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More signs of a slowdown: initial claims and real retail sales

More signs of a slowdown: initial claims and real retail sales

We got two negative data points. One is cause for concern; the other – not quite yet.

Let me start with the “not yet” first. Initial jobless claims rose 4,000 to 239,000. That means that the 4 week moving average rose to 231,750:

This means that the number is both higher YoY, and 12.5% above its 206,000 low in September.

Ordinarily that would be cause for concern. BUT, the biggest factor in the increase is the week of 253,000 claims two weeks ago, which was almost certainly due to the government shutdown. That week, in turn, was immediately preceded by the week of 200,000 claims, which was the lowest in nearly 50 years.

The bottom line is, although the trend is clearly higher since September, I would prefer to wait two more weeks for both of those outliers to pass out of the 4 week moving average before hoisting a yellow flag on jobless claims.

Now let me turn to the number that *is* a cause for concern now: real retail sales, which cratered by -1.2% in December. That is the worst monthly reading since just after the Great Recession, and consistent with readings in the year before both of the last two recessions, so unless this reading is revised away, it is a definite sign of a slowdown. On the other hand, in the longer view monthly readings of -1% or more aren’t that uncommon during expansions:

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Amazon defeated in New York UPDATED

Amazon defeated in New York UPDATED

In the biggest ever defeat for a subsidized project in history, Amazon announcedFebruary 14th that it was canceling its planned half of HQ2 for New York City, which was to receive subsidies worth at least $3.133 billion. After facing months of public opposition, the company provided a Valentine’s Day present in the form of capitulation. Amazon showed that, like Electrolux, its efforts to extract maximum subsidies from 238 cities constituted corporate rent-seeking on a grand scale. Not only did Amazon conduct an exploitative public auction for the supposedly single HQ2 facility, it furthered the impression that it was engaging in rent-seeking by its refusal to discuss alternatives with New York officials, by its absolute insistence on opposing a union for its workers, and by its sudden though not unexpected cancellation announcement. Activists scorched the firm, too, for the fact that for the second year running, Amazon will pay 0 in federal income tax despite earning $11.2 billion in profits in 2018 and $5.6 billion in 2017.

This is not to be confused with Foxconn, which is looking more and more like an economic development failure. There, it appears that the company will not be able to provide the investment and benefits it promised in Wisconsin. With Amazon, what we have is a case of the company being unwilling to continue the political battle to obtain its $3+ billion in incentives. While Amazon is by far the largest project ever defeated, such defeats are not unprecedented. I participated in two successful campaigns in the late 1990s and early 2000s against abusive tax increment financing (TIF) projects in the St. Louis suburbs of Olivette and O’Fallon, but these were on the order of $40 or $50 million, not $3 billion. Alas, I was also on the losing side of an exceptionally bitter battle against a TIF-funded mall in Hazelwood, Missouri, which still hurts to think about. The residents lost their homes to eminent domain, the city administration was high-handed and manipulative, and the new mall contributed substantially to the death of at least two nearby malls, part of the $2 billion retail subsidy merry-go-round during 1990-2007 documented by the East-West Gateway Council of Governments.

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Amazon defeated in New York; more to come

Amazon defeated in New York; more to come

In the biggest ever defeat for a subsidized project in history, Amazon announcedyesterday that it was canceling its planned half of HQ2 for New York City, which was to receive subsidies worth at least $3.133 billion. After facing months of public opposition, the company provided a Valentine’s Day present in the form of capitulation. Amazon showed that, like Electrolux, its efforts to extract maximum subsidies from 238 cities constituted corporate rent-seeking on a grand scale.

Moreover, as Richard Florida reports at Citylab, the victory has also energized reformers around the country searching for a solution to the problem of corporate bidding wars. I myself have received inquiries from multiple elected officials’ offices about the European Union’s systematic control of investment incentives.

I’m playing at a chess tournament in Texas right now, so I will have more to say about this when I next have time to post.

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Electrolux closing Memphis plant; Economic development malpractice leaves Tennesse holding the bag

Electrolux closing Memphis plant; Economic development malpractice leaves Tennesse holding the bag

On January 31, Electrolux announced (h/t Alan Freeman, ipolitics.ca) that it would be closing its new (2012) factory in Memphis, Tennessee, by the end of 2020. This facility, you may recall, was a subsidized relocation from L’Assomption, Quebec (a Montreal suburb) that had an aid intensity of at least 99%! Yes, Tennessee state and local governments gave Electrolux a free factory ($188.3 million at present value in subsidies) while allowing it to get rid of its union, cut 60 jobs, and save over $4 per hour in wages on the jobs they kept.

As if all that weren’t bad enough, the state of Tennessee agreed not to put clawback provisions into the contract with Electrolux, although the state was already requiring such clauses in contracts with major companies like Volkswagen in Chattanooga. That piece of economic development malpractice has now come back to bite the governments involved where it hurts. Not only does the contract specifically prevent the state from getting its money back, state and local governments guaranteed loans connected with the project, the payments for which will last until 2036. According to the Commercial Appeal’s article, state government is on the hook for $48.5 million in loans, while Memphis and Shelby County governments must pay off a further $28.0 million.

While Electrolux committed to employing 1,240 people in order to receive the subsidies, its peak employment appears to have been the 1,100 who were employed in 2017. Now, just two years later, the company employs only 530 in Memphis, a figure that has been stable for about a year, supplemented only by overtime and temporary workers, both of which have now disappeared.

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I actually disagree with Paul Krugman for once

This is an exiting day. I disagree with something Paul Krugman wrote.

In 2017, private insurance paid about a third of America’s medical bills — $1.2 trillion, or 6 percent of GDP. Having the government pay those bills directly, without a revenue offset, would therefore be a spending increase — a fiscal stimulus — of 6 percent of GDP.

Suppose — as MMTers tend to assume — that interest rates nonetheless didn’t rise. Then this stimulus would have a multiplier effect, probably raising GDP, other things equal, by 9 percent.

I have 2 objections. First the replacement of private insurance with debt financed single payer is effectively a tax cut not a spending increase (as indicated by the phrase “those bills”) as such, the direct effect on demand is less than 6% of GDP. Krugman likes to do two kinds of analysis IS-LM and New Keynesian.

In a standard new Keynesian model, the shift would have no effect on demand — ultra rational consumers would assume that they would have to pay the public debt eventually, so they would save the money that isn’t being paid as insurance premiums (which would presumably be paid as salaries instead).

In an IS-LM model, the incrase would be 6% times the marginal propensity to consumer. Going full Hicks (the orignal IS-LM model) that is 1-1/(the multiplier) = 1/3. To consistently apply the original IS-lm model, Krugman should calculate (multiplier -1)(the tax cut) = 3% of GDP.

Second Krugman writes “a multiplier effect” when he means “a multiplier greater than one”. I hate that. It does not follow from the definition of “to multiply” If I have to multiply a by something to get b, that doesn’t mean b is greater than a. Mutiplying by 0.9 is multiplying.

I insist on this, because anti Keynesians often play the 1=0 trick. When fiscal stimulus is proposed, they claim to prove that the multiplier is zero. When data is analyzed they claim to have been proven right, because there isn’t proof that the multiplier is greater than 1.

But the important point is that the correct calculation implies a 3% increase in GDP. Okun’s law (click the link) implies a 1.5% reduction in unemployment to 2.5% which would probably scare the Fed into raising interest rates, but which is a lot more possible than -0.5% as calculated by Krugman.

Now I don’t think that the marginal propensity to consume is 1/3, but that means that Krugman and I have to explain why estimate multipliers are only 1.5 and not much higher. I suspect this explanation would imply that MMTers predict a negative unemployment rate, so I suspect thaat, in the end, I would agree with Krugman’s conclusion.

But I find his calculation suspect.

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The Usual Suspect Bashes Social Security

It Is Monday And Usual Suspect Bashes Social Security

 That would be Robert J. Samuelson at the Washington Post, and, yes, he has done it yet again, actually for the first time in a while.  Dean Baker has already done a good job of cutting him up over on CEPR, but I can’t help piling on as well.

That would be Robert J. Samuelson at the Washington Post, and, yes, he has done it yet again, actually for the first time in a while. Dean Baker has already done a good job of cutting him up over on CEPR, but I can’t help piling on as well.

Samuelson presents his case as opposition to Social Security being expanded as proposed by Cong. John Larson (D-Conn). Samuelson also cites a recent study Andrew Biggs at AEI supposedly showing that old people have been doing better in income terms than previously reported.

Dean notes several points. One is that the current setup of Social Security is that is going to be reducing benefits over the next few years as retirement ages get raised as a result of long past agreements, actually dating to 1983. The supposed expansion by Larson is quite minor and mostly just offsets this planned reduction, although not precisely.

Another point is that while it is true that while some older people have been doing better than previously reported, although not the poorest recipients, the main source of this better performance is due to something that will be disappearing in the near future. It is due to income from defined pensions, which have nearly all disappeared. Such income will be less and less important for older people as time proceeds.

I shall add to these valid points one other. It is a par for the course nearly all times RJS gets off onto this topic. Early in his column he sets up as how disastrous for future budget balances all these awful “entitlements” will be is to cite projections for Social Security, Medicare, and Medicaid all lumped together. So, according to the CBO, while federal transfers to over 65s in 2005 was 35% of federal outlays, and those rose to 40% in 2018, these are projected to be 50% in 2029. Now while this might happen if no changes happen, the overwhelming majority of this increase is due to to expected further increases in medical care prices, not due to an increase in use, much less an increase in Social Security spending. It is only a couple of those projected percent increases.

He does this all the time, citing these kinds of scary looking aggregate numbers and then jumping to focus on Social Security and how we need to cut benefits (and certainly block any proposed increases in benefits). He never talks about how maybe we should make serious reforms in our health care system that would really put a serious dent in those projected increases. I recognize that this is a lot harder than it may seem (see all the battles over Obamacare). But RJS simply shreds his own credibility by failing to make this point before he jumps right in to wildly exaggerate the fiscal issues related to Social Security.

OTOH, given how much just totally weirdly wacko things that have been going on, having Robert J. Samuelson back on his old Monday morning schtick bashing Social Security is almost a nostalgic relief, a return to older and simpler times.

Barkley Rosser

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“Just doesn’t add up'”

“Just doesn’t add up'”

  • “I’m not sure I follow the arithmetic here.”
  • “It’s all down to the numbers – something the article avoids and so is just pie-in-the-sky.”
  • “That clearly does not add up.”
  • “If you produce X in 30 hours you will produce > X in 40 – unless you are just sitting on your arse for the extra 10 hours.”
  • “If you work 40 hours your total output will be higher than if you work 30 hours – unless you are actually destroying output in those extra 10 hours.”
The U.K. think tank Autonomy has published a report on working time, “The Shorter Working Week: A Radical And Pragmatic Proposal.” Autonomy’s co-director, Will Stronge, wrote an Op-Ed for the Guardian on Friday that outlines some of the proposal’s main points. The Guardian piece received over 600 comments, around a quarter of which were opposed to the proposal. I am always fascinated with why people are hostile toward seemingly good things so I downloaded the comments and sorted and coded them.
Twenty-eight percent of the negative comments included gratuitous disparaging remarks about the article and its author. “Riiiiight. …whoever dreamed up this silly notion hasn’t got a clue about the realities of life.” “This drivel is always coming from some useless twit who sits on their backside…” “Yes, the article is nothing but pie-in-the-sky.” “Really?  It’s all a bit if a pipe dream isn’t it?” “Comrades , rejoice!  Tractor production will still be up 130%.” “Along with flying cars and pet unicorns for all, presumably.” “Following the columnist’s logic, why not a three day week? Or a two day week?” “better still just pay me full time but I don’t want to turn up at all.”

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How To Go After The US Wealthy Reagan Style

How To Go After The US Wealthy Reagan Style

Ah yes, this is going to be another one of those ironic posts about what a big leftist liberal Ronald Reagan was compared to the current GOP gang in charge of so many of our policies, especially our tax policies. Certainly, the image of Reagan is one who cut taxes for the high-income wealthy, and in general that is the case. But there were a few items going the other way, and again, compared to current policies some combination of what came out of the two major Reagan tax cuts looks downright progressive by comparison.

Let us start with taxing wealth, with the Elizabeth Warren proposal to put a 2 to 3% annual wealth tax on those holding over $50 million. I am not opposed to this in principle, but worry that it faces very serious practical problems of implementation due to the high costs involved in simply determining the wealth of these large and complicated portfolios, especially given the hollowing out and reductions at the IRS, which would have to do all of it. As it is, whereas not too long ago 20 nations taxes wealth, that is now down to three: Norway, Spain, and Switzerland, with the latter lacking either a property tax or a capital gains tax. What have those other 17 nations done? Well, going in the opposite direction from where the US has gone under Trump with his tax “reform.” Indeed, a model might well be what we saw in the Reagan tax laws. So, one of the most important both as a redistribution mechanism taxing wealth while also raising revenue would be to return to the Reagan 1986 tax law’s taxing capital gains at the same rates as income is. The other one is also to undo the cuts in estate taxes Trump has put it and move back to what Reagan had in place after his 1981 tax law, a much more redistributive system than we see now. Both of these, especially the capital gains tax change, would be easily to implement and enforce.

On income taxes, the proposal by AOC for a top marginal income tax rate of 70% does not face the implementation problems the straight wealth tax faces. As noted, putting this only on those earning over $10 million per year should not be too damaging on various fronts, although it would probably not raise all that much revenue. It might be better to go with what came in with the 1981 Reagan tax law of a top marginal rate of 50%, but having it on a broader set of upper income people. This would arguably both raise more money than the AOC proposal while also arguably having fewer disincentive effects. So, returning to a combination of the Reagan 1981 and 1986 tax laws might be something that can be adopted, implemented, and enforced, which would both raise more revenues, and engage in wealth and income redistribution.

Barkley Rosser

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Foxconn is flailing in Wisconsin (Insert your joke here.)

Foxconn is flailing in Wisconsin (Insert your joke here.)

 In what may end up as the biggest economic development failure in U.S. history, Foxconn announced Wednesday that its $10 billion Wisconsin factory will not be a factory. Instead, the company says, it will still create 13,000 jobs, but these will be research jobs rather than manufacturing ones. I’ll believe it when I see it.

Accompanied by an almost $4.8 billion subsidy package as estimated by Good Jobs First (follow the link to the spreadsheet), the project was heavily criticized even before it was announced in 2017 (my take here and here). The massive subsidy helped normalize the idea of multi-billion investment incentives and gave Amazon a handy benchmark for its own effort to break the bank.

As I analyzed a year and a half ago, it didn’t make sense to manufacture electronics in the United States when everything was cheaper in China, unless you were worried about access to the U.S. market. The illegitimate Trump regime had already created an unpredictable and protectionist trade climate, and this was long before the trade war with China really took off. If Foxconn felt it had to locate in the United States, the country was in a strong bargaining position, but by playing the states off against each other, it was still possible for a foreign company to score huge subsidies.

What happens next? As noted, Foxconn still says it will build a huge facility and hire 13,000 workers. But in 2018, it failed to meet its job creation target and forfeited what would have been a $9.5 million subsidy. I predict we will see more such failures from Foxconn until it finally pulls the plug. Indeed, on January 31, Good Jobs First called for the immediate cancellation of the deal, with the company financially responsible for expenses made by the state and by Racine County in connection with the project. This would be a fair resolution of the situation, appropriately leaving egg on the faces of the deal’s promoters, the recently defeated Governor Scott Walker and the head of the illegitimate Trump regime.

As you see, I have managed to steer clear of the obvious puns. Instead, I invite you to insert your joke here.

Cross-posted at Middle Class Political Economist

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Reagan’s Tax Cuts and the Volcker Recession

(Dan here…lifted from Robert’s Stochastic Thoughts)

Reagan’s Tax Cuts and the Volcker Recession

 Max Boot is a candidate member of the Rubin Gerson can’t be a conservative anymore, because I always agree with them club of Washington Post columnists. But he is a bit confused about US macroeconmic history and macroeconomics. He wrote”The deficit spending of the Reagan years was at least justified because it boosted the economy out of a deep recession “

As a matter of timing, this can’t be right. The Kemp Roth tax cut was enacted in 1981. Real GDP peaked in 1981q3 — the tax cut corresponds to the beginning of the recession not the end.

The part that Boot misses (because it has been unimportant for the past 10 years) is monetary policy. It is possible to cause a severe recession in spite of fiscal stimulus by driving the Federal Funds rate up over 19 %. The combination of loose fiscal and very tight monetary policy caused huge real interest rates and a collapse of investment. It also caused an over-valued dollar, a huge surge in imports and deindustrialization.

One can discuss the effects of fiscal policy without considering the response of monetary authorities only when monetary policy is constrained by the zero lower bound. If GDP is determined by the Fed’s ideas about what level is consistent with low inflation, then fiscal policy which is, in itself, stimulatory just changes the composition and not the level of demand.

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