The state of economics: Krugman is wrong

from Peter Radford

Paul Krugman this morning hammers away at hedge fund managers who, by and large, are complaining about Fed monetary policy, and especially its so-called quantitative easing. The managers are all predicting doom and hyperinflation because of the ongoing ease of Fed policy. It might also have to do with those low interest rates making it harder to earn a living as a hedge manager, but let’s give them the benefit of the doubt. The point is that there are many folks out there who still predict doom based upon the continuance of monetary ease.

Krugman, and others, have long argued that such a view is misguided because an economy mired in the depths – like ours is – does not respond to loose monetary policy the way it would under more ‘normal’ conditions. In particular, no amount of cash whizzing around will cause an inflationary spiral while we are stuck in a liquidity trap. Thus the analysis of the hedge fund managers, which seems to ignore the existence of a liquidity trap, is just wrong and their dire predictions will never be correct.

Case in point: this week’s report that inflation is nonexistent and that consumer prices have edged up only a little over 1% during the last year. Clearly hyperinflation remains a way off. So Krugman’s analysis seems correct, and the hedge fund managers are wrong.

Where I disagree with Krugman in his blog today is his references to the economics profession.

A picture of history

from Peter Radford

There is no serious effort in Washington to deal with our so-called debt crisis. I would like to think this is because people realize we don’t have one, but a more realistic interpretation on non-events is that the Republicans are stuck in a rut of obstruction. They have no policy other than to contradict whatever Obama says. Even if this means contradicting what they themselves said in the past. At the moment this obstruction produces gridlock on any constructive efforts to get the economy moving at a more rapid pace. It also means avoiding negotiating on the budget, even though both the Senate and the House now have working budget proposals. The problem seems to be that were the Republicans to engage in negotiations they wouldn’t be able to engineer a crisis atmosphere within which they could extort excessively. They want, apparently, to wait until we nudge back up against the debt ceiling at which point they can reload their hostage taking weaponry and cause the nation greater mayhem.

Error Correction and Ethics

from Peter Radford

You probably have missed it, but there is a major furor within the economics profession concerning the findings of an academic paper written by Carmen Reinhart and Kenneth Rogoff in 2010. The profession issues a torrent of papers annually, most of which remain scarcely read and massively under-appreciated. Probably deservedly so since the sole objective of most is to meet the check-box requirement of publication that dominates academia. This desperation to publish to build reputation and to demonstrate mastery of the subject to a determinedly self-referential peer group is one of the causes of the rapid decline within economics: it encourages ever more fragmentation of the subject into ever less relevant sub-disciplines, and has resulted in a near total elimination of a common understanding – or common memory – of its development.

It has also produced sloppiness.

The R-R paper has now become a cause-celebre of such sloppiness.

This would not normally be worthy of passing along to a broader audience – who cares what academic economists write after all? – were it not for the particular topic that R-R covered. 

USA Inequality Update

from Peter Radford

In case you missed it: the US is a wildly unequal society, and it’s getting worse by the hour.

No surprise at all, but nonetheless some of the data can be quite eye-opening. Allow me to point you to David Cay Johnston and some of his analysis.

• Incomes have grown between 2009 and 2011. Great. But 149% of that growth has gone to the top ten percent of all income earners. Yes. More than all the increase has gone to a small minority. You knew that right?
• How? Because income for the rest actually went down.
• According to the Internal Revenue Service data you needed an income of above $110,651 to achieve top ten percent status. $366,623 gets you into the top one percent.
• And it’s worth getting into that top one percent: 81% of all the extra income earned since 2009 has gone to that lucky group.
• Even better if you can squeeze into the top of the top. The top ten percent of the top ten percent – bear with me here – managed to make off with 39% of all the income gains nationwide. That’s 15,837 households if you’re counting. Out of 158,400,000 households.

Now Johnston gets cruel: 

Deficit realities: No cuts needed

from Peter Radford

It seems like the entire economic discussion is now about the Federal deficit and what we ought to do about it. You all know my position by now: nothing. The deficit is going to melt away, or at least back to manageable proportions. So there is no need to do anything. Really.

But, in the interests of science, and to give you some context, I ought to pass along to you some facts and figures. That way you can keep score for yourselves at home.

Since Obama arrived in the White House the accumulated deficits have been approximately $5,100 billion. That’s a lot by any standards. To put that in perspective: accumulated GDP has been $59,231 billion dollars. So the deficit has been about 9% of GDP throughout. 

What’s Missing?

from Peter Radford

A couple of days ago I complained about the misrepresentation of Federal spending under Obama. It hasn’t risen anywhere near as much as some folks say it has. Indeed it has been under control since that first burst during the heat of crisis.

That drew the ire of one or two of you who complained that the real issue is not the budget, but the economy and its chronic under performance.

I agree.

I look at this chart and wonder why our fearless leaders don’t see what’s missing:

Because it’s pretty obvious to me.  

US federal spending facts (2 graphs)

from Peter Radford

Like many people I am perplexed by claims that federal spending has ‘exploded’ on Obama’s watch. The claim is generally made by someone on the right of center in politics and is stated as if it is a well known fact. So well known that no one can possibly refute it. The conversation is then meant to proceed immediately to what we can do about said ‘explosion’ and how we can restrain the Federal government.

The problem I have is factual.

Here is a chart of Federal spending from way back when:

In not Of?

from Peter Radford

Today’s New York Times has a reminder of the damage the crisis has done to the economy, and, more importantly, to enduring attitudes towards opportunity. The article summarizes the results of a survey conducted by Rutgers University.

The main thrust of the article is that this crisis was both deep and broad enough to involve almost eighty percent of the population in one way or another. Unemployment and its awful effects were that widely felt. People’s lives were often ruined permanently. The entire trajectory of some people’s lives will be changed forever. The damage is incredible. The downdraft from Wall Street’s extraordinary greed driven stupidity caught almost all Americans and has left enormous psychological as well as material scars.

Yet we still have not dealt with the causes and have not undertaken strong remedial action.

Why not?

Standard & Poor’s

from Peter Radford

It is good news that Standard & Poor’s is being sued by the government. S&P was complicit in the market rigging that led us to the bubble and the destruction of a boatload of wealth. It has escaped, thus far, any serious damage from its involvement in the creation of crisis and deserves to be taken down a peg or two. The amount of damages being sought is roughly equivalent to one year’s income of S&P’s parent company McGraw-Hill. That’s not enough to put the company out of business, but it is noticeable.

Anyone who is committed to a free market system will applaud the suit. Market rigging is about as serious a problem as can be imagined in a free market.

Geithner’s poor legacy (13 key things to bear in mind)

from Peter Radford

It’s my turn to comment on Tim Geithner’s unfortunate legacy at the Treasury Department.

I think that, by and large, that legacy has to be seen through the lens of Wall Street. He was an ally of Wall Street, he bent over backwards to help Wall Street, and will forever be associated with an overly cordial relationship with Wall Street bankers and sympathy for their self-inflicted plight.

The record is unequivocal: Geithner, whenever called upon to choose, chose to back Wall Street’s interests over those of the public at large. In this he simply follows in the footsteps of other Treasury Secretaries – Rubin and Paulson come to mind – who made the tragic mistake of conflating Wall Street and Main Street as if the two shared common cause.

Geithner is a limited person who, having been brought up in the Reagan era, sees nothing wrong with the stranglehold big finance has on the economy. Big gigantic banks betting on both sides of the street, propped up by taxpayer subsidies, and with ineffective, duplicative, and outdated oversight are, in his eyes, perfectly fine.  They represent no threat to our economy. They simply need a periodic tweak, a tad more capital, and a little nudge now and again and they will steer their rivers of cash towards socially beneficial ends.

In all this Geithner is the living epitome of the group thinks that grips our elite whenever it tries to confront the perpetual problems that our big banks create. 

British Test Case

from Peter Radford

For those austerity advocates amongst you: may I draw your attention to the plight of the British economy?

Its’ headed down again. There’s a distinct possibility that it will enter recession. Make that a third recession. A rare triple dipper. The prolonged slump pervading Britain has now lasted longer than the Great Depression. It is taking an enormous toll. It is steadily eroding the future potential of the economy.

And it is entirely a manmade problem.

Manmade as in Conservative party made..

The British government, for ideological reasons, decided to trash the British economy, It is doing a fine job. So good is its effort that it surely would be eligible for some prize, were prizes given for most asinine, antisocial, deliberately destructive, and all round stupid economic policy.

Economic Hypocrisy

from Peter Radford

It takes a particular type of gall for someone hiding behind the comfort of a cozy tenured professorship to yelp about the way in which unions distort the otherwise – presumably – smooth operation of a mainstream style economy. Apparently one person’s guarantee is another’s structural impediment.

This really stinks. It reeks of hypocrisy. It is devoid of ethical self-understanding. It is just rotten.

But it happens all the time. Far too often.

Today’s Financial Times has another in its series focusing on America’s so-called debt problem. This one is decidedly on the side of the austerity seekers. It is written by Ken Rogoff who seems determined to tarnish the good name he earned when he co-authored a book called “This Time is Different” in which he correctly highlighted that recoveries subsequent to a financial melt down are more difficult and prolonged. Unfortunately he drew  some conclusions from his data that have a somewhat tenuous cause and effect connection.

The meaning of Aaron Swartz

from Peter Radford

This weekend has seen a flurry of comment about Aaron Swartz, whose recent suicide has set me thinking about the way in which society is dogged by bureaucracy that serves either itself or a limited elite. So many of the rules that beset us all on a daily basis exist only to protect the interests of those with access to power. The rest of us are left to flounder on our own, and to conform as best we can to the contours of society as we find them. Our ability to shape those contours is minimal.As a result, we have precious few moments when our voices really matter.

Swartz was no anarchist. He was a liberal and someone who understood that most bureaucracy is a thin veil drawn over deep seated power structures.

He was being threatened by a massive legal challenge in Massachusetts.

Cartoon Economics

from Peter Radford

I haven’t commented on the state of economics lately largely because there’s been no change. It remains a mess. Moreover it remains a mess few people seem keen to clean up. Pet theories abound. Old ones are trotted out anew. Academic bricks are tossed over walls into rival camps. But no one fixes much of anything. The public has a right to be confused.

Perhaps we should all just laugh. Economics is so far away from what its most ardent practitioners think it is that it has become a cartoon. Enjoyable, but not to be taken seriously.

And I say this as someone who has a passion for the subject. Imagine my despair at what its leading thinkers have wrought.

Economists nowadays love to talk about their models.

Debt Ceiling Nonsense

from Peter Radford

When a very old matter of convenience becomes a contemporary pain in the butt strange things get said, people act peculiarly, and really stupid stuff happens.

Meet the debt ceiling.

Only in America.

The debt ceiling was introduced back in World War I as a convenience. The constitution, that fusty bedrock of American politics, gives Congress the right to tax and spend. So the debt represents the accumulated difference between those two things. We incur national debt because Congress, in its infinite wisdom, decided at some point in the past to spend money it wasn’t raising through taxes. Rather than have Congress run around and authorize borrowing regularly the debt ceiling was a way of handing the Treasury Department a kind of credit card. It could keep up with Congressional spending without having to seek authorization for new debt, and Congress could spend away happily without having to worry about actually raising the cash it needed for those programs.  

Latest News

from Peter Radford

Yes it’s hard to focus at this time of year under the best of circumstances. This year is even worse. The background noise provided by the lack of active negotiation over the so-called fiscal cliff, and the Treasury Department’s sudden discovery that we will hit the debt ceiling at year’s end, drown out any day to day news. So in the spirit of giving here’s a look at that humdrum stuff:

House Prices

We learned yesterday, from the Case-Shiller index, that home prices fell in October. Since the index is not seasonally adjusted most people seem to think that this simply reflects the early fall slow down in activity rather than the onset of a prolonged decline. The biggest declines were registered in Chicago – down 1.5% for the month and 1.3% for the last twelve months, and in Boston – down 1.4% for the month, but up 1.4% over the past year. That twelve month decline in Chicago was only one of two city declines: New York was the other where prices dropped 1.3% over the last year.

In general the numbers support the notion of a slow recovery in real estate from a very low level. I doubt prices will accelerate much in 2013, with a lot riding on how income tax rates and deductions are sorted out as part of the current sort-of negotiations in Washington. 

Oh Boy: Over the Cliff We Go?

from Peter Radford

No one knows exactly what went on, but this evening’s extraordinary melt down within the House Republican caucus is surely a historical moment.

Here’s the story:

Speaker Boehner has been negotiating a deal to resolve the so-called ‘fiscal cliff’ with President Obama. Set aside whether we think the economy has a debt or budget problem. It certainly has a manufactured fiscal policy problem. The reason the cliff is a rotten thing is that unless it dealt with it will induce a severe contraction in policy staring January 1st. The CBO forecasts a recession if we go over the cliff with GDP dropping by nearly 4.0% in the first quarter. 

Robots don’t buy stuff

from Peter Radford

With the fiscal cliff now swallowing the entirety of Washington and media corps, the rest of us can sit back and get on with life. We can also start to discuss the real issues that have eroded the economy. Some folks have just noticed that the balance between profits and wages is awry. A lot awry. Like so unbalanced that our future depends on plotting a way to get back to a better balance.

This is a point I have made several times over the last few years. Let me summarize:

For a long time after World War II, up through the late 1970′s at least, there was an unwritten but clear ‘social contract’ operating in the US.

What goes around

from Peter Radford

Read any news story about the onrushing ‘fiscal cliff’ and somewhere within it will be a reference to the massive damage it is doing to business confidence. A major, if not the only, reason for limp business hiring and investment is the supposed uncertainty that the ‘cliff’ implies. Financial writers especially speak of the ‘cliff’ as if it were some huge dark cloud lurking in the distance about to engulf and swallow whole businesses and their profits.

Elsewhere we read that the impasse is ideological – it is caused by a titanic clash between two views of government. The big versus small argument that has torn American politics apart for the past four decades has reached its boiling point. The ‘cliff’ debate will determine, for now at least, which side wins. So there’s a lot to lose. No one wants to be the first to blink.

Other writers are now beginning to write about the inordinate shift in the way GDP is parceled out.

Cliff Walking

from Peter Radford

This is really irksome.

For most of this phony war, as the key players strut their stuff for public eyes but not for serious negotiation, the Republicans have been oddly coy about what their plan would be. They released no details, gave no hints, and merely repeated their continuing objection to the horror of a tax rate increase for the wealthy.

As a result no one, including most Republicans, had a clue about where the starting lines were being drawn in what was supposed to be a fairly short and intense negotiation. For those of us familiar with Obama’s history, particularly that from 2009 and 2010, the GOP silence was easily explained: he has a tendency to do all the negotiation with himself. Thus his starting position is already heavily leaning towards a Republican viewpoint, which makes him vulnerable to being bullied even further. This is why so much of the early legislation of the Obama administration was so lame from a left of center perspective.