no deal.

— Hillary Clinton, speaking today in Des Moines, Iowa

I have to confess that I’ve been somewhat sympathetic to Clinton in her decision, until today, to avoid speaking about the TPP, mainly because she plays no role in the decisionmaking process.  Unlike Bernie Sanders and Elizabeth Warren, Clinton isn’t a member of Congress.  And she wasn’t likely to persuade any Democratic members of Congress one way or another simply by weighing in publicly on it.  And by the time the new president is sworn in in January 2017, Congress will have long earlier decided the issue.

Had she taken a public stand against it before last week’s vote, it would have been simply a gratuitously political act.

Now that that vote is over, it’s fine for her to discuss it.  But not tautologically.  Obama says the current deal is the strongest deal possible.  That is, he says that the counterparties would not agree to any of the changes and additions that the pact’s US critics (most prominently Warren, Sanders and Joseph Stiglitz) say are necessary to make the agreement a benefit rather than a detriment to the American workforce and others who would be effected (by the patent provisions that would pertain to pharmaceuticals, for example).

What does she mean when she says that Obama should listen to and work with his allies in Congress who have expressed their concerns about the impact that a weak agreement would have on our workers to make sure we get the best, strongest deal possible?  And that if we don’t get it, there should be no deal?  Does she mean that unless the pact’s terms are what Pelosi and the other congressional critics of it say is necessary, there should be no pact?

Presumably so.  The other alternative is that she means that Congress should approve the fast-track process once they’re convinced that the terms negotiated are the best possible ones that the other parties will accept, but she negates that possibility when she says, “And if we don’t get it, there should be no deal.” But then, why didn’t she just say it, outright?

She’s so consumed by her strategy of never saying anything actually specific about anything that her statements come off as some combination of a Rubik’s Cube and a Rorschach test for the listener.  I wish she’d start speaking in straightforward sentences and paragraphs—sentences and paragraphs that lead somewhere other than a cul-de-sac.

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Listen to Michigan Congressman Sander Levin Tongue – Lash Wisconsin Congressman and Chairman Paul Ryan

Michigan is pitifully gerrymandered due to state Republicans controlling the state legislature in 1990, 2000, and 2010 and controlling redistricting. Michigan sends fewer Democrats to The House than how the state votes which is 54+% Democrat in national elections. Democrat Congressman Sander Levin is one of those Congressmen. Listen to his response to Republican Congressman Paul Ryan, Chairman House Ways and Means Committee during another unscheduled committee meaning.

“So whatever the Supreme Court decides later this month,” Paul Ryan said. “I think the lesson is absolutely clear. Obamacare is just flat busted. It just doesn’t work. And no fix can change that fact.”

Sanders: “What’s busted is not ACA But your attacks on it, endless attacks.”Sander Levin said calmly and deliberately. “Never coming up with a single comprehensive alternative all these year. So you sit as armchair critics while millions of people have insurance who never had it before. Millions of kids have insurance who would not otherwise have had it. People who have pre-existing conditions no longer are cancelled or can’t even get insurance. The donut hole is gone. Millions of people in lower income categories are now insured through Medicaid, millions and millions and millions. Cost containment is beginning to work. The increase in cost net rate is going down. And so you are livid because it is getting better. That’s why you are livid. … And the states that are denying their citizens further coverage under Medicaid, are essentially telling people, well get lost when it comes to healthcare. .. And you have a governor Mr. Chairman, who is running around this country talking about the evils of healthcare when millions of people are benefiting from what happened. … Your frustration is millions and millions and millions of people are benefiting, have healthcare when they did not before.

Paul Ryan covering up the truth.

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We Believe ? ? ?

Almost one year old (July 18, 2014) this speech by Senator Elizabeth Warren. We Believe:

– “We believe that Wall Street needs stronger rules and tougher enforcement, and we’re willing to fight for it.”

– “We believe in science, and that means that we have a responsibility to protect this Earth.”

– “We believe that the Internet shouldn’t be rigged to benefit big corporations, and that means real net neutrality.”

– “We believe that no one should work full-time and still live in poverty, and that means raising the minimum wage.”

– “We believe that fast-food workers deserve a livable wage, and that means that when they take to the picket line, we are proud to fight alongside them.”

– “We believe that students are entitled to get an education without being crushed by debt.”

– “We believe that after a lifetime of work, people are entitled to retire with dignity, and that means protecting Social Security, Medicare, and pensions.”

– “We believe—I can’t believe I have to say this in 2014—we believe in equal pay for equal work.”

– “We believe that equal means equal, and that’s true in marriage, it’s true in the workplace, it’s true in all of America.”

– “We believe that immigration has made this country strong and vibrant, and that means reform.”

– “And we believe that corporations are not people, that women have a right to their bodies. We will overturn Hobby Lobby and we will fight for it. We will fight for it!”

Reference: Elizabeth Warren’s 11 Commandments of Progressivism

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Paul Krugman’s Argument is Liquidated when it’s Specious Character is Revealed

Got you to look. I am using 18th century English, the title translates into 21st century English as “Paul Krugman’s Argument is clarified when the fact that it is precise is revealed”

Krugman objects to Stephen Schwarzman’s use of the word “liquidity” which, he claims, conflates two different meanings. I think the word should be liquidated with extreme prejudice — it has at least 4 different meanings (counting neither the 18th century meaning “clarified” and the one I just invoked in an attempt at humor).

Kruman notes two

I’m pretty sure that the word “liquidity” is being used to refer to two somewhat different things. One is liquidity in the normal sense of “thick markets”, in which someone who wants to sell assets quickly can find buyers without offering fire-sale prices. The other is closer to arbitrage — the presence of investors who will buy assets that are obviously underpriced, and in so doing prevent big deviations of prices from fundamental values. These two things could be related, but aren’t the same — a market in which an individual investor can sell $10 billion in bonds without causing ripples might also be a market in which nobody will step in to buy bonds after a taper tantrum, and vice versa.

and adds

most of the evidence being presented seems to be more about the first issue than the second — bigger intraday swings and so on, which in and of themselves matter only to a handful of players.

Another one of my favorite topics. Keynes also objected to the uses of the word liquidity writing “Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity,” Against “liquidity” Keynes himself contended in vain. But Keynes meant something very different from either of the two meanings Krugman discussed. He went on to define the fetish of liquidity as “the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of “liquid” securities.” This meaning of “liquidity” isn’t market thickness nor is it deep pocketed arbitrageurs — it is ownership of a lot of liquid securities. This is the early 20th century meaning as in “liquidity preference” a phrase which is, as far as I know, used in the 21st century only by Brad DeLong.

I think there is a fourth meaning of “liquidity” and that this is a form of liquidity which is very dear to the hearts of financiers — not “the presence of investors who will buy assets that are obviously underpriced, and in so doing prevent big deviations of prices from fundamental values. ” but “the presence of investors who will buy assets that are obviously overpriced, and in so doing, make the gains from detecting obvious mispricing enormous.”

I read somewhere (no link because I forget where) that actively managed mutual funds are underperforming the S&P 500 partly because unsophisticated investors are shifting to index funds* — instead of becoming more profitable because there is less competition, stock picking is becoming less proftable because there is less competition by incompetents.

I ask why does this investor want to sell $10 billion worth of some asset ? It isn’t often because the investor suddenly needs $10 billion. I think much more often it is because the investor thinks the asset is over priced. If so, the thick market she needs is a market full of thick headed people who are willing to buy an overpriced assets.

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Rick Perry admits that deregulation of the financial services industry, and insufficient economic stimulus in the wake of economic collapse, were mistakes. Cool!

Republicans jumped on Clinton’s decision [in her speech today] to cite her ties to Obama and were trying to raise money off the speech almost as soon as it ended. In an email appeal asking for donations, former Texas Gov. Rick Perry wrote, “We want to look toward a brighter future, not backward at the failed policies of the Obama-Clinton years.”

— In 2016 kickoff, Clinton embraces potential to make history, Lisa Lerer, Associated Press, today

Yup. We must demand a return to the failed policies of George W. Bush and Ronald Reagan.  Y’know, if we want a brighter future.

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Elon Musk has received billions in subsidies

While receiving subsidies is nothing new for the Forbes 400 or even multi-hundred millionaire pikers like Mitt Romney, a recent story in the Los Angeles Times (via Good Jobs First) shows that Elon Musk (#34 in the Forbes 400) is a champion at getting subsidies for his companies. According to the Times article, Musk’s three companies, Tesla, Solar City, and SpaceX, have received a total of $4.9 billion (nominal value) in subsidies over the years. The article says that Tesla and Solar City stand out in the importance of the subsidies relative to the size of the company.

While SpaceX has received only $20 million, both Tesla and Solar City have received over $2 billion each, if you count the value of the subsidies their customers have received for buying Tesla vehicles and Solar City installations. This is more significant in the case of Solar City (about $1 billion) than for Tesla (about $321 million). Even without these sums, the companies have directly received about $3.5 billion, most notably for the new Gigafactory in Nevada and for a solar panel facility in Buffalo, New York.

Regular readers will remember that I have long argued in my books and elsewhere that these subsidies represent a transfer from average taxpayers to the much wealthier owners of the companies involved, worsening the already substantial inequality in the United States. These investment incentives have to be offset by higher taxes on others, reduced government services, or higher levels of government debt. While they are not the biggest driver of inequality, they do their part. Moreover, location subsidies reduce the country’s economic efficiency: It may well have made more economic sense to locate the battery Gigafactory as close as possible to Tesla’s assembly plant in Fremont, California.

While Musk refused to be interviewed for the Times story, he responded the next day on CNBC. Among other things, he argued that it was wrong to report a single figure for subsidies, which makes it seem like he received one big check. This is right as far as it goes. However, I think it would make more sense to give a single present value for the subsidies rather than the nominal value, which overstates the value of multi-year subsidies such as those for Tesla. Moreover, as Good Jobs First points out, it is perfectly necessary for taxpayers to know what their long-term liabilities are for multi-year subsidies in order to properly assess the impact on government finances.

Musk also defended the Tesla subsidies as merely necessary to make the project happen faster, rather than necessary to happen at all. Yet it conducted a multi-state auction in an all-too-common use of its location decision for rent-seeking. As I analyzed at the time, the deal was below average in terms of cost per job and aid intensity compared to other automobile facilities, and it is 13 times larger than Nevada’s previously largest incentive package.

Ultimately, the Musk story is far too familiar on a number of dimensions. Most importantly, it is a tale of rent-seeking and the policy/political drivers of inequality.

Cross-posted from Middle Class Political Economist.

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Democratic Arithmetic vs Comparative Advantage: TAA, TPA, TPP

In reading around on reactions to the defeat of the TAA (Trade Adjustment Authority) component of the TAA/TPA (Trade Promotion Authority) Package needed to successfully pass TPP (Trans Pacific Partnership) I get the usual incomprehension as to why Democrats can possible oppose Free Trade given the proven mathematical reality of Ricardian Comparative Advantage. And the reason is simple, perhaps too simple for those educated in the higher maths of your typical Econ curriculum, Democrats are using democratic arithmetic.

Lets start with a schematic example. Suppose we have a Free Trade deal between two countries that we confidently predict will result in growth in national income in both over time. And maybe a lot of growth. For those that believe that GDP = Good this becomes a slam dunk, I mean who can argue against America getting richer? But what if the arithmetic goes somewhat as follows:

50% of the net gain flows to the top 1%, 20% to the 2-10%, 20% to the 11-30%, 10% to the 31-50%, 0 to the 51-70%, and -10% to the 71-100%.

Is this a good deal? Well even before you discuss possible offsets, it clearly is a great deal to the top 1% and a good deal to the top 10% but the benefits get pretty attenuated when spread over the top 50% while they range from zero to a net loss among the lowest 50%. And given this distribution this is true no matter how eye popping the top line GDP growth number gets. Which raises the question: why should small d democratic majorities vote for this?

Well the answer from the other side tends to fall into three types:
One. “A richer America is a stronger America. And a stronger America is a safer America.”
Which is a reasonable answer if you have a roof over your head, and sufficient food, and available health care. Because if not your world doesn’t seem that safe at all.

Two. “Well the distribution you suggest is actually impossible. Because of economic theory that shows indubitably:
a) Free Trade, b) PROFIT! c) Invisible Hand d) does something e) somehow, f) EVERYONE WINS!. Okay maybe not LAST time, or the time before THAT. But trust us, Free Trade cannot Fail. It can only be Failed.”
Which answer is reasonable enough if you still laugh when your weird uncle asks you to “Pull the other finger!”

Three. “Voters simply are not rational, they don’t understand the simplest most truistic arguments about Comparative Advantage and insist on nattering about redistribution (as if anyone cared about that) so lets take away their vote by reapplying a property qualification for voting”.
Which answer is reasonable enough in you are Bryan Caplan of GMU. The Myth of the Rational Voter: Why Democracies Choose Bad Policies

It just seems to me that Right economic and political theory seems to hold two contradictory ideas at one time:
One maximizing ones self interest is not only rational, it is virtuous.
Two democratic majorities looking to their own interests are simply selfish.

But you can’t square that circle with pure representative democracy. (Or with Ayn Rand’s The Virtue of Selfishness) Because why NOT a calculation of interest based on that of the majority?

Which given the general commitment in the West to some form of representative democracy leads to the impasse of the post title. Damn 50 + 1.

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Efficiency wages, monopsony and labor demand

Again Krugman writes about something I know something about. This time I enthusiastically agree (yeah I know big surprise there).

he noted that, in efficiency wage models, it can be relatively easy to convince firms to raise wages. His presentation is (as usual) extremely, brief, clear, unwonkish and excellent.

Then he linked to Arindrajit Dube who notes that the same is true if there is monopsony (like monopoly but with one big agent on the demand side — in this case a firm big enough to affect the prevailing wage in its local labor market).

As usual, I stress that your time is much better spent by clicking the links and reading Krugman (and in this case Dube) than by reading on. In any case, even if you insist on reading this post, for some reason, you shourd read Krugman first.

I note that the two stories actually become the same if the local area market is very local (that is if each firm including even each McDonald’s franchise has its own “local market” of people who look for a job at that particular firm”. Quits which decrease gradually as a function of the wage can be seen as just another form of labor supply which decreases gradually. So the two models are the same. Now in the real world, the cost of a quit is mostly not the brief period when the job is vacant (pretty consistently about 1 month on average in the USA) but the cost of training a new worker. But a model of turnover costs can be made to work even without training costs so long as it takes a while to fill a vacancy. This point is barely worth making.

But with much more enthusiasm, I call on George Borjas in support of Krugman and Dube (and yes I did enjoy typing that) .

The reason is that there are two litartures with results which appear contradictory if one assumes no monopsony and no efficiency wages.
It is alleged that increases in the minimum wage have a small to tiny effect on employment. This corresponds to a very steep almost vertical demand curve for labor (similar L and very different wages — by convention labor demand is on the x axis). On the other hand, it is also alleged that immigration has a small effect on wages. This fits an almost flat demand curve for labor with very different labor demand at similar wages.

Borjas says the literatures are contradictory (because he insists on assuming perfect competition with no efficiency wage effect). But both results are consistent with some models of efficiency wages.

1) turnover depends on the wage and the local unemployment rate (and not on local employment). A higher wage causes lower turnover which can imply only a slight reduction in employment (or even an increase in employment). Immigrants arriving imply the same unemployment rate for higher employment. Employment can increase (if the no turnover labor demand curve is close to flat) provided unemployment stays high enough to keep people from quiting. The turnover model reconciles the two apparently contradictory results.

This also works in a work/shirk that is moral hazard efficiency wage model in which high wages are needed so that workers are sufficiently afraid of being fired that they actually work even if the boss isn’t always watching. The wage required to make workers actually word depends on the local unemployment rate (and not on employment) an increase in labor supply (due say to immigration) means higher employment is consistent with the same wage and sufficient fear to make workers work. Again if the no shirking problem demand for labor demand curve is almowst flat, a helicopter drop of workers (with parachutes so they can work after being dropped) has a small effect on wages.

In both cases, an increase in the minimum wage can have a small effect on employment.

With monopsony, labor demand can increase one for one with labor supply (if the firm has constant returns to scale and no market power in the goods market — that is if the no monopsony labor demand curve is flat). The wage depends on the elasticity of labor supply, not the level of labor supply so a doubling of the number of workers with each reservation wage causes employment to double.

In such models a minimum wage can actually cause higher employment.

The alleged results that the arrival immigrants has a small effect on wages and that increases in the minimum wage have a small effect on employment together suggest that efficiency wages and/or monopsony are important.

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It’s crunch time. Just a little reminder from Ross

Just a little reminder for everyone.  It’s not just his “giant sucking sound” comment.  It’s the time frame he noted, and the advantages to a business going to a foreign nation.  Well, tomorrow is the Fast Track vote and there are some dem’s who are not taking the threat of loosing their job seriously enough.

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