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Accountability Bond Accounting

Recently I learned about a proposal for Euro denominated “accountability bonds”. They are basically a clever way to enforce the stability and growth pact. I don’t like the pact, so I don’t support the proposal which I made by Clemens Fuerst here . The idea is that borrowing beyond the level allowed by the stability and growth pact could be financed only by special junior bonds. Owners of those bonds would lose everything before owners of senior bonds lose or taxpayers who finance the ESM risk anything.

The key part (which I don’t support) is that currently outstanding bonds are senior to these new bonds. This means that the reform will cause a windfall gain to current bond owners. The value of their bonds will not be diluted by the junior bonds. The risk that it would be diluted by regular bonds issued above the stability and growth pact levels would vanish. Importantly, this windfall would not be openly paid by the Treasury issuing the junior bonds – on its face, the reform regulates only the interaction of those Treasuries with new investors. The windfall would be paid by other investors who value the old bonds more highly. The old bonds will be more valuable in case of default, because they will be more senior than the average outstanding bond (the average including the junior bonds). Since investors in junior bonds won’t pay this cost in (at least subjective) expected value, the issuing Treasury will.

If no junior bonds are issued, old bonds are average bonds so there is no windfall and no cost. Byt the reform appears to only regulate the interaction between issuing treasuries and investors in new bonds. It is a penalty to be levied by investors thinking of their own interests, so it is a penalty which will actually be levied.

I don’t like the windfall (which Fuerst might consider the whole point of the reform). It implies giving people who are on average wealthy something for nothing. It isn’t hard to come up with a proposal for junior and senior bonds, related to the stability and growth pact, which does not create a windfall. The problem (or whole purpose) is that old bonds are senior to the average bond. The solution is to require that, in case of default, recovery ratios for old bonds are equal to average recovery ratios.

My proposal is that as of the start date T, there is a limit on the issuance of new senior bonds. Beyond that limit, new bonds must be new junior bonds. In case of default, first payments (coupons plus face values of maturing bonds) are divided into the proportions due to newer than T and older than T bonds – so payments to old bonds are
(total payments)(amount owed on old bonds)/(total amount owed).

The remaining payments must first go to new senior bonds and any money left goes to new junior bonds.

Discussion of the effects of such a plan after the jump.

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Poor Salesman Great Grasp of Policy

I am aware of all internet traditions (with notably rare exceptions) and I think this might be another classic.

In a generally very good article in Politico Tim Alberta wrote “Ryan is poor salesman with a great grasp of policy” [skip] “After he unveiled the bill, leading health care experts on the right like Yuval Levin and Avik Roy trashed it as a poorly conceived mess; ”

So having a great grasp of policy is consistent with writing an immensely important poorly conceived mess. I am googling [Ryan salesman “great grasp of policy”] which only gives 142 results. Does seem twitter has taken over the snark industry. This thread burns. Also at least 1% of the US Senate took Alberta to task.

update: I was wrong. The classic is actually

TimAlberta

So the fact that Ryan’s polics don’t withstand scrutiny shows that Ryan has a great grasp of policy. OK I fell for it. Tim Alberta is just trolling me. He. will. not. make. my. head. explode. No he won’t.

end update:

I think the crazy claim shows a few things. One is that conventional wisdom is invulnerable to evidence. Ryan has been declared a super wonk by the cool kids, so the assertion is riskless. Another is that Alberta wasn’t thinking about policy (he wrote almost nothing about the content of the AHCA). Another is that he assumes that the problem for Ryan with Levin and Roy was that he didn’t flatter them enough and not that his bill was a poorly conceived mess (the preceding sentence was “There was no such effort on Ryan’s part, and it showed. (Several allies argued he had done some outreach, but they failed to provide any specific examples.)”). Finally, symmetry is dangerously tempting. The whole crazy claim is “If the bill failed because Trump is a great salesman with a poor grasp of policy, it also failed because Ryan is a poor salesman with a great grasp of policy.” This is symmetry at the expence of accuracy. Ryan is a brilliant salesman who has a weak grasp of policy.

I foolishly said that ignoring policy and discussing inside baseball is what Politico does, then found out that they also published an excellent article by Harold Pollack “Paul Ryan Failed Because his Bill was a Dumpster Fire”

update: Ouch

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No One Knows What It’s Like to be Paul Ryan

Who can tell us how he feels knowing that no one likes his health care reform ?
The Who can tell us how he feels knowing that no one likes his health care reform !

This is some cause for optimism, as we can note The Who’s further forecast that, by the last verse, he will recognize the importance of access to emergency medical care and the moral imperative to share with those in need.

No one knows what it’s like
To be the bad man
To be the sad man
Behind blue eyes

ryan

No one knows what it’s like
To be hated
To be fated
To telling only lies

But my dreams
They aren’t as empty
As my conscience seems to be
I have hours, only lonely
My love is vengeance
That’s never free

ryansad

No one knows what it’s like
To feel these feelings
Like I do
And I blame you

No one bites back as hard
On their anger
None of my pain and woe
Can show through

But my dreams
They aren’t as empty
As my conscience seems to be
I have hours, only lonely
My love is vengeance
That’s never free

ryanlaughs

When my fist clenches, crack it open
Before I use it and lose my cool
When I smile, tell me some bad news
Before I laugh and act like a fool

And if I swallow anything evil
Put your finger down my throat
And if I shiver, please give me a blanket
Keep me warm, let me wear your coat

coats

No one knows what it’s like
To be the bad man
To be the sad man
Behind blue eyes

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Constitutional Crisis ?

To Recap what everyone knows now (in case anyone reads this months from now)

On January 27th Donald Trump signed an executive order suspending the refugee admission program for 120 days and blocking US entry for citizens of 7 countries for 30 days.
The order was written without input from the Justice, Homeland Security, State and Defence departments. As written it banned entry for legal permanent residents (with green cards) who were travelling abroad when it was issued. It also banned entry for people who were on airplanes flying to the USA when it was signed.

On January 28th dozens (to hundreds ?) of people were detained in Airports. Tens of thousands of ordinary Americans went to the airports to protest the new policy (there is hope). Also hundreds of lawyers spontaneously went to airports to attempt to represent (pro bono) the people who were detained and at risk of being put on planes returning to the foreign point of departure.

Early January 29, some aspects of the execution of the executive order was temporarily stayed by a judge

Judge Ann Donnelly of the U.S. District Court in Brooklyn granted a request from the American Civil Liberties Union to stop the deportations after determining that the risk of injury to those detained by being returned to their home countries necessitated the decision.

3:00 AM January 29th, the Associated Press reported — something. It is not clear to me if the recent event is a constitutional crisis or just an absurd lie alternative fact.

The Ap reported

Stephen Miller, a senior adviser to the White House, said that nothing in the judge’s order “in anyway impedes or prevents the implementation of the president’s executive order which remains in full, complete and total effect.”

If Miller meant what he said, he has declared that the Trump administration will order the executive branch to ignore the stay (that is the only way the order could remain in “total effect”. If so, there would no longer be rule of law in the USA. There would only be Trump’s orders and the decision by people in uniforms whether to obey them.

I am fairly confident that the US is still a nation of laws. I think that Miller’s statement is a simple blatant lie not the declaration of a coup. I think he is sayign that the Judges order would have no effect even if it were obeyed. I am pretty sure Miller is insisting that Donnelly didn’t order what Donnelly ordered.

In contrast the more official response by the DHS noted that the stay applies only to people in the USA or in the air at the time it was granted.

Also the DHS didn’t mention legal permanent residents. It is very clear that the DHS can’t block their entry to the USA. In fact, it is known that the DHS argued this immediately and was over-ruled by White House staff. The application of the order to legal permanent residents is very clearly blatantly illegal. Arguably, the executive order is completely illegal, but to ignore green cards is very clearly illegal.

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Donald Trump is a Miracle Worker

Somehow Trump manages to bring out the best in people. In the January 21 women’s march demonstrations, millions of ordinary Americans peacefully engaged in the political process, expressing a variety of consistent opinions with passion and humour. I was delighted.

But today I am amazed. It seems that Donald Trump has somehow managed to make Jasoh Chaffetz act like a statesman. Chaffetz is chair of the government oversight committee, where he has always acted as an aparatchik hack. He promised years of investigation of President Clinton and won’t “go on a fishing expidition” of President Trump. He decided that the most urgent investigation was of the head of the Office of Govermnment Ethics for critizing Trump’s conflicts of interest and not of Trump for profiting from his office and doing business with foreign governments and [uh oh going of on a tangent on Trump’s corruption which will never end].

I was confident that Chaffetz cared not at all about the truth and was a pure partizan who always placed the interests of the GOP over the interests of the country, honesty about plain facts and all human decency.

But today he said

On the voter fraud issue that really happens at the county level. I don’t see any evidence, but the President has 100,000 people at the Department of Justice that if he wants to do an investigation, have at it. I just don’t see any evidence of it.

Chaffetz caring whether there is “any evidence of it” is almost a miracle.

I honestly never thought there was a crazy conspiracy theory too extreme for him.

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Legible version of How have Phillips Curves Shifted in the 15 Countries Which Were in The European Union in 1997 ?

First note strong evidence that the rate of wage inflation is mean reverting. This is a pooled regression with data from the Old EU 15 from 1960 through 2015. Indicator variables for countries are included but the coefficients aren’t reported. dw is the percent rate of wage inflation. ddw is the change of dw. The coefficient of ddw on lagged wage inflation is negative. Since wage inflation is not stationary, inference based on the conventional t-statistic is misleading, but it is very hard to defend excluding lagged wage inflation from regressions.

table1

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In all pooled regressions of the 15 countries, country indicators are included, but the coefficients aren’t reported.
Table 2 shows a simple wage Phillips curve regression in which an equal slope for all countries is imposed. ur is the unemployment rate.

table2

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Table 3 adds EcoFin’s estimate of the non wage inflatin accelerting rate of unemployment (nawru). It provides almost exactly zero evidence that the estimated NAWRU is useful when forecasting the acceleration of the rate of wage inflation.

table3

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Another way to present this is to regress the change of the rate of wage inflation on lagged wage inflation, the NAWRU and the difference between the unemployment rate and the NAWRU (ur_cyc_nawru). If the ewstimated nawru is the rate of unemployment corresponding to non accelerating wage inflation, its coefficient should be zero.

table4

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Results are fairly similar if lagged productivity growth in percent (lp00) and lagged personal consumption deflator inflation in percent (infpce) are included in the regression. When these variables are included, there is statistically signficant evidence that the EcoFin estimates of the NAWRU are of some use, but also very strong evidence that their estimate of cyclical unemployment is not correct.

table6

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table78

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table910

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European Pooled Panel Phillips Curve

This continues joint research with Marco Fioramanti. Our aim is to understand something about European natural rates of unemployment and whether the European Commissions estimated levels which they call NAWRU (for non accelerating wage inflation rate of unemployment) are useful approximations.

Here is a brief summary of work to date (prior to this note). Various subsets of us wrote at length here, here, here, here , and here.

In this note I look at a panel of the 15 countries which were in the European Union in 1997 (that is those for which long series of data are available) and ask if the Commission’s estimates of the NAWRU are useful if one wishes to forecast the acceleration of wage inflation. They don’t seem to be very useful at all.

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Paolo Gentiloni

Foreign minister Paolo Gentiloni has been asked to attempt to form a government. He is a rather bland establishment figure who has two interesting histories. First, back in the day, Italy (then a monarchy) didn’t get along with the pope (they fought a war with a famous battle at the pious gate (no ti sto kiddando per niente). Popes told faithful Italians to boycott elections. This tended to help the relative left (which had radical ideas such as universal suffrage). This ended with the Patto Gentiloni signed in the Palazzo Gentiloni by some people including a Gentiloni. Thus the Gentiloni family is very related to the participation of Catholics in Italian politics.

On the other hand (and maybe making up for this) Paolo Gentiloni himself has a far left past. This is true of an amazing fraction of Italians of his generation. He used to hang out with people who were expelled from the Italian Communist party for left wing deviation from the party line (I think they were the last people ever expelled from the rapidly democratizing party).

He also once said that no one who has been trained as an economist can be really left wing. This was meant as criticism of economics not leftism.

So his ancestor has a history with the ancestor of the old center-right Christian Democratic party and he personally has been far left. Thus there must be some innate dullness which makes my reaction to his surprise appointment one of mild pleasure. He’s not really left wing anymore, but, by the standards of 2016, he’s a raging red.

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Trump Nomination Approval Hearings

It seems we have a cabinet nomination. Word is the Jefferson Beuregard Sessions will be nominated Attorney General. Sen Sessions is an extreme reactionary. He is also, pretty clearly, an old fashioned racist (to complement the new wave alt-right racists). In 1986, Reagan nominated him as a judge and the nomination was rejected by the Senate, because of Session’s alleged racism. He addressed an African American attorney and “boy” and said he should be careful what he says to “white people” and he said he thought the KKK was OK until he learned that some of them smoked marijuana.

I wonder if the Senate will approve the nomination of Sessions as Attorney General. There are three reasons to think they might. First, he is a Senator and if not approved will come back to haunt and hold. Second, Republicans have become much more extreme than they were in 1986 and so the smaller current GOP majority implies a larger minority of right wing loonies. Finally, the general rule that the President should be allowed to pick his team and the very large number of unacceptable nominees will imply that the bar for approval is very very low.

On the other hand, I think there is one reason that Sessions might end up in trouble. He is a Senator.
He contests the allegations of racism. I think he has chosen to lie (as is his right). As a sworn in witness, he will lose that right. Lies become felonies. I think that even extremely dishonest and arrogant people tend to be cautious when testifying in front of Senate committees. I’m not sure that Sessions will be. He isn’t afraid of the Senate. That’s where he has worked for years and years. He doesn’t fear his colleagues with whom he has worked for years and years.

He will be testifying in the particular rooom where he works day after day (Tuesday through Thursday with lots of recesses).

Also he is used to Senatorial comity (which has been something which constrains Democrats and not Republicans for years).

I think Sessions can be provoked into telling lies under oath. I think witnesses prepared to testify under oath that he is lying can be found (and the minority can call them). I think it is possible to block confirmation of Senator Sessions by the other Senators (for one thing I don’t think he can vote on the resolution to confirm him).

My guess is that he is confirmed. But I am not sure.

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TARP and Twitter

I had an interesting web experience. My tweet noting that the US Treasury made a profit on TARP got a relatively large number of replies. Many people were outraged in many contradictory ways.

Twitter is damaging the discussion. Trump on twitter lowered the level of debate. I am now a carrier of Twitteritis into the Angry Bear community, because I am brining a tweet debate here.

The discussion starts with this tweet

tarptwitter

note it is the 5th of a series. Trying to summarize, I realize that I should quote

1. To those saying there is no such thing as a good Trump voter. Context man. Context
2. Imagine a scenario. You got two choices, as understood by you
. This is the key. This is how you see it, not how others think you see it
3. Vote for candidate
A) who will devalue you socially & economically
Or
B) who might devalue economically, but will value you socially
4. What will the majority of any group do? Including blacks & Latinos?
If you don’t give them SOMETHING to vote for they won’t vote for it
5. Mistake is thinking that Trump voters believe they are getting anything economically out of a Clinton administration. (TARP cough TARP)

I will briefly summarize my impresssion of @Chris_arnade thoughts on the topic expressed on twitter.

Overall the point is that it is possible to understand why people voted for Trump. Consider TARP. Anger at TARP (and NAFTA) helped Trump. I agree entirely, and think this is important. Hatred of TARP helped Trump.

I am trying to get to responses to my tweet

“@Chris_arnade TARP was a Bush admin initiative and a gigantic success. US gov made a profit”

They do not include anyone suggesting it is unfair to Consider Clinton responsible for TARP (I agree — she deserves credit only for her yes votes in Senate roll calls). The fact that TARP was a Bush administration initiative is clearly considered irrelevant to the question of whether Democrats should be punished for TARPing.

I’m going to put alll of my thoughts after the jump.

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