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

Economists are disingenuous about Sweden’s interest rate slump


An economic slump or recession is considered a bad thing by economists. They point to Sweden and blame Sweden for raising its interest and causing a recession. “Bad Sweden, Bad Sweden”. But those economists are being short-sighted. They do not mention that Sweden is now doing much better than the rest of Europe. They have surpassed the rest of Europe. Is it possible that there was a good side to the recession? God forbid…

There is a sense that there is waste in the economy, but it is difficult to know exactly where. An economic slump tends to clean out inefficiencies in the economy and ultimately increase productivity. But which companies will be affected as inefficiencies get washed out is hard to predict.

Good economic medicine seeks to clean out the waste in a safe and measured way. The key would be to not rapidly hike the Fed rate. The key would be to tighten in a measured way. In the end, the economy will respond better… The Fed seems determined to raise the Fed rate just a little and they are receiving lots of criticism. But if the Fed wants to clean out some inefficiencies by lifting the Fed rate a little, would they just come out and say it? Probably not…

Yet look at Sweden after their apparent mistake of raising the interest rate. They are doing better than the rest… I look at the healthier growth afterward and I recognize the medicine of the slump to heal socially inefficient units in the economy.

If people think that the US economy is so fragile that a measured rise in the interest rate would trigger a big socially catastrophic recession, then economists are being too afraid of taking a good and measured medicine. It reminds me of a child who doesn’t want to take the medicine because of the taste. Yet many medicines are effective because of the bad taste. One example is bitters to improve digestion.

Economic slumps are a healthy part of the business cycle. They occur best in a measured way through policy. And realize, that economic sicknesses can develop if policy goes to extraordinary lengths to avoid a slump.

Inhaling gives you oxygen. Oxygen is good. OK… so just keep inhaling. Don’t ever exhale. Try inhaling without exhaling. It is foolish in the long run. Exhaling allows us to expel unneeded substances and create space for another healthy inhale. That is how a recession works in the business cycle.

If monetary policy acts in a measured way to control an economic slump, the economy will grow much better through time… like inhaling and exhaling.

So the next time you hear an economist point to Sweden and criticize their raising of the interest rate which caused an economic slump, remember that Sweden bounced back healthier than the rest of Europe. Think about the good medicine that a measured tightening of monetary policy can have. Realize that the economist is being short-sighted or disingenuous. Then don’t be afraid if the Fed raises the interest rate in a carefully measured way. It is good medicine. The economy will be better off in the long run.

Some day China will have to take its medicine too… They have massive social inefficiencies in their economy that keep piling up.

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TTIP Deal “Break Environmental Pledge”

According to The Guardian


… a confidential text seen by The Guardian and filed in the sustainable development chapter of negotiations earlier this week contains only vaguely phrased and non-binding commitments to environmental safeguards.

For those who think trade deals do not matter or who think Free Trade is the cat’s meow, think carefully about what is coming down the pike. Companies will be able to sue countries if environmental regulations affect profits or even reputation. The same will be likely true of health regulations.

Free Trade is never free. Yet there are enough paid trolls and paid commentators to sing TTIP’s praises in order to drown out a serious discussion.

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Failure of Globlization and the Fourth Estate

“Free Trade,” the banner of Globalization, has not only wrecked the world’s economy, it has left Western Democracy in shambles. Europe edges ever closer to deflation.  The Fed dare not increase interest rates, now poised at barely above zero.  As China’s stock market threatened collapse, China poured billions to prop it up. It’s export machine is collapsing. Not once, but twice, it recently manipulated its currency to makes its goods cheaper on the world market. What is happening? The following two graphs tell most of the story.

First, an overview of Free Trade.


Capital fled from developed countries to undeveloped countries with slave-cheap labor, countries with no environmental standards, and countries with no support for collective bargaining. Corporations, like Apple, set up shop in China and other undeveloped countries. Some, like China, manipulated its currency to make exported goods to the West even cheaper. Some, like China, gave preferential tax treatment to Western firm over indigenous firms.  Economists cheered as corporate efficiency unsurprisingly rose.  U.S. citizens became mere consumers.

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EU slams Starbucks and Fiat advanced tax rulings as state aid; Is Apple next?

The European Commission decided two of its major tax subsidy cases on Wednesday, October 21, and the rulings could not have been worse for Starbucks and Fiat (h/t Chillin’ Competition). These cases can be seen as a barometer of what is to come in the legally similar but much larger case of Apple, where potentially billions of euros could be at stake.

The gist of the three cases is that tax haven subsidiaries of each company (Starbucks in the Netherlands, Fiat in Luxembourg, and Apple in Ireland) were given advance tax rulings by each country that were so removed from economic reality as to constitute illegal subsidies (“state aid” in Euro-speak) under EU competition law. In the Commission’s decision, it was emphasized that the artificially low tax bills created by the rulings gave them an unfair competitive advantage over competitors, especially small business (“small and medium-sized enterprises” or “SMEs” in Euro-terminology).

Since the alleged subsidies were not notified to the European Commission in advance as required by EU law, the Commission has ruled that Starbucks and Fiat have to repay the illegal aid to the granting countries, with interest. The decision states that each company will owe € 20-30 million in aid repayments.

Of course, both of these cases will be appealed to the European court system, all the way to the Court of Justice of the European Union (CJEU), the highest court in the EU. Tax haven shenanigans are built into the economic structure of both Luxembourg and the Netherlands, and the two countries will do everything they can to maintain the status quo. The Apple case is much bigger, because it goes back all the way to 1991, and some estimates have put its tax savings at billions per year. If Apple loses, and I think it will, we can again be assured that the case will be appealed to the CJEU.

If the Commission makes these decisions stand up on appeal, it will dramatically change the shape of tax havens in Europe (including Switzerland, which the EU holds as being subject to the state aid rules through its free trade agreement). It won’t put them out of business, because the decisions pertain to corporate income tax rather than personal income tax, but the amount of revenue lost on the corporate tax alone is a very big deal.

Cross-posted from Middle Class Political Economist.

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A Truth about Sweden’s Recession & Raising its Interest Rates

Within an economy, there are different industries. and each industry would require a different central bank interest rate to function best. But there cannot be a different interest rate from a central bank for each and every industry.

What happened when Sweden raised its interest rate?

We hear that Sweden raised its interest rate a few years ago and their economy went into a recession. But here is Adair Turner from an interview with INET. (link) Listen to between 23:45 minutes and 26 minutes. In this space of time, he says…

“Essentially, the economy is not efficient and rational enough that we can assume that all sectors have the same concept of what the rate of return is… and therefore respond in an equal way to a rate of interest increase. We’ve seen this actually within the last few years in Sweden. 3 years ago back in 2011-2012 the Swedish central bank, Riksbank, was worried about a credit-asset price bubble getting going in Stockholm property in particular. It decided against the trend of central banks to raise its interest rate. It raised… didn’t make a blind set of difference to the credit and asset price cycle in Stockholm, but what it did do was drive the Swedish economy into a recession.”

The implication of his words is that interest rates are set low enough that even the most marginal of industries will get a break. Thus interest rates have fallen to the level of the least healthy industries, while some industries benefit greatly from low interest rates.

So these questions then arise… Does any industry struggle with low interest rates? What industry might require a zero % interest cost? And are these industries then socially optimal?

Limits on Development

Even for those industries, like high-end housing, that might laugh at low interest rates because they could still do well with much higher interest rates, there are still limits to their investment, such as demand. They can only develop their investments within the limits of the demand in the market. So interest rate costs become a non-issue. They have all the money they would need to develop their investments. So interest rates are not a limiting factor.

Read more…

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Hamlet’s Decision is Bad News for Janet Napolitano

Okay, I get Joe Biden’s extreme, unabated grief over the death of his son last May.  But there are, in my opinion, no circumstances under which the Hamlet pose, with its many, many leaks from friends, should have gone on beyond Labor Day.  There are, after all, (or should have been, anyway) some important considerations beyond his feelings and his ambition.  Such as the Democratic Party’s interest in not having to deal with what became a ridiculous spectacle of sorts.

Biden would not have won the nomination, even if he had not pronounced himself the ultimate triangulator who could get triangulation things done, as he did yesterday.  But he did.  Which was about to prompt me to notify AB readers that Biden said two years ago that Janet Napolitano should be appointed to the Supreme Court.

Seriously.  He said this.  The idea of Janet Napolitano as a Supreme Court justice would have warmed the hearts of Hispanic and African-American voters, of course, given their fondness for Sheriff Joe Arpaio and 1980s-‘90s-era tough-on-crime criminal laws and still-current police tactics and outrageous prosecutor conduct.  Because we don’t have enough current Supreme Court justices who are overt proxies for law enforcement folks who engage in outrageous misconduct, see.

Biden took one—and, to my knowledge, only one—important and gutsy step regarding civil rights in his entire career: In the spring of 2012 he publicly stated his support for same-sex marriage, forcing Obama to do the same.  But that just isn’t enough for me, or any other progressive, to have wanted him to become the Democratic nominee.  At least now we won’t have to suffer through his primary candidacy.


UPDATE: Heather Digby Parton in an article in Salon today captures perfectly the depth of Biden’s delusions as he revealed them so stupefyingly yesterday.  H/T Greg Sargent.  (Her article was written before Biden’s announcement today.)

Dismaying. Just plain dismaying.

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Yet another mindless canard re ‘Denmark’, this one offered by MIT economist Daron Acemoglu: That the U.S. was less innovative during the postwar decades, because of, y’know, those high tax rates on high incomes.

The sophisticated safety net that ensures few Danes ever experience poverty, fear hunger or lack in health care does not come cheap. The Danish economy may be the most heavily taxed in the world, with rich Danes paying over 55 percent of their total income in taxes to support generous social services.

Even if high taxes, redistribution and low inequality is appealing to some, there are reasons to be skeptical that the U.S. could ever be like Scandinavia. Beyond the fact that Denmark is small and homogeneous — so it eludes many of the social, educational and economic challenges that the vast, multi­ethnic and deeply diverse U.S. must contend with — Denmark is technologically behind the U.S. If the U.S. increased taxation to Denmark levels, it would reduce rewards for entrepreneurship, with negative consequences for growth and prosperity.

As a result, the country significantly benefits from, and in some cases relies on, the technologies American entrepreneurs create. American technologies are used by Danish consumers and built upon by Danish companies, but in Denmark, the existence of the social welfare state means far fewer rewards for similar entrepreneurship.

The situation would be very different in a world where the Danes did not have access to the inventions of Silicon Valley or the new drugs and medical technologies created by U.S. companies. Imagine if the U.S. increased taxation, reduced rewards for entrepreneurship and discouraged risk­taking: It is reasonable to expect that its entrepreneurs — in Silicon Valley, medicine, robotics and aerospace, to name a few — would become less daring and innovative. This could have negative consequences for growth and prosperity not only in the United States, but throughout the world. There is no other country that could step in as the innovation engine of the world economy.

All of this is not to say that there isn’t much the U.S. can learn from Scandinavia, especially in alleviating and preventing poverty, in creating a level playing field for its citizens, and in achieving higher rates of social mobility. Some of the lessons the U.S. could learn might make innovation more inclusive, and consequently, even further propel the American economy. But when it comes to emulating Denmark or Scandinavia wholesale, Hillary Clinton put it best: “We are not Denmark…. We are the United States of America.”

A Scandinavian U.S. Would Be a Problem for the Global Economy, MIT economist Daron Acemoglu participating in a New York Times Room for Debate exchange titled “The United States of Denmark,” today

Okay, as you can see, Professor Acemoglu did not actually say outright that the U.S. was less innovative during the postwar decades, because of, y’know, those high tax rates on high incomes.  Or for any other reason.  He doesn’t mention the three decades following WWII at all, in fact.

But someone should, so I will. It was a period of very progressive taxation, with very high marginal rates on very high (for that era) incomes and pretty high rates for just sort-of -high incomes (for that era).  It also was an era of huge innovation here in this country, in a broad spectrum of areas of engineering, medicine, and other sciences.

And it was the era in which the Internet was invented. By the federal government.  Y’know, that invention that Professor Acemoglu says the Danish economy depends on and that allows Denmark to succeed as it has.  They’re piggybacking on U.S. innovation!

There are excellent refutations of this canard by two or three participants in that discussion. Such things as that there have been key medical inventions in European countries that are mainstays of U.S. medicine.  And that Denmark in fact has a higher rate of research and innovation than the U.S. does.

But disappointingly, no one mentions the trajectories of U.S. innovation and progressive tax rates.  When was it that the first modern computers were invented?  And that Microsoft and Apple were founded?  And that the Salk and Sabin polio vaccines were invented?  What were the marginal tax rates then?

What bothers me most about this particular canard–the canards on this are endless, apparently–is that it invokes American innovation during a lengthy period of high, progressive taxation as support for a false claim that the United States owes its high level of innovation to low tax rates.  These inventions came about in the USA, see. Therefore, …. what, exactly?

Then there is the question of how Acemoglu became a chaired professor of economics at M.I.T.  Does M.I.T. get a tax break from this, or something?


UPDATE: This post was linked to on an aggregator called Nuzzel, and tweeted by “@guan”, who added “This was also the era of Bell Labs and Xerox PARC. The US was innovative *because* of high tax rates.”

Added 10/21 at 2015.  Also, I’ve corrected the typos in the post!

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The mindless canard stating as unexplained fact that it would be worse to expand the federal government by a third in order to accommodate single-payer healthcare insurance than it is to have private, for-profit health insurance companies playing this role instead

No one would ever accuse Bernie Sanders of thinking small. The senator from Vermont and Democratic presidential candidate wants to transform one of the world’s most boisterous free-market economies into an exemplar ofScandinavian-style “democratic socialism.” He wants to jail Wall Street executives and double the minimum wage. And he wants to spend taxpayer money, lots of it.

According to an estimate by The Wall Street Journal, Sanders’ spending plans would cost $18 trillion over 10 years, increasing the federal government’s size by roughly a third. He would create a single-payer health plan, make public universities free, expand Social Security, spend big on infrastructure, create universal child-care and pre-K programs, provide federal jobs for young people and bail out struggling pension plans, among other things.

To be sure, fully $15 trillion of the $18 trillion would come from Sanders’ health plan, which seems unlikely to cost that much. Bringing all Americans under the umbrella of a single-payer system would create enormous power to hold down prices.

Even so, there’s no doubt that Sanders, who’s running a surprisingly strong second to Hillary Clinton in the latest polls, is talking serious money.

— Bernie Sanders: ‘Now is the time for bold action’, USA Today editorial, yesterday

Yes, no one would ever accuse Bernie Sanders of thinking small.  And no one should ever accuse the USA Today editorial page staff of explaining why increasing the federal government’s size by roughly a third is per se a bad idea. I mean other than just saying we can’t afford it.

I give the writer of this editorial credit for saying upfront and explicitly that $15 trillion of the $18 trillion would come from Sanders’ health plan.  That’s more than Washington Post editorial writer Stephen Stromberg did the day after that WSJ report last month.*  And it’s more than the WSJ reporter did in the article itself, if I remember right.

But why exactly is it per se bad to expand the federal government significantly?  That is what Medicare and Social Security did, and the National Labor Relations Act and the Securities Exchange Act and the EPA, etc.  If you think these pieces of legislation should not have been enacted, fine.  But most people would disagree with you.

Sanders wants to replace private-industry healthcare insurance with federal, nonprofit, single-payer insurance.  Like Denmark!  And like Medicare.  I would love to see Sanders have an economist like Uwe Reinhardt or Joseph Stiglitz compute what the cost to individuals receiving Medicare would be now if there were no Medicare.  Especially since most of them are retired, so there would not be the possibility of employer-based private insurance.

What drives me crazy about this mindless but politically potent canard is that these folks don’t attempt to explain why it would be worse to expand the federal government by a third in this respect than it is to have private, for-profit health insurance companies playing this role instead.  How much more income tax revenue would the federal government receive if the money that employers now pay in insurance premiums went instead to wages and salaries?  And how much better would the economy be if that happened, and if individuals weren’t saddled with premiums and large out-of-pocket healthcare costs?

Josh Barro has an outstanding column in today’s New York Times, the theme of which is that Sanders unnecessarily complicates his candidacy and causes confusion—providing an opening to his opponents like the one Clinton took at the debate last week to imply that Sanders wants to nationalize businesses, large and small; he cited Clinton’s comment—by calling himself something he is not: a democratic socialist.  He’s a social democrat, Barro and others he quotes, say, accurately.

But the key part of Barro’s lengthy column is this:

“When you look at the policies, there’s a way to see it as Bernie has cranked up Hillary’s agenda to 11,” [Roosevelt Institute economist Mike] Konczal said. To wit: Mrs. Clinton favors preserving Social Security with some enhancements for the poorest beneficiaries, while he wants to raise taxes on the rich to expand it in ways that could add $65 per month to the average benefit. This, like most political debates, is a disagreement about how far to turn the knobs when adjusting policy; it does not seem to call for a separate ideological label. That said, Mr. Konczal did offer one difference between Mr. Sanders’s and Mrs. Clinton’s worldviews that is of kind rather than degree. This is decommodification: the idea that some goods and services are so important that they ought to be removed from the market economy altogether.  [Italics added.]

The idea behind the Affordable Care Act, and behind Mrs. Clinton’s approach to tinkering with Obamacare, is that quality health insurance should be affordable to everyone, and that people who can’t afford it should be given subsidies to buy it. For a democratic socialist, that’s not good enough; instead, health care should simply be provided to everyone without charge, removing the profit motive from health care. But even this is a matter of degrees. Mr. Sanders favors Medicare for all: a single­payer health care system, with the federal government as the sole insurer. This would remove the profit motive from health insurance but not from health care, which could continue to be provided by private doctors and hospitals, often working on a for­profit basis. Mr. Sanders is not proposing to go further, like Britain, and have doctors work directly for the government. Nor does he appear inclined to decommodify broad swathes of the economy; in other countries, even conservatives often endorse special, less-­marketized rules for health care than for other sectors.

This distinction is real, but it’s not clear to me that it merits Mr. Sanders his own ideological label.

That—the idea that some goods and services are so important that they ought to be removed from the market economy altogether—is why it is absolutely incumbent upon the USA editorial writer, Stephen Stromberg, Hillary Clinton, and anyone else who takes the position that a single-payer, Medicare-for-all healthcare insurance system is per se bad because it would be run by the federal government, to actually state why this is so.

*The editorial was, like all Post (and most newspaper) editorials, published without a byline, but Stromberg had a blog post there on the same day that was virtually identical to the editorial.  [Elementary, Watson!]

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