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April 2011

Nick Rowe on the Uses and Limits of Functional Finance


Worthwhile Canadian Initiative: Functional Finance vs the Long Run Government Budget Constraint: Functional Finance says you only use taxes if you want to reduce Aggregate Demand to prevent inflation. The Long Run Government Budget Constraint says you use taxes to pay for past, present or future government spending. They sound very different. They aren't. There's a general principle in economics: first you eat the free lunches; then you  look at the hard trade-offs. Functional Finance says "first eat the free lunches". The Long Run Government Budget Constraint says "then look at the hard trade-offs".

Suppose, just suppose, that if you kept on doing what you were planning to do, you never had to worry about inflation. Not now, not in the future, not ever. Because Aggregate Demand was too low now, and was projected to be too low forever. So you are not worried about inflation. Instead you are worried about deflation. And you were a government that could print your own money. What would you do? You would print money and spend it. Or print money and use it to finance tax cuts. And you would keep on doing it, more and more, until you got to the point where you did start to worry about inflation. You first eat all the free lunches. That's the underlying kernel of truth in Abba Lerner's Functional Finance.... And I don't know of any mainstream macroeconomist who would disagree. You use taxes only so you don't have to print money. When you get to the point that Aggregate Demand is high enough, so you start to worry about inflation, you use taxes to finance past, present, or future government expenditure precisely because you don't want to print more money and make inflation higher.

Continue reading "Nick Rowe on the Uses and Limits of Functional Finance" »

Benjamin Wallace-Wells's Paul Krugman Profile Is Up...

It is a good piece. Ezra Klein is first out of the gate with a reaction:

Ben Wallace-Wells’s profile of Paul Krugman is an excellent piece of work, but rather than engage with the various big ideas and tough questions that the piece raises, I’m just going to quote from the hilarious sniping between Krugman and Larry Summers:

The two economists have known each other since the late seventies, when they were both graduate students in Cambridge, and there were moments in conversation with Krugman that I began to suspect he viewed Summers as a one-man control group for his study of himself. They each share a high assessment of the other’s intellect (“Larry’s extremely smart — ask him and he’ll tell you,” Krugman says). Krugman’s sense of humor is built upon self-deprecation, and sometimes Summers’s sense of humor is built upon deprecating Krugman, too.

I should say that Wallace-Wells also gets both men to offer more substantive criticisms of the other, and their indirect exchange is arguably the most interesting section in the article.

Continue reading "Benjamin Wallace-Wells's Paul Krugman Profile Is Up..." »

The Sensible Conservative Alternative To The Affordable Care Act Is The Affordable Care Act

The Bonnie Blue Blog Keep your feet on the ground but never be complacent

Matthew Yglesias reads Ramesh Ponnuru and Yuval Levin. I think he reads them wrongly. According to them, the sensible conservative alternative to the ACA is not the ACA but rather a process that leads us in a decade to single payer:

Yglesias » The Sensible Conservative Alternative To The Affordable Care Act Is The Affordable Care Act: Ramesh Ponnuru and Yuval Levin have a thoughtful New York Times op-ed about the desperate need for conservatives to come up with a substantial alternative on health insurance reform. There proposal, which has a lot of intuitive appeal, is to rescind the costly tax break for employer-provided health insurance and use the funds thereby raised to provide Americans with subsidies to purchase health insurance on the individual market.

There’s a lot to like about this idea, but there’s also a major problem: Adverse selection. If you simply do what Ponnuru and Levin propose, every insurance company will be competing to offer a product that’s attractive to young men with no chronic health problems and unappealing to everyone else. To turn this idea into an idea that actually works for people with medical needs you need to do three things. One, you need to prevent firms from turning customers away because of their health status or demographic characteristics. Two, you need some kind of regulatory definition of the minimum benefits that need to be offered in order to qualify as “health insurance” that’s eligible for the tax credit. And three, you need some kind of penalty for failing to enroll yourself in a plan to ensure the existence of a viable risk pool. What you need, in other words, is the Affordable Care Act and its regulate/subsidize/mandate tripod structure.

Continue reading "The Sensible Conservative Alternative To The Affordable Care Act Is The Affordable Care Act" »

New York Times FAIL Watch: In Which Ross Douthat Begs for Other People Go to Hell


Why oh why can't we have a better press corps?

If Hell does not exist, Ross Douthat claims, God ought to create it--and put some of those other people in it for eternity:

A Case for Hell: [T]o believe in God and not in hell is ultimately to disbelieve in the reality of human choices. If there’s no possibility of saying no to paradise then none of our no’s have any real meaning either. They’re like home runs or strikeouts in a children’s game where nobody’s keeping score. In this sense, a doctrine of universal salvation turns out to be as deterministic as the more strident forms of scientific materialism. Instead of making us prisoners of our glands and genes, it makes us prisoners of God himself. We can check out any time we want, but we can never really leave.

Continue reading "New York Times FAIL Watch: In Which Ross Douthat Begs for Other People Go to Hell" »

Will Canada's Liberal Party Soon Have a New Leader?


Matthew Yglesias:

Yglesias » Multi-Party Systems And Attack Ads: This Conservative Party hit on Liberal Party leader Michael Ignatieff is just unbelievably devastating. To a small extent they seem to me to have buried the lead and it’s the final seconds where they really nail him.... This makes Ignatieff and the Liberals look terrible, but depending on your ex ante political preferences thinking worse of Ignatieff could turn you into a voter for the separatist Bloc Québécois or the social democratic NDP rather than the center-right Conservatives. And, indeed, over the past week we’ve been seeing a surge in support for the NDP.

Paul Krugman: Conceding the Principle


Conceding the Principle (Wonkish): Dave Altig at the Atlanta Fed is a circumspect blogger — as he must be, given his position. He generally understates his points, and gives the benefit of the doubt to those who don’t deserve it; again, that’s the nature of his position, so it’s perfectly OK. But his latest post, about the very Keynesian models of some supposed anti-Keynesians, hits a little harder than most. And well it should. As Altig says, it’s really peculiar to have John Taylor, Robert Mundell, and Ken Rogoff portrayed as anti-Keynesians. Rogoff in particular is one of the founders of the “new open economy macroeconomics”, which is basically new Keynesian analysis applied to international macro. I knew immediately that some of the arguments being advanced about how government spending would lead to an equal fall in private spending were wrong precisely because I had read Obstfeld and Rogoff, and new that fiscal policy “works” even given very strong assumptions about rational, perfectly informed consumers....

What Altig soft-pedals here, understandably, is how inconsistent it is to accept the importance of aggregate demand, on one side, and reject any possible role for fiscal policy, on the other. If an increase in debt-financed business investment expands the economy; if an increase in debt-financed consumer spending expands the economy; then how can it be that an increase in debt-financed government spending doesn’t do the same thing? Faced with this question, as far as I can tell, the response of the Keynesian anti-Keynesians is, “Look! Regulation!” or maybe, “Anybody else have a question besides this guy?”

Continue reading "Paul Krugman: Conceding the Principle" »

Richard Grossman on John Taylor


John Taylor’s disingenuous op-ed: John Taylor... bashes the White House budget proposals of February 14 and April 13 and lauds the House Republican budget proposal of April 5.... Taylor’s simplifications go so far as to be misleading.... Taylor [implies that when hi]s boss, George W. Bush, was president (Taylor was  Under Secretary of the Treasury for International Affairs during the Bush Administration), spending was under control.  This implication omits several inconvenient facts. The substantial increase in the government’s budget after 2007 resulted, in large part, from responding to the most substantial financial crisis and recession since the Great Depression. Had government spending not increased dramatically, the Great Recession would have morphed into a rerun of the Great Depression. The financial crisis itself was partially the result of the irresponsible fiscal policies (fighting two wars and cutting taxes at the same time) of that same Bush Administration....

To simplify: reducing the federal budget deficit by an amount and increasing the aggregate of all state budget deficits by the same amount does not demonstrate fiscal rectitude.

To claim, as Taylor does that, “…the House budget plan, with spending in the same range, approximately balances the budget with no increase in taxes…” is misleading.  John Taylor should know better.

Paul Krugman: Zombie Tax Lies


Zombie Tax Lies: The claim that only rich people pay taxes is a zombie lie — something that keeps coming back no matter how many times it’s killed by evidence. So, let’s try another shot to the head. Yes, high-income people pay the bulk of the federal income tax. But that’s not the only tax! And while the income tax is quite progressive, the payroll tax — the other major federal tax — isn’t; and state and local taxes are strongly regressive.... The overall system is barely progressive at all. And here’s the thing: the people peddling this stuff about those lucky duckies who don’t pay tax because their incomes are low know all this, because it has been pointed out many times. They are deliberately trying to deceive you.

The Sorry State of Republican Thinktanks: Heritage Edition


Strawman Alert | The Big Picture: As the Heritage Foundation’s fingers lose their collective grip on the last rung of the ladder of credibility, William Beach, who authored their analysis of the Ryan budget proposal, takes aim at Paul Krugman, who has arguably been the biggest — but hardly the only — thorn in his side. Beach’s open letter is, regrettably, as pathetic as their recent budget analysis and subsequent hide-and-seek shenanigans with the unemployment rate.  While I disagree with much of what Beach has written, I think it might be instructive to put that disagreement aside and look instead at another facet of this debate.

For those who are just tuning in:

Heritage's original analysis of the Ryan budget proposal had the unemployment rate falling to a near-record-low of 2.8 percent by 2021.  This, of course, raised some eyebrows.  Among the first to question this projection was Krugman.  We at TBP made some quick Obama/Ryan comparisons here.  (Personally, I find it hard to believe that anyone from Heritage actually looked at — scrutinized — their output and questioned whether a 2.8 percent unemployment rate — without inflation, mind you — is attainable.  Garbage in, garbage out, is what I’m saying.  But I digress.)

Continue reading "The Sorry State of Republican Thinktanks: Heritage Edition" »

Bertolt Brecht: Questions from a Worker Who Reads

Questions from a Worker Who Reads by Bertolt Brecht:

Who built Thebes of the seven gates?
In the books you will find the name of kings.
Did the kings haul up the lumps of rock?
And Babylon, many times demolished.
Who raised it up so many times? In what houses
Of gold-glittering Lima did the builders live?
Where, the evening that the Wall of China was finished
Did the masons go? Great Rome
Is full of triumphal arches. Who erected them? Over whom
Did the Caesars triumph? Had Byzantium, much praised in song,
Only palaces for its inhabitants? Even in fabled Atlantis
The night the ocean engulfed it
The drowning still bawled for their slaves.

The young Alexander conquered India.
Was he alone?
Caesar beat the Gauls.
Did he not have even a cook with him?
Philip of Spain wept when his armada
Went down. Was he the only one to weep?
Frederick the Second won the Seven Years' War. Who
Else won it?

Every page a victory.
Who cooked the feast for the victors?
Every ten years a great man.
Who paid the bill?

So many reports.
So many questions.

Too Big to Fail?: Yves Smith Asks a Question

Yves Smith:

A funny thing happened at the INET conference: I got to ask Larry Summers a question because Martin Wolf, who was moderating the session, is a good sport.... [M]y recollection of his long answer (which ducked my question, as various people remarked to me that evening and the next day) seems to not all be on the tape, which led me to think I was losing my mind.... I recall him citing someone (I didn't recognize the name, but I may also not have heard it clearly since I was at a table in the back) and then mentioning "socialist" and "communist."... But when I went to look at the tape, lo and behold, no mention of either dirty word that I thought I heard...

Yves is, I think, confusing Larry Summers's answer to an earlier question from Martin Wolf with his answer to her (and Louis Koch's_ question.

Continue reading "Too Big to Fail?: Yves Smith Asks a Question" »

Disequilibrium Economics: Algorithmic Trading Department

Tyler Cowen directs us to Michael Elsen:

Amazon’s $23,698,655.93 book about flies: A few weeks ago a postdoc in my lab logged on to Amazon to buy the lab an extra copy of Peter Lawrence’s The Making of a Fly – a classic work in developmental biology that we – and most other Drosophila developmental biologists – consult regularly. The book, published in 1992, is out of print. But Amazon listed 17 copies for sale: 15 used from $35.54, and 2 new from $1,730,045.91 (+$3.99 shipping). I sent a screen capture to the author  - who was appropriate amused and intrigued.... At first I thought it was a joke.... But there were TWO new copies for sale, each be offered for well over a million dollars. And the two sellers seemed not only legit, but fairly big time (over 8,000 and 125,000 ratings in the last year respectively).... [W]hen I reloaded the page the next day, both priced had gone UP! Each was now nearly $2.8 million. And whereas previously the prices were $400,000 apart, they were now within $5,000 of each other.... By the end of the day the higher priced copy had gone up again. This time to $3,536,675.57. And now a pattern was emerging....

Once a day profnath set their price to be 0.9983 times bordeebook’s price. The prices would remain close for several hours, until bordeebook “noticed” profnath’s change and elevated their price to 1.270589 times profnath’s higher price. The pattern continued perfectly for the next week.... Why were they doing this, and how long would it go on before they noticed?... Both profnath and bordeebook were clearly using automatic pricing – employing algorithms that didn’t have a built-in sanity check on the prices they produced....

Continue reading "Disequilibrium Economics: Algorithmic Trading Department" »

Have We Won the Empirical Debate About Economic Policy

Matthew Yglesias:

Yglesias » Pity For The Rich: You can tell something’s happening in the economic policy debate when you start reading more things like AEI’s Arthur Brooks explaining that it would simply be unfair to raise taxes on the rich. Harvard economics professor and former Council of Economics Advisor chairman Greg Mankiw has said the same thing. And of course Representative Paul Ryan is both a fan of Books and a fan of the works of Ayn Rand. Which is just to say that we used to have a debate in which the left said redistributive taxation might be a good idea and then the right replied that it might sound good, but actually the consequences would be bad. Lower taxes on the rich would lead to more growth and faster increase in incomes.

Now that idea seems to be so unsupportable that the talking point is switched. It’s not that higher taxes on our Galtian Overlords would backfire and make us worse off. It’s just that it would be immoral of us to ask them to pay more taxes even if doing so would, in fact, improve overall human welfare.

If that sounds remotely plausible to you, you might have a lucrative career ahead of you working as an apologist for said Galtian Overlords. If not, then congratulations for possessing a modicum of common sense.

The Independent Payment Authorization Board

Earlier this week Robert Pear of the New York Times wrote an article about the Independent Payment Authorization Board--the IPAB--that included absolutely no information about how the IPAB would work, why so many people that it was a very good idea, or why it had made its way into the Affordable Care Act in the first place. It was the kind of context- and substance-free article that the Robert Pear I knew in the early 1990s when I was in the Treasury would simply never have written.

Today Paul Krugman adds some of the missing pieces back in:

Patients Are Not Consumers: Earlier this week, The Times reported on Congressional backlash against the Independent Payment Advisory Board.... This backlash was predictable; it is also profoundly irresponsible.... We have to do something about health care costs, which means that we have to find a way to start saying no. In particular, given continuing medical innovation, we can’t maintain a system in which Medicare essentially pays for anything a doctor recommends. And that’s especially true when that blank-check approach is combined with a system that gives doctors and hospitals — who aren’t saints — a strong financial incentive to engage in excessive care. Hence the advisory board.... The board, composed of health-care experts, would be given a target rate of growth in Medicare spending. To keep spending at or below this target, the board would submit “fast-track” recommendations for cost control that would go into effect automatically unless overruled by Congress.

Before you start yelling about “rationing” and “death panels,” bear in mind that we’re not talking about limits on what health care you’re allowed to buy with your own (or your insurance company’s) money. We’re talking only about what will be paid for with taxpayers’ money....

Continue reading "The Independent Payment Authorization Board" »

Paul Krugman and Jonathan Chait vs. Yammerheads Who Don't Know What They Are Talking About Yet Keep Yammering Anyway

Yep. They read Jacob Weisberg, so none of us have to. This one is bad enough that I am turning off the ad block I have so I can see who is advertising on Slate so I can make sure not to buy anything they sell.

Jacob Weisberg writes:

After my last column, I got pummeled in the liberal blogosphere for asserting that the Ryan budget represented a big step in the direction of conservative honesty. I deserved some of the abuse. Though I criticized Ryan for his unsupported rosy assumptions (shame on you, Heritage Foundation hacks), I reacted too quickly and didn’t sort out just how laughable Ryan’s long-term spending projections were. His plan projects an absurd future, according to the Congressional Budget Office, in which all discretionary spending, now around 12 percent of GDP, shrinks to 3 percent of GDP by 2050. Defense spending alone was 4.7 percent of GDP in 2009. With numbers like that, Ryan is more an anarchist-libertarian than honest conservative.

And Paul Krugman asks the natural question:

Economics and Politics: Um, how can you lavish praise on a supposed long-term budget proposal without, you know, asking whether its long-run spending projections make sense? Plus, while Weisberg originally poo-poohed my column from last year about Ryan’s flimflam, he apparently didn’t reread the part of the column where I criticized Ryan for making … laughable projections about discretionary spending.

Look, this is an important debate. If you can’t be bothered to look at the numbers, you shouldn’t weigh in.

Continue reading "Paul Krugman and Jonathan Chait vs. Yammerheads Who Don't Know What They Are Talking About Yet Keep Yammering Anyway" »

The History of Economic Policy from 1993 to 2001

Duncan Black:

Eschaton: It Wasn't That Long Ago: Clinton passed a tax increase to reduce the deficit. He was rewarded for his efforts by Democrats being destroyed in subsequent elections and eventual impeachment. The tax increase, combined with a booming economy, led to the US government having a surplus. At this point, the greatest threat to the union was suddenly...a budget surplus. This, of course, could only be remedied by massive tax cuts for rich people.

There's no point in worrying about budgets 5 years from now. You can't control future Congresses.

I want to be part of the sensible bipartisan center. But what answer can I give Duncan?

Oh Dear: Invisible Bond Market Vigilantes Making Policy Department

Duncan Black says:

Eschaton: Word Salad: Word Salad I guess I can be comforted by the fact that the uncustomarily high level of gibberish suggests that maybe he doesn't actually believe this [dreck].

Here we have Barack Obama at Facebook, held hostage by the invisible bond market vigilantes:

So those were all investments that we made in the first two years. Now, the economy is now growing. It’s not growing quite as fast as we would like, because after a financial crisis, typically there’s a bigger drag on the economy for a longer period of time. But it is growing. And over the last year and a half we’ve seen almost 2 million jobs created in the private sector.

Because this recession came at a time when we were already deeply in debt and it made the debt worse, if we don’t have a serious plan to tackle the debt and the deficit, that could actually end up being a bigger drag on the economy than anything else. If the markets start feeling that we’re not serious about the problem, and if you start seeing investors feel uncertain about the future, then they could pull back right at the time when the economy is taking off.

Continue reading "Oh Dear: Invisible Bond Market Vigilantes Making Policy Department" »

Political Economy: Soak the Rich Department

Of course, nobody is talking about soaking the rich. A very mild moistening is the most radical thing being proposed...

Ryan Avent tells us:

Political economy: Soak the rich: THIS is a remarkable piece of video. The setting is a Wisconsin town hall meeting between Congressman Paul Ryan and his constituents.... The problem for Paul Ryan, and for Republicans generally, is that entitlement programmes are incredibly popular and taxing the rich is incredibly popular. The problem for Barack Obama, and for Democrats generally, is that taxing the rich doesn't yield enough money to pay for entitlement programmes. But don't think for a minute that Americans are unwilling to raise tax rates on top earners.

The End of Steven Brust's Jhereg

The end of Jhereg:

More than our apartment, more than my office, the library at Castle Black has seemed like home base to me. How many times in the past had Morrolan and I, or Morrolan, myself, and Aliera, or a host of others, sat in this room and said some form of "Thank Verra, it's over."

"Thank Verra, it's over," said Aliera.

I lay on my back on the lounge chair. As I said, Aliera was good, but it takes time to heal completely. My sides still ached, and my head gave me no end of trouble. Still, in the three days since Mellar had passed from among the living, and the two days since I'd met with the Demon to arrange for nine million gold to be returned (and to insure that no more attempts were going to be made on my life), I had pretty well made the transition back to humanity.

Not that I am disappointed in the books Steven Brust has written since--no, no, not at all! But I do feel a certain regret: I read this as a promise that Brust would go on and write half-a-dozen or so medieval fantasy noir puzzle books starring Vlad, Morrolan, Aliera, Cawti, and company. And I was looking forward to them. And now I know I will never read them.

I feel as if I had been promised free vanilla ice cream, and it has never materialized. (Of course, what has materialized is free tiramisu, lots and lots of tiramisu...

i Take That Back. Most Amazing Thing I Have Read Today

The problem is that Landsburg claims to believe that if your consumption spending today does not fall you are not "taxed," and that if your consumption spending today does fall you are "taxed." And that is simply not so--at least, not so in English.

Alex Tabarrok sends us to:

The Rich Man Who Can’t be Taxed: Stevens wants to tax the “idle rich”, her Exhibit A being Robert Kendrick, heir to the $84 million Schlage Lock Company fortune. According to Ms. Stevens, Mr. Kendrick appears to do pretty much nothing but park and re-park his four cars all day long. Taxing people like Mr. Kendrick, she says, has to be part of any solution to America’s fiscal crisis. Here’s what Ms. Stevens misses: Assuming the facts are as she states them, it is quite literally impossible to raise revenue by taxing the likes of Mr. Kendrick. We could argue about whether it’s desirable, but because it’s impossible, the discussion is moot. Here’s why it’s impossible: For the government to consume more goods and services, somebody else must consume fewer. But Mr. Kendrick, by Ms. Stevens’s account, consumes almost no goods or services whatsoever. He just pushes cars around all day. His consumption can’t go much lower.

Continue reading "i Take That Back. Most Amazing Thing I Have Read Today" »

Debt Ceiling: The Most Extraordinary Sentence I Have Read Today


For example, in 1996, Congress passed and the President signed legislation allowing Treasury to issue securities temporarily excluded from the debt limit in an amount equal to the March 1996 Social Security payments to ensure that benefit payments were made on time. Pub. L. No. 104-103 (Feb. 8, 1996).

So the Republicans in congress wouldn't pass an increase in the debt ceiling at the start of February 1996, but they would pass a law allowing Treasury to borrow to be sure it could issue the March 1996 Social Security checks and excluding that borrowing from the debt ceiling?

Dingbat kabuki indeed...

Stan Collender: Obama Budget Plan: Changing The Debate Without Changing The Likely Outcome

Stan Collender:

Obama Budget Plan: Changing The Debate Without Changing The Likely Outcome: As the very quick negative response yesterday from the House GOP showed, the White House was never going to get even a reluctant, grudging admission from the Republicans that the Obama administration did something even marginally positive on the budget when it announced it's new deficit reduction plan. After beginning their complaints on February 14th -- the day the Obama 2012 budget was sent to Congress -- that the White House wasn't leading on fiscal issues, there was no expectation that House Republicans would do anything but drop the "refuses to lead" line and instead start using "we don't like what he's proposing" mantra....

[W]ho or what was the real target?  The answer is independents, the increasingly large percentage of American voters who don't identify with either political party and the group that made the difference in the 2008 and 2010 elections.... [A]s yesterday's almost instantaneous and totally negative Republican response demonstrated, once the "we-have-a-plan-and-he-doesn't" charge was muted, the budget debate almost immediately retrogressed to the same issues that have made it almost impossible for any deficit reduction plan to be considered seriously in recent years....

[T]he plan offered a process by which negotiations could begin.  The president offered himself as a facilitator, convener, and expediter and, given the independents' past dislike of how the sausage typically is made in Washington, this likely will appeal to them.... Significantly heightened approval by the independents could spur the GOP to come to the bargaining table...

Origins of the Reagan Deficits: Hoisted from the Archives

David Weigel writes:

"Not a revenue problem, a spending problem": Tracing the history of a Republican talking point: Republicans love to punch right back and say that Reagan had to wrestle with a Democratic Congress, so his ability to cut spending was limited.

It wasn't that Reagan's ability to cut spending was limited. It was that he did not even try.

From my files:

Some ancient history: a Treasury Department memo from my files.

June 17, 1993

From: J. Bradford DeLong, Deputy Assistant Secretary
Subject: Origin of the Deficit: "Presidential" or "Congressional"?

SUMMARY: The overwhelming proportion of the deficits of the last decade [i.e., the 1980s] were already proposed in President Reagan's and President Bush's original budget submission. There was no explosion of federal spending over and above what the presidents had asked for. More than four-fifths of the 1980s deficits were "presidential." Less than one-fifth were "congressional."

Continue reading "Origins of the Reagan Deficits: Hoisted from the Archives" »

The Cold War White House Leaks to Wall Street. The CIA Doesn't Leak...

Ah. I have been waiting for this. Henry Farrell makes the catch:

The Monkey Cage: Making a Killing: Forthcoming (PDF) from Arin Dube, Ethan Kaplan and Suresh Naidu, at the Quarterly Journal of Economics.

We estimate the impact of coups and top-secret coup authorizations on asset prices of partially nationalized multinational companies that stood to benefit from US-backed coups. Stock returns of highly exposed firms reacted to [presidential] coup authorizations classified as top-secret.

The average cumulative abnormal return to a coup authorization was 9% over 4 days for a fully nationalized company, rising to more than 13% over sixteen days. Pre-coup authorizations accounted for a larger share of stock price increases than the actual coup events themselves. There is no effect in the case of the widely publicized, poorly executed Cuban operations, consistent with abnormal returns to coup authorizations reflecting credible private information. We also introduce two new intuitive and easy to implement nonparametric tests that do not rely on asymptotic justifications.

Somehow, I suspect that it isn't the easy-to-implement nonparametric tests that will be getting public attention.

History 101: Gay Marriage Edition

History 101, from The Onion: America's Finest News Source:

Future U.S. History Students: 'It's Pretty Embarrassing How Long You Guys Took To Legalize Gay Marriage': DECATUR, IL, THE YEAR 2083—According to students in Mr. Bernard's fourth-period U.S. history class, it's "really pathetic" how long it took for early-21st-century Americans to finally legalize gay marriage. The class of 2086 said it was "laughable" that people against gay marriage were given a legitimate political voice in the early 21st century.

The classroom of 15-year-olds at MacArthur High School—all of whom were born in the late 2060s and grew up never questioning the obvious fact that homosexual couples deserve the right to get married—were reportedly "amazed" to learn in their Modern U.S. History: 2081 Edition textbooks that as late as the 2020s, gays and lesbians actually had to fight for the constitutional right to wed. "Wow, that is nuts," said student Jeremy Golliver, who claimed he knew gay rights was a struggle "like, a hundred years ago" but didn't realize it lasted so long. "It's really embarrassing, when you think about it. Just the fact that people in this century were actually saying things like, 'No, gays should not be allowed to marry,' and were getting all up in arms about it, as if homosexuals weren't full citizens or something. It's insane." "I mean, was everybody just a huge bigot back then or what?" Golliver added.

Continue reading "History 101: Gay Marriage Edition" »

Uwe Reinhardt: If Budget Chair Paul Ryan Says That it Is Raining, He Is, Instead, _____

Public Finance 101, from Uwe Reinhardt:

Comparing Ryan's Medicare Plan to What Congress Gets: On April 15, the House of Representatives passed, on a partisan vote, the budget plan that Paul D. Ryan, Republican of Wisconsin and chairman of the House Budget Committee, had earlier introduced to his committee.... With regard to health care, the Ryan plan envisages a major withdrawal of at least the federal government from the financing of health care in America.... In an Op-Ed piece in The Wall Street Journal, Mr. Ryan wrote, “Starting in 2022, new Medicare beneficiaries will be enrolled in the same kind of health-care program that members of Congress enjoy.” He repeated that assertion on NBC’s “Meet the Press” on April 10, when he said, “For future generations, what we are proposing is a personalized Medicare, a Medicare system that works exactly like the health care I have as a member of Congress and federal employees have.”

Exactly? I beg to differ.

There is a huge difference.... [T]he F.E.H.B.P. is best described as a typical employer-sponsored health insurance plan. The federal government’s – that is, taxpayers’ – annual contribution to the premiums paid to competing private insurers by employees and members of Congress would rise in step with the average premiums charged by the private insurers. These premiums have been rising over time more or less in step with the overall increase in per-capita health spending in this country.

By contrast, under the Ryan plan, the federal contribution toward the purchase of private health insurance by future Medicare beneficiaries would be indexed only to the Consumer Price Index (see Page 2 of the C.B.O. analysis). Over the last three decades, the C.P.I. has grown at a much slower rate than per-capita health spending, especially since 2000....

The specific proposals aside, does the Ryan plan offers anything to control overall health-care spending?

No, nor does that appear to have been Mr. Ryan’s objective.

As the Congressional Budget Office observed, “Private plans would cost more than traditional Medicare because of the net effect of differences in payment rates for providers, administrative costs and utilization of health services, as described above.” The data in the table above support that conclusion as well.

Republicans. They lie all the time. About everything. We as a country would be much better off if they simply vanished today, and we had a different opposition party to the Democrats.

Ryan Avent vs. the Pointless Pain Caucus

Inflation Wage price spirals have two spiraling components | The Economist


Inflation: Wage-price spirals have two spiraling components | The Economist: For inflation expectations to begin spiraling upwards, price increases must be sustainable. And for price increases to be sustainable, they must be matched by wage increases; otherwise real purchasing power falls, consumption pulls back, and the economy weakens until prices adjust downward. Given the state of the American labour market, there is very little upward wage pressure, and therefore very little risk of a wage-price inflation spiral. A 2010 IMF  working paper on persistent, large output gaps covered this territory:

This paper studies inflation dynamics during 25 historical episodes in advanced economies where output remained well below potential for an extended period. We find that such episodes generally brought about significant disinflation, underpinned by weak labor markets, slowing wage growth, and, in many cases, falling oil prices. Indeed, inflation declined by about the same fraction of the initial inflation rate across episodes. That said, disinflation has tended to taper off at very low positive inflation rates, arguably reflecting downward nominal rigidities and well-anchored inflation expectations. Temporary inflation increases during episodes were, in turn, systematically related to currency depreciation or higher oil prices. Overall, the historical patterns suggest little upside inflation risk in advanced economies facing the prospect of persistent large output gaps.

One might even go so far as to suggest that the persistence of a large output gap suggests the Fed isn't doing enough.

And We Are Live at the FT...

Brad DeLong: / Comment / Opinion - S&P aims to whip Congress into debt action: A spokesperson for Standard & Poor’s said on Monday that there was an “at least a one-in-three likelihood” that the rating agency “could lower” its long-term view on the US within two years. US equities quickly dropped by more than 1.5 per cent. Importantly, however, the dollar did not weaken and US Treasury interest rates did not rise. The reason for this unexpected pattern is simple: the markets think this move is important not because it signals something fundamental about the economy, but because of the political impact it will have in Washington.

So what is going on? A sovereign-debt downgrade is supposed to mean that a government’s finances have become shakier. This means that the likelihood of internal price inflation is higher, the future value of the nominal exchange rate is likely to be lower, and the possibility that creditors might not get their money back in the form and at the time they had contracted for had gone up. But if this were true the value of the dollar should have fallen on Monday. At the same time nominal interest rates on US debt should also have risen. The value of equities, meanwhile, could have gone either way: macroeconomic chaos would diminish future profits, but stocks have always been and remain a hedge against inflation.

But that is not what happened here....

Monday’s pattern makes sense... if S&P’s announcement is seen as a political move.... Normally the whip to get a deficit-reduction deal is fear of the bond market’s producing a spike in interest rates and borrowing costs, but perhaps a fear of a ratings downgrade will do instead.

Over the next few months we will see if the market is right.

Overinterpreting Short-Term Market Movements: The S&P U.S. Treasury Rating Downgrade Threat

James Fallows asks a question:

Today's (Needless) Hysteria: the S&P Panic: I agree with Clive Crook's puzzlement about the S&P downgrade "bombshell" today:

S&P adduces no new information that I can see. Competent ratings of opaque instruments such as, oh, mortgage-backed securities would be very useful to investors (not that ratings agencies troubled to provide competent ratings in that case, obviously). But why should anybody need that kind of help in judging the soundness of US government bonds? S&P knows nothing about them that you or I don't know....

I know that markets run on fear, greed, instinct, and panic as much as on logic. But seriously, how could this non-story have dominated the news today?...

  1. To repeat Clive Crook's point, S&P knows nothing more about U.S. budget prospects than you or I do. They're saying they have an opinion on the state of Congressional-White house dealings on the budget. Fine. Go on a talk show or start a blog.

  2. To repeat James Galbraith's different but also true point, as long as the U.S. government doesn't tie itself up in debt-ceiling insanity, it is not going to default on dollar-based bonds. It can't. It controls the "means of production" for the dollars to pay off those bonds. If you're worried about inflation, fine. But that's a different matter, with a lot of other variables that count for more than S&P's feelings.

I think it may be more complicated than that. First, let's look at the S&P announcement:

“[W]e believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years,” Nikola Swann of Standard and Poor's said Monday morning. “The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012.” "Could lower" is a weasel phrase: what is a "one-third chance we could lower our long-term rating"?

Nevertheless, that announcement triggered a drop by U.S. equities of more than 1.5% after S&P's announcement. But the dollar did not weaken--it strengthened by nearly 1.0%. And U.S. Treasury interest rates did not rise.

What is going on here? A sovereign-debt downgrade is supposed to mean that a government's finances have become shakier: the likelihood of internal price inflation is higher, the future value of the nominal exchange rate is likely to be lower, and the possibility that creditors might not get their money back in the form and at the time they had contracted for had gone up. The value of the dollar should have fallen. The nominal interest rates on U.S. Treasury debt should have risen. The value of equities could have gone either way--macroeconomic chaos would diminish future profits, but stocks have always been and remain a hedge against inflation. That is not what happened here: equities fell, the dollar rose, nominal U.S. Treasury interest rates were unchanged.

There are I think, two things to bear in mind.

First, you can go insane trying to overinterpret short-term market movements.

Second, news comes in flavors: new news, old news, no news, and political news.

If S&P's announcement were new news being conveyed to the market we would have expected to see the standard pattern that we did not--dollar down, Treasury nominal interest rates up, equities either way. So it is not new news.

If the announcement were old news we would have expected to see no price movements--the smart money would already have taken up their positions, and when those less-informed investors to whom S&P was news responded by selling the smart money was there to buy and offset. That's not what we saw either: so it is not old news.

If it were no news--if the market as a whole simply thought that S&P was irrelevant--then we would have expected to see no price movements at all. The problem is that we did see price movements: both in equities, and in the dollar. So it is not no news.

That leaves us with political news.

What would we have expected to see if we were to read S&P's announcement not as a piece of information produced by a financial analyst studying the situation but instead as a move by a political actor trying to nudge a government toward its preferred policies? What asset price movements would we have expected to see then?

If we are willing to run the risk of possibly overinterpreting short-term market movements, we see that confidence in the U.S. and the dollar as a safe haven strengthened: some people who were previously leery of keeping their money in dollars out of fear of future depreciation are now less leery. We would have to judge that markets expect the S&P announcement to be successful, considered as a political intervention: Ms. Market thinks the S&P has just increased the chance of a long-term budget deal.

But what about equities? How can investors bid down the prices of equities if they are more confident that the U.S. will resolve the future fiscal problems created by both parties' appetite to extend the Bush shift of the tax burden from the present into the future and by the explosive growth of government-funded medical care costs? There are two natural hypotheses.

The first natural hypothesis is that Ms Market expects future stockholders to bear a large share of the burden of restoring long-term fiscal balance. Perhaps Ms Market is thinking back to the Bradley-Baker tax reform of 1986--cut marginal rates on individuals but increase the tax base, reduce tax expenditures, and raise corporate taxes and thus the burden on shareholders.

The second natural hypothesis is that Ms Market views the S&P move as a political intervention that will lead to more restrictive and austere fiscal policies in the short run--and hence to a slower recovery and an enhanced risk of renewed recession. Ms Market is thus pricing that extra risk into today's equities.

And, as Felix Salmon points out, maybe Ms Market does not care about S&P. Maybe Ms Market is worried about Europe, and fears renewed global recession from the spread of the European financial crisis.

My guess--which might well be wrong--is that we saw the price pattern we saw because Ms Market views the S&P announcement as a political move. Congress, she may be thinking, is like a mule: it only moves when hit with a whip. Normally the whip to get a deficit-reduction deal is fear of the bond market's producing a spike in interest rates and borrowing costs, but perhaps a fear of a ratings downgrade will do instead. And my guess--which might well be wrong--is that the dominant view of Ms Market is that this will harm equity holders not so much by loading more of the burden of balancing the budget on corporate and capital gains taxes but, rather, by slowing recovery and raising the risk of a double dip.

Over the next few months we will see if Ms Market is right.

Final Exam: Journalism 1

  1. Read Fred Hiatt's fifteen-year late recognition that the earth is round--that it is simply not the case that the political parties' "opinions of the shape of the earth differ."

  2. Complete the following sentence: "When you have lost Fred Hiatt, you have..."

Why Did the North Fight?

Matthew Yglesias asks:

I’ve always thought there was something about the Lincoln administration’s determination to fight and win the Civil War that was a bit odd. Secession gave the regionally based Republican Party large congressional majorities that wouldn’t exist if southern states had representation in congress. What’s more, the Republican Party’s controversial policy objective of banning slavery from the western territories could have been easily achieved by the much more modest policy of simply ensuring military control over the territories. Some fighting in border states such as Maryland, Tennessee, Missouri, and Kentucky is easy to understand but why try to reconquer the Deep South?

two reasons:

  1. The goal was not to keep slavery out of the territories but to put slavery on the path to ultimate extinction. Letting the Deep South go does not accomplish that.

  2. The union must be preserved because without union sooner or later the pieces of the USA would fight a bloody war. (I know, I know.)

Fred Hiatt: Five Years Late and Many Dollars Short

After a career spent whining "opinions of shape of earth differ," Fred Hiatt finally writes something not false:

The Republican self-deception that draws the most attention is the refusal to believe that Barack Obama is American-born....

When President George W. Bush and Congress lowered taxes in 2001, the justification, unlikely as it seems today, was a budget surplus. When the surplus melted away, that didn’t affect the ideology....

In Ryan’s vision, all federal spending other than Medicare, Medicaid, Social Security and interest payments will decline from 12 percent of the national economy (GDP) in 2010 to 6 percent in 2022 to 3.5 percent in 2050. “For comparison, spending in this category has exceeded 8 percent of GDP in every year since World War II,” the CBO said. “The proposal does not specify the changes to government programs that might be made in order to produce that path.” Of course not — because they are changes that few Americans would ever support.

The climate change denialism is a newer part of the catechism. Just a few years ago, leading Republicans — John McCain, Sarah Palin, Mitt Romney, Newt Gingrich and Tim Pawlenty among them — not only accepted global warming as real but supported some kind of market-based mechanism to raise the cost of burning fossil fuels....

Pawlenty similarly acknowledged on “Meet the Press” last year that “the climate is changing,” but added that “the more interesting question is how much of that is man-made versus natural causes.” When I asked last week how Pawlenty would answer that “interesting question,” his spokesman responded by e-mail: “We don’t know [the] cause of climate change.”... But if you asked 1,000 scientists, 998 of them would say that climate change is real and that human activity — the burning of oil, gas and coal — is a significant contributor. But Pawlenty’s supposed uncertainty is convenient, because if we don’t know the cause, then there’s little point in looking for a cure. And any cure is going to cost money, or votes, or both.... To say that Republican irresponsibility makes it more difficult for Democrats to speak honestly is not an excuse. But it is a partial explanation. And while Obama may wish the climate change conversation would go away between now and 2012, he at least is not pretending the phenomenon is fiction.

Does Pawlenty believe what he says now?... As recently as 2008 he was supporting congressional action to limit greenhouse gas emissions. I do not believe that he believes those 998 scientists are wrong. Which leads to another question: Should we feel better if a possible future president is not ignorant about the preeminent environmental danger facing our planet, but only calculating or cowardly? To paraphrase Pawlenty, I don’t know the answer to that one.

What Hiatt's piece is missing is the part where he apologizes for not writing this piece five or ten or fifteen years ago. What Hiatt's piece is missing is the part where he resigns, donates all his wealth to the poor, and takes up a life of anonymous service to others in partial atonement for the abominable atrocity that he has run.

Robert Greenstein on the Obama Speech:


TUnlike the Ryan plan, the President’s plan puts all parts of the budget on the table.... Ryan’s Medicare proposals would substantially raise overall costs per beneficiary. Ryan’s plan reduces federal Medicare expenditures only because it dramatically shifts more of these costs on to the backs of beneficiaries.... Ryan’s plan doesn’t lower health costs; it shifts them. The President’s plan, by contrast, seeks to reduce underlying health costs themselves.

Nevertheless, we have several significant concerns.... [T]he President’s plan takes two-thirds of its deficit reduction from budget cuts and one-third from revenue increases.... Domenici and... Rivlin offered a more balanced approach — with half of its deficit savings from budget cuts and half from revenue increases. Such a 50-50 split represents a fairer and more balanced approach.

Because the Obama plan relies on budget cuts for two-thirds of its deficit reduction measures, it goes dangerously far in two areas... $360 billion in cuts in mandatory programs other than Medicare, Medicaid, and Social Security. The large budget-cut target for this part of the budget risks leading to substantial cuts in core programs for low-income Americans, our most vulnerable people....

Another significant concern stems from the President’s proposal to limit the annual growth in Medicare costs per beneficiary to the per capita rate of growth in the Gross Domestic Product (GDP) plus only 0.5 percentage points and to require automatic cuts in Medicare if this target would otherwise be exceeded. This goal is laudable. But it may be unrealistic....

Finally, the President’s plan calls for a mechanism to trigger automatic reductions in programs and tax expenditures if the debt would exceed certain benchmarks.... [T]riggers like this that have been designed in the past have suffered from a fatal flaw — they required the deepest budget cuts when the economy was weakest and the smallest cuts when it was strongest....

[T]he President’s plan represents an important step forward in the debate. But it should be recognized that this plan is a rather conservative one, significantly to the right of the Rivlin-Domenici plan...

Mark Thoma: The S&P’s Negative Outlook for US Debt

Mark Thoma:

The S&P’s Negative Outlook for US Debt - CBS Today, Standard & Poors downgraded the US credit outlook to negative. As the WSJ reports, “Standard & Poor’s Ratings Services Inc. cut its outlook on the U.S. to negative, increasing the likelihood of a potential downgrade from its triple-A rating, as the path from large budget deficits and rising government debt remains unclear.”...

[T]he fear that political gridlock will prevent a solution to the debt problem. However, the sentiment “no big deal” seems correct to me. I am worried about the particulars of the solution to the long-run debt problem — who will end up paying most of the cost of closing the budget gap — but one way or the other the political process will deal with this problem. Also, it’s important to remember that the US debt is a promise to pay dollars, and we can print as many dollars as we want. That could be inflationary, and the inflation can undermine the real value of those bond payments and cause other problems, but that is not technically a default. In any case, the Japanese experience described above (here too) is worth remembering. Even after the downgrade of its debt, and all the worries about its ability to pay it off, borrowing costs for the Japanese government remain very low. Given that the biggest risk from fear of the debt is rising interest rates, that is reassuring.

Zachary Liscow: Why Fight Secession? Evidence of Economic Motivations From the American Civil War

Now published in Public Choice:

Public Choice: Why fight secession? This paper is a case study on this question, asking why the North chose to fight the South in the American Civil War. It tests a theoretical prediction that economic motivations were important, using county-level presidential election data. If economic interests like manufacturing wished to keep the Union together, they should have generated votes to do so. That prediction is borne out by the data, and explanations other than Northern economic concerns about Southern secession appear unable to explain the results, suggesting that economic motivations were important to support for fighting the South.