Monthly Archives: December 2013

Polarization, the 1960s, and Today

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I have been thinking about this. During the era of Vietnam protests, politics was quite heated. I would describe it as confrontational, with traces of violence. The tactics today strike me as milder (or subtler). However, I think we were better off back then in two ways.

1. The vast majority of the American people were repelled by confrontations with traces of violence, and they expressed this through voting for Richard Nixon, particularly his landslide re-election in 1972. I hate to give Nixon credit for anything, but he did provide a vehicle through which the silent majority got its message across. Today, it may be the case that most people are sick of partisanship, but it is less likely that they will find a vehicle with which to express that. Primaries being what they are, could we wind up in 2016 with Ted Cruz vs. Elizabeth Warren? Even if a centrist were elected, would the polarization in Congress remain too intense to be overcome?

2. Back then, elite individuals changed their minds and reversed course. A lot of prominent supporters of the Vietnam War, including Senators who voted for the Gulf of Tonkin resolution, recanted and turned against the war. The economists who had enthusiastically supported “incomes policies” (meaning wage and price controls) and pooh-poohed monetary policy as an inflation-fighting tool recanted, based on experience. I don’t see that sort of mind-changing being possible today. If Obamacare ends up helping millions more people than it harms, will its opponents recant? If Obamacare ends up harming millions more people than it helps, will its supporters recant?

I am most worried about problem (2), the way that people are closing their minds. I have said that very few bloggers or newspaper columnists seek to communicate with people on the other side or to open minds of people on their own side. Instead, the goal seems to be to ensure the opposite–that people on your own side keep their minds closed. You reinforce mind closure by demonizing the other side, using ad hominem and straw-man arguments, and by working intensively to reinforce your side’s narrative through using spin, denial, and bullying.

And Yet They Stay in Yuma

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The WSJ reports,

The October unemployment rate was a staggering 31.9% in the metro area of Yuma, Ariz., and 25.2% in El Centro, Calif., according to a Labor Department report released Thursday. They had the highest unemployment rates, which aren’t seasonally adjusted, among the 372 metro regions measured by the Labor Department’s monthly report.

Other regions — namely, those benefiting from a natural resources boom — are humming. Bismarck, N.D., for example, had the nation’s lowest unemployment rate in October at 1.7%.

I think we know how those on the right would try to explain why people stay unemployed in Yuma rather than move to Bismarck. What is the explanation that comes from the left? Mark Thoma? Brad DeLong? Anyone?

I am quite serious. I do not want sarcastic answers from people on the right. I would like someone on the left to offer a reasonable counter to the obvious story that someone on the right would tell.

The Confiscation Option

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Romain Hatchuel writes,

As applied to the euro zone, the IMF claims that a 10% levy on households’ positive net worth would bring public debt levels back to pre-financial crisis levels. Such a tax sounds crazy, but recall what happened in euro-zone country Cyprus this year: Holders of bank accounts larger than 100,000 euros had to incur losses of up to 100% on their savings above that threshold, in order to “bail-in” the bankrupt Mediterranean state. Japanese households, sitting on one of the world’s largest pools of savings, have particular reason to worry about their assets: At 240% of GDP, their country’s public debt ratio is more than twice that of Cyprus when it defaulted.

I consider this to be one of the most likely scenarios.

P(A|B) != P(B|A)

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Timothy Taylor writes,

those in the top 1% are almost surely paying the top marginal tax rate of about 40% on the top dollar earned. But when all the income taxed at a lower marginal rate is included, together with exemptions, deductions, and credits, this group pays an average of 20.1% of their income in individual income tax.

…The top 1% pays 39% of all income taxes and 24.2% of all federal taxes.

Assume you are in the top 1 percent. For any particular dollar of your income, there is 20.1 percent chance that it winds up with the government. However, for any particular dollar (not necessarily yours) that winds up with the government, there is a 39 percent chance that it came from your income.

Think Tank or Narrative Tank?

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The WSJ blog reports,

The Brookings Institution is bringing a new player into Washington’s think tank arena, launching a center to study fiscal and monetary policy that will be led by The Wall Street Journal’s David Wessel.

In recent weeks, I have been struck by how firm the Insiders have become about their narrative of the financial crisis:

–it was caused by markets run amok
–the economy was saved by bailouts and stimulus
–the public does not appreciate the good that the interventions achieved
–in fact, it turns out that the “secular stagnation” is so stubborn that we need even more interventions

I am not saying that this narrative is necessarily wrong. I just don’t like the sense that I get that the Insiders are determined to bully us into suppressing any doubts.

I hope that this is truly a think tank, and not a narrative tank. But it looks pretty Insiderish to me.

Does QE Steal from Savers?

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This issue seems to come up a lot. For example, Timothy Taylor writes,

Of course, lower interest rates help borrowers pay less, while those who are receiving interest payments get less. Thus, the big winner from ultra-low interest rates is the U.S. government, which over the 2007-2012 period could owe $900 billion less in interest payments. Indeed, the McKinsey report also notes that central banks like the Federal Reserve have been buying assets as part of the “quantitative easing” policies in recent years, and funds earned by the Fed over and above operating expenses go to the U.S. Treasury. They estimate that the quantitative easing policies gained the U.S. government another $145 billion or so during this time period. So overall, the ultra-low interest rate policies have been worth about $1 trillion to the U.S. government.

At this point, I think I prefer to think in terms of consolidating the government balance sheet. The Treasury issues long-term debt, and the Fed buys some of this long-term debt with short-term instruments (such as interest-bearing reserves). You could get the same result without QE–just have the Treasury not issue long-term debt and issue short-term debt instead (or even buy back some of its outstanding long-term debt while issuing more short-term debt).

From that perspective, what QE does is change the mix of outstanding government debt so that more of the debt is short-term and less of the debt is long-term. I do not see that as taking money away from savers and giving a profit to the Treasury. To a first approximation, it is simply a fair swap of equal-value assets.

Suppose that expected returns are equalized across maturity structures. In that case, over the next 20 years, the government’s interest costs will be the same regardless of whether it issues a 20-year bond or instead issues one-month bills and rolls them over for 240 months.

Any saver who thinks that the short-term rate is being held down artificially is welcome to buy long-term bonds instead. You will find some right-wingers outraged over what the Fed is doing to savers. I have no plans to join that chorus.

Brad DeLong on Stagnation

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A lengthy, interesting essay. A brief quote:

In the future we are going to want to spend a greater share of our incomes and attention in areas where the market system works less well: information goods, public goods, increasing-returns goods, pensions, health care, education. The market works less well in these areas. But our alternative modes of collective organization, product [sic?] take some bureaucracy, not exactly cover themselves with glory in these areas either. Thus I suspect that not innovation exhaustion but rather institution design will be our big problem in keeping the pace of true economic growth going into the long-run future.

This is where I use my line: “Markets fail. Use markets.”

That is, I do not think that replacing markets where competition works imperfectly with technocrats shielded from competition entirely is the way to go. So while Brad and I might agree that institutional arrangements matter, we disagree on which institutional arrangements are likely to be most promising. I wish we could arrange it so that he lives in his technocratic utopia while I live in a messier decentralized system without having to create an impermeable boundary between us.

But do not let that deter you from reading Brad’s entire essay. One thing that he does well, compared to other discussions I find in the blogosphere and in the press, is wrestle with the meaning of “stagnation.” Too often, I see demand-side stagnation lumped in with supply-side stagnation, even though to me it seems that they are mutually exclusive. You cannot have both excess supply and excess demand at the same time in the aggregate (you can certainly have excess supply in one market and excess demand in another, but that is not what the sloppy thinkers are describing). Of course, I am willing to forget about demand-side issues altogether and just look at everything in terms of PSST.

As Brad also points out, you need to clarify which problems you think are temporary and which problems are embedded in long-term trends. My own view is that the decline in the value of unskilled (and some skilled) labor is embedded in a long-term trend. If there a lot of low GDP-per-worker folks out there, one has to ask whether the best use of their time is working (I think Brad hints at this issue, but perhaps he means something different).

This brings us down to the issue of whether pure innovation is going to be a favorable long-term trend going forward. I am optimistic, but I go back and forth between being more optimistic about information technology vs. biotechnology. I think that improvements in information technology and its applications are easier to achieve but less dramatic. Human biology strikes me as really complex (and perhaps more complex than many researchers were expecting 20 years ago), but the potential payoffs from biotech strike me as huge. For example, I expect chemicals to do much more to improve cognitive ability than any educational tools.

Are $20 Bills Getting Picked Up?

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Don Peck writes,

I spoke with managers at a lot of companies who are using advanced analytics to reevaluate and reshape their hiring, and nearly all of them told me that their research is leading them toward pools of candidates who didn’t attend college—for tech jobs, for high-end sales positions, for some managerial roles. In some limited cases, this is because their analytics revealed no benefit whatsoever to hiring people with college degrees; in other cases, and more often, it’s because they revealed signals that function far better than college history, and that allow companies to confidently hire workers with pedigrees not typically considered impressive or even desirable. Neil Rae, an executive at Transcom, told me that in looking to fill technical-support positions, his company is shifting its focus from college graduates to “kids living in their parents’ basement”—by which he meant smart young people who, for whatever reason, didn’t finish college but nevertheless taught themselves a lot about information technology. Laszlo Bock told me that Google, too, is hiring a growing number of nongraduates. Many of the people I talked with reported that when it comes to high-paying and fast-track jobs, they’re reducing their preference for Ivy Leaguers and graduates of other highly selective schools.

The article is about data-driven personnel practices. It reads like something out of Average is Over.

Dean Baker on Housing Finance Policy

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He writes,

Way back in the last decade we had a huge housing bubble which was propelled in large part by junk loans that were packaged into mortgage backed securities (MBS) by Wall Street investment banks and sold all around the world. Unfortunately few people in policy positions are old enough to remember back to the this era, which is why they are now in the process of altering rules so that investment banks will be able to put almost any loan into a MBS without retaining a stake.

Pointer from Mark Thoma.

I have argued that the general trend of housing policy is to give Wall Street and the housing lobby, particularly the Mortgage Bankers Association, exactly what they want. Baker is one of the few economists on the left who is willing to speak up on this. When I suggested to an audience of conservatives that we needed to engage Brookings and the Urban Institute to study the effects of housing finance subsidies, people came up to me afterwards to say that they thought that those think tanks would not want to offend important donors.