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


So apparently Gmail is a hot commodity, though prices are falling as Google increases supply (fancy that!). As part of the expanding supply, Gmail is now offering me the chance to invite others to have Beta access. I don’t know how many I have, but if any long-time and/or frequent commenters would like an invite, just drop me a line. Co-bloggers, past and present, are also welcome to an invite.


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Giblets, Fafnir, and The Medium Lobster

If the title of this post is a mystery to you, then you should click here to read the Parable of Chris’s Stuff.


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Moral Clarity

I’m glad to see that Bush is taking the lead in providing “moral clarity”. From yesterday’s press conference:

QUESTION: Mr. President, I wanted to return to the question of torture. What we’ve learned from these memos this week is that the Department of Justice lawyers and the Pentagon lawyers have essentially worked out a way that U.S. officials can torture detainees without running afoul of the law. So when you say that you want the U.S. to adhere to international and U.S. laws, that’s not very comforting. This is a moral question: Is torture ever justified?

BUSH: Look, I’m going to say it one more time. Maybe I can be more clear. The instructions went out to our people to adhere to law. That ought to comfort you.

Ah yes, a good answer to a moral question.


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Fighting the Reagan Economic Myth

In today’s NY Times, Paul Krugman makes an attempt at halting the avalanche of Reagan myth-building that we’ve had to endure this week. It’s a good effort, but I’m skeptical that his voice of reason will be heard above the roar of the delirious crowd.


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Postcards from Old Europe – Fed Watching

Last Friday saw the release of payroll data for the month of May. As most of you know the number came in at a not too hot, not too cool +248k. The accompanying data was heartening as well, with the workweek rising to 33.8 hours. More work means that more “stuff” and services are being produced which should in turn lend support to GDP.

All this positive news has given rise to expectations that the Fed will move aggressively with regard to tightening monetary policy. Fed watchers have become ever more vigilant in their attempts to deduce Fed policy via public speeches held by Fed worthies.

The last in line of speeches by Alan Greenspan was at the International Monetary Conference in London, England on June 8. This speech was looked on with much interest by markets because it was almost a year ago (on June 3, 2003) that the Fed Chairman made his now epic “firebreak” comment in which he emphasized the Fed’s commitment to fight deflation. He said

One important issue here is that we’ve worked with inflation over the years. We know how it functions, we know its dangers, we know how to address it. It’s a difficult job to contain inflation, but we’re not all that uncertain about it as we are with the issue of deflation. We’re far more unclear on the issue of deflation, and as a consequence, we need a wider firebreak, in logging and forestry terms, because we know so little about it. So we lean over backwards to make certain that we contain deflationary forces

Fed watchers were looking at this year’s speech to see if Greenspan was going to a) declare deflation dead and b) speak about the need to quash the inflation beast.

The Fed chairman delivered (mostly) on a) but failed to give rate-hawks much ammunition as his view of the economy’s future policy was mostly balanced. But markets are still expecting a quick series of rate hikes going forward.

I don’t think that we’ll actually see that. I think that the Fed is actually engaged in actively steering market’s perceptions of what will come to pass. Thus managing of expectations has been going on for a while now and may actually constitute the monetary policy “Plan B” proposed by Fed Governor Bernanke.

The Fed engineered much of the current recovery by letting markets know that rates will remain low for a “considerable period”, thereby switching from an economic metric such as inflation, to a calendar metric. The Fed is now engaged in an attempt to assuage markets that it is not behind the curve with regard to inflation without giving the impression that they will tighten in such a way that will kill the recovery. That is why the Fed is saying “we’re vigilant, we’re looking at inflation, we’ll act. But we’ll act in a steady fashion”.

The problem that the Fed (and everyone else) has is that inflation data has been quite volatile with the first months of the year showing subdued (“quiescent”) prices rises while the most recent data has shown stronger gains. Just not enough data to form any kind of trend. Higher prices for many raw materials have been well publicised and have provided many companies with the possibility to raise prices on the back of newspaper headlines. This is serving to inflate profit margins and is raising consumer’s expectations of inflation in the process.

The summation: I believe that the Fed will hike, but not by as much as many people think (say around 75bp by year end). The risk is in market expectations of inflation running rampant. This will the force the Fed to act to counter – or “manage” – these expectations. This could in turn really hurt economic growth in the third or fourth quarter.

Thank you for reading. Remember to visit and bookmark CurryBlog for more economic and market news.

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Thoughts on This Week’s News

I’m back from a nice two week vacation, which was a good break not only from work, but also from the news. I’ve just started catching up on my reading, including PGL’s excellent work here on Angry Bear while I was gone. On the whole, it seems that it was a pretty good two weeks to have missed out on the news – because I have been blissfully unexposed to the busy myth-building activities of the conservative media (which this week seems to include the NY Times, Washington Post, CNN, NBC, ABC, CBS, etc.) about Reagan’s legacy. This post by PGL, this piece by Paul Krugman, and this piece by AB do a good job of pointing out the types of fictions and blatant lies about Reagan (and Bush, for that matter) that the conservative movement is working furiously to have established as fact, and that raise my ire so effectively.

One overriding thought has been running through my head this morning as a result. If Bill Clinton died next year, and our major news media outlets ran the sorts of swooning stories about him that they are currently running about Reagan – despite the fact that Clinton’s economy was stronger than Reagan’s, and that he was a more popular president than Reagan – can you possibly imagine the right NOT crying “Liberal Media!!!” at the top of their lungs? I fear that in today’s media environment it would simply be impossible for any Democratic president, no matter how good a president they were, to be afforded the sort of coverage that Ronald Reagan is getting this week. The right has mastered the art of building positive myths about conservative heroes, and simultaneously stripped the left of any ability to do the same.


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Ok, so you love Ronald Reagan …

… but you’re unsure whether Reagan’s overall bestness-at-everythingness necessarily means that you have to love George W. Bush as well? Well fret no more. In this masterful hard-news piece (really, it’s “news” not “commentary” or “analysis”), CBS kindly solves your dilemma: Reagan and W. Bush are exactly the same:

  • “Two decades separated their inaugurations, but the similarities in the speeches are among several common threads of their presidencies.”
  • “Reagan and Mr. Bush were both governors before becoming president…in matters of style and substance, there is much common ground. Both men carry themselves with swagger, projecting a masculinity closely tied to images of the American frontier, and reflected in tough talk like Reagan’s ‘make my day’ to tax-raisers and Mr. Bush’s ‘bring ’em on’ to Iraqi insurgents.”
  • “Both men have consistently defied critics who dismissed them as lightweights.”
  • “The first President Bush brought a managerial style to office, often having to fend off criticism that he lacked, in his words, ‘the vision thing.’ His son is dubbed an ideologue, by friend and foe. The first President Bush battled ‘the wimp factor,’ while his son pilots his own plane to aircraft carriers and pumps iron.”

    “And while Bush I evoked an air of patrician New England, his Texas-dwelling son and the Californian Reagan exude the egalitarianism of the new West: The 41st president was not known to sport cowboy hats, but both Reagan and Bush II favor Stetsons.”

  • “Like Reagan, ‘this President Bush is not particularly good at press conferences, is not highly articulate,’ notes Sabato. But like Reagan, he also ‘manages with a wink and a nod and a joke to get his point across.'” [ed. note: WTF? Seriously, W-T-F? Reagan was, of course The Great Communicator; George W. Bush is decidedly not a great communicator. Reagan’s substantial oratorical skills are now posthumously redacted just so some hack at CBS News can draw more parallels between W. and Reagan? Note that the writer takes a legitimate quote from Sabato contrasting W. and Reagan, breaks it up, twice prepends “Like Reagan”, and throws in an “also” for good measure.]
  • “Mr. Bush and Reagan are the only two recent presidents to refer to both God and taxes in their inaugural addresses.” [ed. note: At the risk of repeating myself, WTF? I only checked for Clinton (1993; 1997) but I’m willing to bet that every inaugural speech mentions “God”, so the writer here just gratuitously throws God into the mix in order to link Reagan, W. Bush, God, tax cuts, and chewy cream-filled goodness together in the reader’s mind).]

I don’t know much about Jarrett Murphy; the name rings a bell, but that’s it. In any case, he should be fired. Posthaste.

Oh, and the title of the story? It’s Reagan & Bush, Father & Son.


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Government variations on Enron accounting

Kash returns tomorrow so I thought I’d have my last post cover another one of my pet peeves that covers public finance concerns and a twist on how financial economics impacts tax contorversies.

Janet Yellin’s “The Bringe Mentality in the Federal Deficit” drew a parallel to what Wall Street has come to know as Enron accounting:

The budget binge is supported by the same kinds of unrealistic projections of future revenues, low-balling of spending and obfuscatory accounting that are now the focus of the Wall Street scandals…The perpetrators of the budget binge – President Bush and Congress – are sacrificing the public’s long-term welfare for their own short-term political gains. In the case of Enron, the company’s long-run stability was sacrificed for inflated stock prices in the short run. In the case of the federal budget, the health of Social Security and other programs is being sacrificed for unaffordable tax cuts.

Dr. Yellen focused on the Social Security accounting issues, which certainly dominate the debate over our long-term fiscal future. I wish to draw attention to two other forms of possible Enron accounting – one at the Federal level and one at the state level. One draws from (but should not be blamed on) chapter 5 of the Economic Report of the President 2003, where Glenn Hubbard makes his case for two means of reducing the tax burden on capital income: (a) a proposal to not tax capital income (akin to a Roth IRA), or (b) a proposal to switch from income taxation to consumption taxation (akin to tradtional IRAs). Box 5-3 notes:

For an investment with expected normal returns, the tax payment due upon distribution under a deductible IRA is equivalent to the prepayment of tax under a Roth IRA. If the government could reinvest the tax received from prepayment under a Roth IRA in an equivalent investment, the value of its investment would be exactly equal to the tax payment due upon distribution under the deductible IRA.

In other words, the present value of tax revenues is the same. However, note that the Roth IRA would have the government receiving its revenues earlier than would the tradtional IRA. Hubbard’s argument that changing the way we collect taxes would induce more savings and investment assumes that government spending is not affected by the timing of taxes. But if there is any validity to the alleged “starve the beast” view of political decision making, would not such the acceleration of tax revenues under a Roth IRA approach induce more government spending now and hence less investment with the debt implications deferred for future generations?

Californians may be concerned that our replacement governor is also deferring the issue of the deficit problem that drove Gray Davis out of office. Other states are also facing deficit issues and may be tempted to sell some of its assets to private entities and then lease back the proceeds. This editorial criticizes these sale in-lease out (SILO) transactions noting how there is a bipartisan consensus in the Senate to eliminate this tax planning on the premise that the Federal government loses an estimated $11 billion in present value terms from the timing of tax deductions (there is a growing literature on this issue, but I thought this editorial captured the essence of the public concern quite simply). The defenders of SILOs would argue that only about half of this Federal loss is reaped by the private owners of property the local government lease with the local governments allegedly reaping the other half. Their analysis that claims that the private sector only gets half of the benefit rests on economic assumptions that are controversial, but then those who put forth the models that suggest such a split ask why would a local government ever engage in a SILO that does not yield it a positive net present value? This argument presumes that government decision makers engage in SILO transactions considering the long-term budgetary implications as opposed to short-term appearances and are not constrained by borrowing restrictions. In many cases, however, neither assumption is true. State and local governments are often faced with self-imposed borrowing restrictions and if national politicians are guilty of Enron accounting as Dr. Yellen suggests, why should be assume state and local government officials are not?

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Is Blair about to endorse Kerry?

David Williamson of The Western Mail writes:

STEVE MORGAN, the Welshman at the heart of the John Kerry presidential campaign, said yesterday Peter Hain’s upcoming visit with senior Democrats suggests that the Government is now expecting President Bush to lose the November election. He said several potential scandals were looming over the Bush administration which have prompted Downing Street to build bridges with the Democrats…Mr Hain’s meeting with Democrat leaders, who are expected to include House minority leader Nancy Pelosi and Senate minority leader Tom Daschle, follows a visit by junior minister Gareth Thomas. Around 10 Labour MPs are expected to attend the convention in Boston. A spokesman for Mr Hain denied that the trip was an endorsement of Mr Kerry. Instead, he said it is to study new election-winning techniques and to exchange ideas.

So who is Peter Hain who ask? “Leader of the House of Commons, Lord Privy Seal and Secretary of State for Wales”. Of course, my question is how much reliability can we place in David Williamson of The Western Mail? But if I were Mr. Blair, I certainly would be hedging my bets.

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Reagan’s small-government vision

Last Wednesday, I gave Cato’s Chris Edwards an A for effort for his suggestions as to how to reduce government spending by almost $300 billion per year and asked you to check out the details. Some of you did and were quite hard on Mr. Edwards. After reading his “Reagan’s small-government vision” over at NRO today, I’m going to be quite hard on him for a couple of different reasons. First of all, how can one raise a small-government vision and then write: “It is true that Reagan did not control federal spending growth. By 1989, federal spending was up 69 percent from 1981”?

It is true that Reagan failed to cut government spending to pay for his tax cuts (Bush43 has the same problem) but Mr. Edwards numbers that indicate a 68.7% increase in spending are nominal figures. To suggest that an increase in government spending caused the deficit ignores that fact that nominal GDP rose by 75.3% over the same period. The increase in nominal GDP is only partly due to an increase in real income (31.9%) as prices rose by 32.9% over this period. And the increase in real income is in part attributable to the 14.4% increase in the labor force over the same period. We know that Stephen Moore understands nominal versus real when it comes to oil and gasoline prices even if his colleague Tom Nugent does not (see our discussion last Thursday) so hopefully he can teach Mr. Edwards how to do real per capita comparisons across time. Then again, Mr. Edwards seems to be following Mr. Moore’s habits of comparing total nominal Federal revenues across time when he suggests that they rose by 65.4% over this period. On Monday, we noted that when one removes increase the payroll contributions to finance the Social Security retirement benefits for the Baby Boomers, the real increase in Federal income taxes over this period is actually less than the increase in the labor force.

My second critique of Edward’s oped is over the following:

The first thing to note is that Reagan inherited a $79 billion deficit from Jimmy Carter in his last budget for 1981. Indeed, the government had run deficits every year since 1961 with the sole exception of 1969. Reagan did not invent deficit spending.

While the conventionally reported government deficit was positive during the Carter years, it is interesting that Milton Friedman wrote in a 1980 Newsweek article that Carter’s fiscal stance was showing annual reductions in the real value of debt. Even the $85.8 billion increase in gross Federal debt during 1981 (Table B.78 of the Economic Report of the President 2004) represented only a 9.4% nominal increase in Federal bond during a year when the GDP deflator also rose by 9.4%. Of course, Robert Barro’s 1979 Journal of Political Economy article “On the Determination of the Public Debt” noted that U.S. fiscal policy since 1789 had strived to retire any debt created during major wars or recessions. In fact, the ratio of gross debt to GDP fell to 32.5% by the end of 1981.

Despite Edward’s claim that “Reagan did not invent deficit spending”, Thomas Sargent and Neil Wallace warned in the fall of 1981 in “Some Unpleasant Monetarist Arithmetic” that Reagan’s fiscal stimulus of “never tax, always borrow” could imply a Federal bankruptcy path that would result in an exploding debt/GDP ratio. Table B.79 of the Economic Report of the President 2004 notes that the debt/GDP ratio rose to 67.3% by the end of 1996 before the efforts of Bush41 and Clinton managed to put Federal finances on a debt retirement path that lowered this ratio to 57.5% by the end of 2001. Alas, Bush43’s desire to be ReaganII has led to tax cuts and spending increases, which have us back on the Sargent-Wallace Federal bankruptcy path with the debt/GDP ratio expected to be 67.5% by the end of 2005.

I suspect Mr. Edwards understands that such fiscal policies are not sustainable, which is why the Cato Institute is proposing nearly $300 billion in spending cuts. Perhaps he also realizes that the Bush Administration has even less political will to follow his recommendations than Reagan displayed. Unless all of his cuts are adopted, which is not likely politically, then we will have to choose between tax increases or an ever rising debt/GDP ratio. Rather than sugar coat this issue with a misleading oped, why not just admit the fiscal irresponsibility of both ReaganI and ReaganII?

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