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Barro’s Misstated Case for Federal Reserve Independence

Barro’s Misstated Case for Federal Reserve Independence

I guess I should applaud Robert Barro for standing up for the independence of the Federal Reserve and hoping it can resist political pressure to lower interest rates too much. But there are two aspects of his case that strike me as silly to say the least starting with his opening sentence:

In the early 1980s, the chairman of the US Federal Reserve, Paul Volcker, was able to choke off runaway inflation because he was afforded the autonomy necessary to implement steep interest-rate hikes.

This statement glosses over the fact that we had a macroeconomic mess in 1982. This mess was in part to blame on an ill advised fiscal stimulus initiated the moment St. Reagan took office. But clearly the Federal Reserve overreacted. To be fair – Barro continues his magical history tour in a reasonable way until we get this absurdity:

one could infer the normal rate from the average federal funds rate over time. Between January 1986 and August 2008, it was 4.9%, and the average inflation rate was 2.5% (based on the deflator for personal consumption expenditure), meaning that the average real rate was 2.4%. The long-term normal real rate can be regarded as an emergent property of the real economy. From an investment and saving standpoint, economic equilibrium balances the benefit from a low safe real interest rate (which provides low-cost credit for investors) against the benefit from a high real rate (which implies higher returns for savers). In the Great Recession, the federal funds rate dropped precipitously, reaching essentially zero by the end of 2008. That was appropriate, owing to the depth of the crisis. But what few expected was that the federal funds rate would remain close to zero for so long, through the end of then-Fed Chair Ben Bernanke’s term in January 2014 and beyond.

While it is nice that one conservative economist has finally decided that the low interest rates policies during the Great Recession were appropriate and not the harbinger of hyperinflation, Barro seems to be saying the long-run real interest rate has been the same for the last 23 years. There has been a lot of research to suggest otherwise.

Rather than cite all of this research, let’s just check out the interest rate on the 10-Year Treasury Inflation-Indexed Security, which used to hover around 2 percent before the Great Recession but is now less than 0.3 percent. I agree with Barro that the Federal Reserve should resist Donald Trump’s push for significantly lower interest rates at this time but I also hope that the Federal Reserve resists the temptation to increase real interest rates as much as Barro’s devotion to some 23 year average would suggest.

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Mankiw Misrepresents a Story on Senator Sanders Campaign Worker Negotiations

Mankiw Misrepresents a Story on Senator Sanders Campaign Worker Negotiations

Greg Mankiw reads this story and writes:

Staffers in the Sanders campaign, who are working on salary, complain that they are paid less than the $15 per hour that Senator Sanders advocates for the minimum wage. So Sanders raises their hourly wage. Does that increase their income? No, because he raised the hourly wage by cutting the number of hours they work! Of course, if a President Sanders raised the federal minimum wage, I am sure he would be confident that the change would not have any adverse employment effects. Downward-sloping demand curves may describe socialist political campaigns, but back in the actual capitalist economy, the laws of supply and demand work completely differently.

OK – he started his post by saying it is a wonderful story, which is true. But as I read the story, I saw a very different tale than the one Mankiw suggested:

Field organizers say they make a salary of $36,000 annually but work 60 hours per week, which is an average of $13 per hour … Sanders’ 2020 campaign was the first to unionize in March 2019. The union then made an agreement with the campaign that field workers were to be paid $36,000 annually. The contract, which began on May 2, also provides platinum level health care, paid vacation, sick leave and other benefits. Shakir also told Newsweek that leadership at the campaign previously offered a pay increase for field organizers, but that the offer was rejected in a formal vote. According to the Post, Shakir offered organizer pay to be raised to $42,000 annually and extend the workweek to six days. The offer was reportedly rejected because it would have elevated staff to a pay level in which they’d be responsible to pay more of their own health care costs.

Let’s note what Mankiw did not. The negotiations also involved what appears to be a decent level of fringe benefits in addition to a $36,000 per year salary. These workers are apparently working 60 hours a week, which if they did so for 50 weeks would indeed translate into 3000 hours per year at $12 per hour. Does Harvard require its faculty to put in such an incredibly demanding schedule? I hope not as we know Mankiw loves to spend time with his children. Now if one worked 6 days a week and 8 hours a day for 50 weeks, then $36,000 per year translates into $15 an hour. How Mankiw interprets this story into evidence that we are seeing a competitive labor market moving along a downward sloping demand curve is beyond me. I’m sure he can explain this all to his students at Harvard.

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Pence’s Potemkin Village on the Mexican Border

Pence’s Potemkin Village on the Mexican Border

Merriam Webster defines a Potemkin Village as:

an impressive facade or show designed to hide an undesirable fact or condition

Mike Pence visited a Potemkin Village in Donna, Texas:

Pence also visited a tent-like temporary detention facility in Donna, Texas, that holds unaccompanied children and immigrant families. The new and mostly clean facility stood in stark contrast to the McAllen station Pence later visited.

While the Buzzfeed story focused on the McAllen station, which depicted horrific conditions, I’m sure Trump’s favorite “news” outlets will highlight the facility in Donna, Texas. In other words, part of Pence’s visit to the border was designed to con the American people that immigrants are being treated well. Leon Panetta is right:

Trump treats Americans like we’re chumps

Since Pence is a Christian, we have to wonder how he can still support Trump’s racist immigration policies after seeing how God’s children are being horribly abused. Here’s a little challenge for Mr. Pence – how many of the Ten Commandments are you violating? Certainly the first two with your idol worship of Donald Trump:

1. You shall have no other gods before Me. 2.You shall make no idols.

This abuse of God’s has led to many deaths, which of course violates the Commandment not to murder. OK – Mike Pence has not committed adultery even if his idol has many times. But cheating on one’s wife is sort of routine for powerful politicians. The serial abuse of innocent people solely based on their race and mainly for partisan purchases is not only unAmerican but also against everything Pence’s religion stands for.

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The Rise of Global Innovation by US Multinationals

The Rise of Global Innovation by US Multinationals

Lee G. Branstetter, Britta Glennon, and J. Bradford Jensen of the Peterson Institute for International Economics provide an interesting discussion of the risks and opportunities from the following:

Total US R&D spending as a share of GDP increased slightly from 2.5 percent in 1999 to 2.7 percent in 2016.2 Multinationals are an important driver of aggregate R&D spending in the United States.3 Their share of total US R&D spending was 57 percent in 2015.4 US MNCs play a disproportionately important role in driving innovation within the United States. At the same time, US MNCs have dramatically increased their overseas R&D expenditures. Figure 1 shows that US MNCs’ foreign R&D expenditures increased from nearly $15 billion in 1997 to over $55 billion in 2015. In some industries, the growth of overseas R&D has been especially striking. R&D expenditures by overseas affiliates in professional, scientific, and technical services increased by more than a factor of 18 between 1999 and 2014, and the ratio of overseas R&D to domestic R&D by multinationals in this industry has increased from under 10 percent in 1999 to over 40 percent in 2015. While US MNCs’ foreign R&D expenditures have increased dramatically, they still conducted about 83 percent of their R&D in the United States in 2015 (down from 92 percent in 1989).

I wish to add one more wrinkle – that being the transfer pricing implications from these observations and the latest from the IRS:

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Housing: Elizabeth Warren v. John Cochrane

Housing: Elizabeth Warren v. John Cochrane

Noah Smith has a lot of praise for the economic policy proposals from Elizabeth Warren. I’ll mention only one:

With costs for shelter eating a bigger piece of Americans’ paychecks, and local government paralyzed by incumbent homeowners, the country needs a big solution. Warren’s would combine incentives for raising zoning density with increased public construction”.

This is interesting in light of John Cochrane’s rant attacking the Democrats on the housing issue. Read it for yourself. Cochrane only noted the increased public construction aspect and tried to tell his readers that only Cory Booker wanted to reform zoning issue. While Cochrane admitted increased housing supply would be a good idea – he slandered any government efforts to do so. No wonder he’s the “grumpy economist”!

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Donald Trump – Don’t Insult Our Team at the World Cup

Donald Trump – Don’t Insult Our Team at the World Cup

At 3PM EDT on Friday, I’ll be watching the coverage via Fox of our great women’s soccer team playing the host team in Paris. It is only the quarterfinals of the World Cup and yet this may be the game of the entire match. Unfortunately the Idiot in Chief has been writing a lot of insulting tweets:

President Donald Trump has invited the U.S. women’s soccer team to the White House, regardless of whether they win the World Cup, after Megan Rapinoe’s assertion that she is “not going to the f—ing White House.” Rapinoe, who has described herself as a “walking protest” to Trump’s policies, made her recent comments about a potential White House visit to soccer magazine Eight by Eight.

I support Megan Rapinoe and guess what – her teammates do too:

I am not going to fake it, hobnob with the president, who is clearly against so many of the things that I am (for) and so many of the things that I actually am,” Rapinoe told SI. “I have no interest in extending our platform to him.” Fellow U.S. star Alex Morgan also has said she would decline an invitation to the White House, telling Time Magazine that she doesn’t “stand for a lot of things the current office stands for.” “We don’t have to be put in this little box,” Morgan told Time in an interview published last month. “There’s the narrative that’s been said hundreds of times about any sort of athlete who’s spoken out politically. ‘Stick to sports.’ We’re much more than that, OK?”

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Ali Velshi Interviews Arthur Laffer

Ali Velshi Interviews Arthur Laffer

Today I endured listening to Arthur Laffer lie serially to Ali Velshi today. Skip the first 36 minutes of this Youtube as the interview begins there. Never mind the praise for Laffer’s cheerleading for Trump. Laffer actually claimed that the FED’s low interest rates after the Great Recession began was the cause of the Great Recession. OK! But then he pivots and advocates we should have low interest rates now that Trump is President. I know – WTF?! OK – don’t trust Laffer on monetary policy but the real fun was when he claimed that the Reagan tax cut of 1981 led to average annual growth rates of 8% during his first term. I think that is what Laffer is claiming but BEA data suggests much lower growth rates for real GDP. OK – we all know that Laffer lies a lot but why on earth does MSNBC bother to let Ali Velshi just sit there and thank him for such dishonesty.

Arthur Laffer lying to Ali Velshi on low Fed Rates after the Great Recession actually were the cause of it.

UpdatePaul Krugman explains Laffer’s bizarre monetary theory well before this interview:

The Trumpification of the Federal Reserve: In late 2015 then-candidate Donald Trump accused Janet Yellen, chair of the Federal Reserve, of being part of a political conspiracy. Yellen, he insisted, was keeping interest rates unjustifiably low in an attempt to help Hillary Clinton win the presidency. As it happens, there were very good reasons for the Fed to keep rates low at the time. Some measures of the job market, notably prime-age employment, were still well below precrisis levels, and business investment was going through a significant slump — a sort of mini-recession. Fast forward to the present. The employment picture is much stronger now than it was then. There are hints of an economic slowdown, partly because of the uncertainty created by Trump’s trade war, but they’re considerably fainter than those of 2015-16. And Trump himself keeps boasting about the economy’s strength.

But of course Trump insists we need to lower interest rate because??? And of course Art Laffer has to agree with his political master.

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A Very Erroneous Chart in the Economic Report of the President

A Very Erroneous Chart in the Economic Report of the President

Menzie Chinn has been reading the latest Economic Report of the President and finds a very erroneous and misleading chart, which is figure 1-6 from this this document (see page 45), which states:

Equipment investment, in particular, exhibited a pronounced spike in the fourth quarter of 2017, as both the House and Senate versions of the TCJA bill, which were respectively introduced on November 2 and November 9, stipulated that full expensing for new equipment investment would be retroactive to September 2017. This created a strong financial incentive for companies to shift their equipment investment to the fourth quarter of 2017, so as to deduct new equipment investment at the old 35 percent statutory corporate income tax rate. After the initial spike in the rate of growth in fixed investment, standard neoclassical growth models would predict a return of the rate of growth to its pre-TCJA trend, but from a higher, post-TCJA level, with the capital-to-output ratio thereby asymptotically approaching its new, higher steady-state level.

Earlier on page 43 we see:

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A Tariff Laffer Curve?

A Tariff Laffer Curve?

Douglas Irwin is a very good economist. Let’s highlight his Historical Perspectives on U.S. Trade Policy:

The Civil War marked the beginning of a long period of high U.S. tariffs. These tariffs served the dual purpose of raising revenue for the federal government and keeping out foreign goods, ostensibly for the protection of U.S. labor and business. After the war, tariffs (which generated roughly half of government revenue) remained high to service the enormous debt burden that resulted from the war. Yet by the mid-1880s a curious problem had arisen: though much of the debt had been paid off, federal revenues were outstripping expenditures by as much as 50 percent. Republican and Democratic politicians agreed that the fiscal surplus should be reduced, but they proposed exactly the opposite policies for achieving this objective. Democrats advocated cutting tariff rates in an effort to reduce revenue. Arguing that this would simply encourage imports and raise even more revenue, Republicans proposed higher tariff rates to reduce fiscal revenue. This debate over the tariff “Laffer curve” essentially hinged on whether existing tariffs were above or below the revenue-maximizing rate, which in turn depended on the height of the tariff and the price elasticity of import demand.

Irwin examined this issue in his Higher Tariffs, Lower Revenues? Analyzing the Fiscal Aspects of the “Great Tariff Debate of 1888”:

This paper examines this debate and attempts to determine the revenue effects of the proposed tariff changes. The results indicate that the tariff and the price elasticity of U.S. import demand during the 1880s below the maximum revenue rate, and therefore a tariff reduction would have reduce customs revenue.

Irwin also contrasts the other policy agendas of the two parties.

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Art Laffer is Not an Economist

Art Laffer is Not an Economist

 Can The Hill be more wrong?

President Trump will award the Presidential Medal of Freedom, the nation’s highest civilian honor, to economist Arthur Laffer, the White House announced Friday. The president will honor Laffer on June 19 for his contributions to economic policy. The White House described Laffer as “one of the most influential economists in American history” in announcing the award.

OK the Idiot-in-Chief did say that but repeat after me – Art Laffer is not an economist. Why did Trump debase the Presidential Medal of Freedom and the entire economics profession?

Laffer co-wrote a book published last year titled “Trumponomics: Inside the America First Plan to Revive Our Economy.” His co-author was Stephen Moore, who earlier this year was nominated to serve on the Federal Reserve Board of Governors but withdrew amid bipartisan opposition from senators.

Well at least The Hill got this right. But this?

Laffer championed supply-side economics and gained prominence serving as a top adviser to then-President Reagan. He established what is known as the “Laffer Curve,” which showed that increases in tax rates will eventually cause government revenue to decrease at a certain point. The model has been cited to argue for the benefits of tax cuts. Critics of supply-side economics argue that it has contributed to inequality and disproportionately benefits the wealthy.

The inequality critique is not the only issue with tax cuts that reduce national savings. Couldn’t The Hill note that the 1981 tax cut lowered investment via higher real interest rates as well as appreciated the dollar leading to large trade deficits? Enough with this weak account as Slate got this right!

Trump Gives World’s Worst Economist the Presidential Medal of Freedom

A better read and if you are going to dub Laffer as an economist please note he is a very poor economist. But at least he lavished Trump with praise.

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