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“On Economic Stupidity”: How Little Many People Who Would Be President Have Learned From The Past

Bill Clinton’s 1992 campaign famously focused on “the economy, stupid.” But macroeconomic policy — what to do about recessions — has been largely absent from this year’s election discussion.

Yet economic risks have by no means been banished from the world. And you should be frightened by how little many of the people who would be president have learned from the past eight years.

If you’ve been following the financial news, you know that there’s a lot of market turmoil out there. It’s nothing like 2008, at least so far, but it’s worrisome.

Once again we have a substantial amount of troubled debt, this time not home mortgages but loans to energy companies, hit hard by plunging oil prices. Meanwhile, formerly trendy emerging economies like Brazil are suddenly doing very badly, and China is stumbling. And while the U.S. economy is doing better than almost anyone else’s, we’re definitely not immune to contagion.

Nobody really knows how bad it will be, but financial markets are flashing warnings. Bond markets, in particular, are behaving as if investors expect many years of extreme economic weakness. Long-term U.S. rates are near record lows, but that’s nothing compared with what’s happening overseas, where many interest rates have gone negative.

And super-low interest rates, which mainly reflect market forces, not policy, are creating problems for banks, whose profits depend on being able to lend money for substantially more than they pay on deposits. European banks are in the biggest trouble, but U.S. bank stocks have fallen a lot, too.

It looks, in other words, as if we’re still living in the economic era we entered in 2008 — an era of persistent weakness, in which deflation and depression, not inflation and deficits, are the key challenges. So how well do we think the various presidential wannabes would deal with those challenges?

Well, on the Republican side, the answer is basically, God help us. Economic views on that side of the aisle range from fairly crazy to utterly crazy.

Leading the charge of the utterly crazy is, you won’t be surprised to hear, Donald Trump, who has accused the Fed of being in the tank for Democrats. A few months ago he asserted that Janet Yellen, chairwoman of the Fed, hadn’t raised rates “because Obama told her not to.” Never mind the fact that inflation remains below the Fed’s target and that in the light of current events even the Fed’s small December rate hike now looks like a mistake, as a number of us warned it was.

Yet the truth is that Mr. Trump’s position isn’t that far from the Republican mainstream. After all, Paul Ryan, the speaker of the House, not only berated Ben Bernanke, Ms. Yellen’s predecessor, for policies that allegedly risked inflation (which never materialized), but he also dabbled in conspiracy theorizing, accusing Mr. Bernanke of acting to “bail out fiscal policy.”

And even superficially sensible-sounding Republicans go off the deep end on macroeconomic policy. John Kasich’s signature initiative is a balanced-budget amendment that would cripple the economy in a recession, but he’s also a monetary hawk, arguing, bizarrely, that the Fed’s low-interest-rate policy is responsible for wage stagnation.

On the Democratic side, both contenders talk sensibly about macroeconomic policy, with Mr. Sanders rightly declaring that the recent rate hike was a bad move. But Mr. Sanders has also attacked the Federal Reserve in a way Mrs. Clinton has not — and that difference illustrates in miniature both the reasons for his appeal and the reasons to be very worried about his approach.

You see, Mr. Sanders argues that the financial industry has too much influence on the Fed, which is surely true. But his solution is more congressional oversight — and he was one of the few non-Republican senators to vote for a bill, sponsored by Rand Paul, that called for “audits” of Fed monetary policy decisions. (In case you’re wondering, the Fed is already audited regularly in the normal sense of the word.)

Now, the idea of making the Fed accountable sounds good. But Wall Street isn’t the only source of malign pressure on the Fed, and in the actually existing U.S. political situation, such a bill would essentially empower the cranks — the gold-standard-loving, hyperinflation-is-coming types who dominate the modern G.O.P., and have spent the past five or six years trying to bully monetary policy makers into ceasing and desisting from their efforts to prevent economic disaster. Given the economic risks we face, it’s a very good thing that Mr. Sanders’s support wasn’t enough to push the bill over the top.

But even without Mr. Paul’s bill, one shudders to think about how U.S. policy would respond to another downturn if any of the surviving Republican candidates make it to the Oval Office.

 

By: Paul Krugman, Op-Ed Columnist, The New York Times, February 12, 2016

February 13, 2016 Posted by | Economic Growth, Economic Policy, Federal Reserve, Recession | , , , , , , , , | 1 Comment

“Cronyism Causes The Worst Kind Of Inequality”: Friends Of The Rulers Appropriating Wealth For Themselves

Economic inequality has skyrocketed in the U.S. during the past few decades. That has prompted many calls for government policies to reverse that trend. Defenders of the status quo argue that rising inequality is a necessary byproduct of economic growth — if we don’t allow people the chance to become extremely rich, the thinking goes, they will stop working, investing, saving and starting businesses. A receding tide will then cause all boats to sink.

Critics of the status quo have responded with the claim that inequality doesn’t help growth, but instead hurts it. This view was given ammunition by a number of recent studies, which have found a negative relationship between how much income inequality a country has and how fast it grows. One example is an International Monetary Fund study from 2015:

[W]e find an inverse relationship between the income share accruing to the rich (top 20 percent) and economic growth. If the income share of the top 20 percent increases by 1 percentage point, GDP growth is actually 0.08 percentage point lower in the following five years, suggesting that the benefits do not trickle down. Instead, a similar increase in the income share of the bottom 20 percent (the poor) is associated with 0.38 percentage point higher growth.

A similar 2014 study from the Organization for Economic Cooperation and Development concluded the same thing. Interestingly, the negative correlation between inequality and growth is found even when controlling for a country’s income level. This isn’t simply a case of wealthier countries growing more slowly and also being more unequal.

So the evidence is pretty clear: Higher inequality has been associated with lower growth. But as with all correlations, we should be very careful about interpreting this as causation. It might be that countries whose growth slows for any reason tend to experience an increase in inequality, as politically powerful groups stop focusing on expanding the pie and start trying to appropriate more of the pie for themselves.

The IMF and OECD list some channels by which inequality might actually be causing lower growth. The most important one has to do with investment. When poor people have more money, they can afford to invest more in human capital (education and skills) and nutrition. Because these investments have diminishing marginal returns — the first year of schooling matters a lot more than the 20th — every dollar invested by the poor raises national productivity by more than if it gets invested by the rich. In other words, the more resources shoring up a nation’s weak links, the better off that nation will be.

That’s a plausible hypothesis. But there might also be other factors contributing to the correlation between inequality and growth. It could be that there is something out there that causes both high inequality and low growth at the same time.

The obvious candidate for this dark force is crony capitalism. When a country succumbs to cronyism, friends of the rulers are able to appropriate large amounts of wealth for themselves — for example, by being awarded government-protected monopolies over certain markets, as in Russia after the fall of communism. That will obviously lead to inequality of income and wealth. It will also make the economy inefficient, since money is flowing to unproductive cronies. Cronyism may also reduce growth by allowing the wealthy to exert greater influence on political policy, creating inefficient subsidies for themselves and unfair penalties for their rivals.

Economists Sutirtha Bagchi of the University of Michigan and Jan Svejnar of Columbia recently set out to test the cronyism hypothesis. They focused not on income inequality, but on wealth inequality — a different, though probably related, measure. Concentrating on billionaires — the upper strata of the wealth distribution — they evaluated the political connections of each billionaire. They used the proportion of politically connected billionaires in a country as their measure of cronyism.

What they discovered was very interesting. The relationship between wealth inequality and growth was negative, as the IMF and others had found for income inequality. But only one kind of inequality was associated with low growth — the kind that came from cronyism. From the abstract of the paper:

[W]hen we control for the fact that some billionaires acquired wealth through political connections, the effect of politically connected wealth inequality is negative, while politically unconnected wealth inequality, income inequality, and initial poverty have no significant effect.

In other words, when billionaires make their money through means other than political connections, the resulting inequality isn’t bad for growth.

That’s a heartening message for defenders of the rich-country status quo. If cronyism is the real danger, it means that a lot of the inequality we’ve seen in recent decades is benign. Eliminate corrupt connections between politicians and businesspeople, and you’ll be safe.

But Bagchi and Svejnar’s finding cuts two ways. It also means that plain old inequality isn’t beneficial for growth, as its defenders have claimed. That removes one of the big objections government policy makers face in talking steps to reduce inequality — and that doing so is unlikely to hurt economic growth.

 

By: Noah Smith, Bloomberg View, Bloomberg Politics, December 24, 2015

December 28, 2015 Posted by | Crony Capitalism, Economic Growth, Economic Inequality | , , , , , , , , | 2 Comments

“A Rerun Of What His Brother Tried”: Jeb Bush’s Tax Plan Shows Republicans Can’t Learn From Economic History

Jeb Bush released the first details of his tax plan today in a Wall Street Journal op-ed, so we finally learn the secret that will produce spectacular growth, great jobs for all who want them, and a new dawn of prosperity and happiness for all Americans. Are you ready?

It’s…tax cuts for the wealthy! If only we had known that this amazingly powerful tool was available to us all along!

To be fair, not everything in Bush’s tax plan is targeted at the rich — there are some goodies in there for other people as well. But it’s pretty clear that in addition to wanting to revive the Bush Doctrine in foreign affairs, Jeb is looking to his brother’s tax policies as a model for how we can make the economy hum, I suppose because they worked so well the first time.

While many of the details are still vague, here are the basics of what Bush wants to do. He would reduce the number of tax brackets from its current seven down to three, of 10 percent, 25 percent, and 28 percent. This would represent a huge tax cut for people at the top, who currently pay a marginal rate of 39.6 percent. He also wants to eliminate the inheritance tax and the alternative minimum tax (both paid almost entirely by wealthy people), and slash corporate taxes. On the other end, he’d raise the standard deduction and expand the Earned Income Tax Credit, which helps the working poor. He would also eliminate the carried interest loophole, which allows hedge fund managers to pay lower rates on their income.

“We will treat all noninvestment income the same,” he says, which is a reminder that investment income, which is mostly gained by wealthy people, would still be treated more favorably than wage income, which is what working people make.

As Dylan Matthews notes, Bush’s plan is something of a compromise between the supply-siders and flat-taxers who think that cutting taxes on the wealthy is literally the only thing necessary to spur the economy, and the “reform conservatives” who would give the wealthy some breaks but put more of their effort toward changes affecting the middle class. But the biggest problem with Bush’s plan may not so much the particulars, but the fact that he believes that making these changes will “unleash” the American economy.

We’ve had this debate again and again in recent years, and every time, events in the real world prove Republicans wrong, yet they never seem to change their tune. When Bill Clinton’s first budget passed in 1993 and raised taxes on the wealthy, Republicans said it would cause a “job-killing recession”; what ensued was a rather extraordinary economic boom and the first budget surpluses in decades. When George W. Bush cut taxes in 2001 and 2003, primarily for the wealthy, they said that not only would the economy rocket forward into hyperspace, but there would be little or no increase in the deficit because of all that increased economic activity. What actually happened was anemic growth and dramatically increased deficits, culminating in the economic catastrophe of 2008. When Barack Obama raised taxes, Republicans said the economy would grind to a halt; instead we’ve seen sustained job creation (despite weak income gains).

The lesson of all this, to any sane person, is that changing tax rates, particularly the top marginal income tax rate, has little or no effect on the economy. Yet Jeb Bush wants us to believe that his plan will produce sustained growth of 4 percent or more — something no president since Lyndon Johnson has managed — with what is essentially a rerun of what his brother tried.

He’s hardly alone in this belief. Indeed, with the bizarre exception of Donald Trump, all the Republican candidates put tax cuts that would benefit the wealthy at the center of the their ideas for helping the American economy. So why can’t they learn from history?

The answer is that for conservatives, cutting taxes on the wealthy is less a practical instrument to produce a healthy economy than it is a moral imperative. When they talk passionately about the crushing burden taxation imposes on the “job creators,” those noble and virtuous Americans whose hard work and initiative (even when it comes in the form of waiting for their monthly dividend checks) provide the engine that moves the nation forward, you can tell they believe it deep in their hearts. If cutting the top marginal rate hasn’t delivered us to economic nirvana before, well they’re sure it will eventually. And even if it doesn’t, it’s still the right thing to do.

There are some cases where partisans will alter their philosophical beliefs in response to real-world evidence; for instance, right now, many Republicans are reexamining what they used to think about criminal justice and the utility of get-tough policies. But taxes occupy a singular place in the conservative philosophical hierarchy, so much so that many elected Republicans literally take an oath swearing never to raise them for any reason. Fourteen of the seventeen Republican presidential candidates have sworn that oath (though Bush is one of the three who hasn’t).

After all that has happened in the last couple of decades, it’s clear that there is literally no conceivable economic event or development that would dent the Republican conviction that cutting taxes for the wealthy is, if not the only thing that can help the economy, the sine qua non of economic revival. Maybe it’s too much to expect them to learn from history.

 

By: Paul Waldman, Senior Writer, The American Prospect; Contributor, The Plum Line Blog, The Washington Post, September 9, 2015

September 14, 2015 Posted by | Economic Growth, Economic Policy, Jeb Bush | , , , , , , , | Leave a comment

“China’s Naked Emperors”: Listen Up Jeb, China’s Rulers Have No Idea What They’re Doing

Politicians who preside over economic booms often develop delusions of competence. You can see this domestically: Jeb Bush imagines that he knows the secrets of economic growth because he happened to be governor when Florida was experiencing a giant housing bubble, and he had the good luck to leave office just before it burst. We’ve seen it in many countries: I still remember the omniscience and omnipotence ascribed to Japanese bureaucrats in the 1980s, before the long stagnation set in.

This is the context in which you need to understand the strange goings-on in China’s stock market. In and of itself, the price of Chinese equities shouldn’t matter all that much. But the authorities have chosen to put their credibility on the line by trying to control that market — and are in the process of demonstrating that, China’s remarkable success over the past 25 years notwithstanding, the nation’s rulers have no idea what they’re doing.

Start with the fundamentals. China is at the end of an era — the era of superfast growth, made possible in large part by a vast migration of underemployed peasants from the countryside to coastal cities. This reserve of surplus labor is now dwindling, which means that growth must slow.

But China’s economic structure is built around the presumption of very rapid growth. Enterprises, many of them state-owned, hoard their earnings rather than return them to the public, which has stunted family incomes; at the same time, individual savings are high, in part because the social safety net is weak, so families accumulate cash just in case. As a result, Chinese spending is lopsided, with very high rates of investment but a very low share of consumer demand in gross domestic product.

This structure was workable as long as torrid economic growth offered sufficient investment opportunities. But now investment is running into rapidly decreasing returns. The result is a nasty transition problem: What happens if investment drops off but consumption doesn’t rise fast enough to fill the gap?

What China needs are reforms that spread the purchasing power — and it has, to be fair, been making efforts in that direction. But by all accounts these efforts have fallen short. For example, it has introduced what is supposed to be a national health care system, but in practice many workers fall through the cracks.

Meanwhile, China’s leaders appear to be terrified — probably for political reasons — by the prospect of even a brief recession. So they’ve been pumping up demand by, in effect, force-feeding the system with credit, including fostering a stock market boom. Such measures can work for a while, and all might have been well if the big reforms were moving fast enough. But they aren’t, and the result is a bubble that wants to burst.

China’s response has been an all-out effort to prop up stock prices. Large shareholders have been blocked from selling; state-run institutions have been told to buy shares; many companies with falling prices have been allowed to suspend trading. These are things you might do for a couple of days to contain an obviously unjustified panic, but they’re being applied on a sustained basis to a market that is still far above its level not long ago.

What do Chinese authorities think they’re doing?

In part, they may be worried about financial fallout. It seems that a number of players in China borrowed large sums with stocks as security, so that the market’s plunge could lead to defaults. This is especially troubling because China has a huge “shadow banking” sector that is essentially unregulated and could easily experience a wave of bank runs. But it also looks as if the Chinese government, having encouraged citizens to buy stocks, now feels that it must defend stock prices to preserve its reputation. And what it’s ending up doing, of course, is shredding that reputation at record speed.

Indeed, every time you think the authorities have done everything possible to destroy their credibility, they top themselves. Lately state-run media have been assigning blame for the stock plunge to, you guessed it, a foreign conspiracy against China, which is even less plausible than you may think: China has long maintained controls that effectively shut foreigners out of its stock market, and it’s hard to sell off assets you were never allowed to own in the first place.

So what have we just learned? China’s incredible growth wasn’t a mirage, and its economy remains a productive powerhouse. The problems of transition to lower growth are obviously major, but we’ve known that for a while. The big news here isn’t about the Chinese economy; it’s about China’s leaders. Forget everything you’ve heard about their brilliance and foresightedness. Judging by their current flailing, they have no clue what they’re doing.

 

By: Paul Krugman, Op-Ed Columnist, The New York Times, July 31, 2015

 

August 3, 2015 Posted by | China, Economic Growth, Economy, Jeb Bush | , , , , , | Leave a comment

“Scott Walker Gets Schooled By His Neighbor”: Minnesota Governor Walloping Walker’s Wisconsin In Terms Of Economic Growth

Wisconsin and Minnesota share a common cultural heritage that until recently included a healthy Midwestern strain of progressive politics. Elected in 2010, Governor Scott Walker upended a hundred years of liberal populism, charting a conservative path for Wisconsin that made him a darling of the Republican Right, but left his state with a serious budget shortfall and disappointing job growth.

Meanwhile, across the border in neighboring Minnesota, Governor Mark Dayton has relentlessly pursued liberal policies, embodying the tax-and-spend Democrat that Republicans love to caricature. The result, surprising to many, is that the Minnesota economy is going gangbusters while Wisconsin’s job growth has fallen to 44th among the 50 states.

Dayton’s success steering his state’s progressive course has been a surprise. He was a middling senator at best, serving a single term from 2001 to 2007 before returning to Minnesota disillusioned with the way Washington operated. Time named him one of America’s “Five Worst Senators” in 2006, and he was known mainly for his inherited fortune as the great-grandson of the founder of Dayton’s department store, which became Target. As senator, he donated his salary to underwrite bus trips to Canada for senior citizens buying low-cost prescription drugs.

“Minnesota’s gains are not because Mark Dayton has overpowered the state with his political acumen,” says Lawrence Jacobs, a political science professor at the University of Minnesota. He describes the low-key Dayton as the “anti-politician,” someone the voters trust because he’s not smooth enough to fool them. “His skill is he has a clear agenda, and he’s unyielding. This is not pie-in-the-sky Great Society adventurism.”

Dayton has a majority Democratic legislature just as Walker has a Republican controlled legislature, bolstering the ongoing policy experiment in their states. The two governors have pursued agendas that mirror their respective party’s core beliefs, and the results so far suggest that the starve-the-government, tax-cutting credo of conservative orthodoxy has run its course.

Dayton has raised the minimum wage, and he’s significantly increased taxes on the top 2 percent of wage earners to close a budget shortfall and to raise money for investments in infrastructure and education. In the legislative session that just ended, some Democrats joined with Republicans to block his goal of expanding universal preschool. But he did get more scholarship money to educate 4-year-olds.

“This is the largest tax increase we’ve seen in Minnesota, over $2 billion,” says Jacobs. More than three-quarters of the new spending is on education, compared to Wisconsin, where education is on the chopping block, and Walker is at odds with professors and administrators alike at his state’s flagship university system.

Minnesota has also passed the state’s version of the Affordable Care Act (MNsure), and while its implementation has been rocky, it is in place and serving tens of thousands of people.

Dayton ran for governor in 2010 on an unapologetically liberal agenda, and won narrowly after a recount. He was reelected comfortably in 2014, and his approval rating in the latest Minneapolis Star Tribune poll is 54 percent. Contrast that with Walker’s 41 percent, and you’ve got a clear picture of how each is faring in the eyes of voters.

Dayton’s idiosyncratic style is in tune with the times, and at 68, he has no ambition for national office. Walker is running for president and touting hard-right policies that play well with Iowa caucusgoers. He opposed raising the minimum wage, has significantly weakened unions, reduced spending for education, cut taxes on the wealthy, and increased taxes on the middle class in part to pay for the tax cut. According to the nonpartisan Wisconsin Budget Project, Walker gave tax breaks that disproportionally favored upper-income earners while cutting $56 million in tax credits for working families.

Faced with a budget shortfall and no way to plug it without additional revenue, Republicans in the Wisconsin legislature are rebelling against additional spending cuts. But Walker shows no sign of softening his stance against raising taxes or fees. Other Republican governors, notably Louisiana’s Bobby Jindal, are in the same quandary.

“It seems like they’ve been backed into a corner and are just going forward with pure ideology and discounting any contradictory evidence,” says David Madland, author of Hollowed Out: Why the Economy Doesn’t Work without a Strong Middle Class.

As the director of the American Worker Project at the Center for American Progress, a liberal think tank, Madland in his book takes on the premise that inequality is good in the sense that helping the rich get richer is going to help everybody else, that a rising tide lifts all boats. Trickle-down economics has gotten a bad rap and is rarely invoked as a phrase anymore, but the belief that tax cuts are the engine of economic growth remains the core of GOP ideology.

That Minnesota’s economy rallied under progressive policies while Wisconsin’s has struggled is “one more data point proving that trickle down is wrong,” says Madland. While it’s tricky to attribute the well-being of a state’s economy solely to its political leadership, Minnesota is experiencing much stronger growth than its neighbor. Dayton has also proved responsive to the business community, easing early fears that his liberalism might go unchecked.

Walker, on the other hand, has doubled down to the detriment of his state on policies that are backfiring. And if voters in his home state aren’t buying what he’s selling anymore, that doesn’t bode well for his presidential campaign.

 

By: Eleanor Clift, The Daily Beast, July 19, 2015

July 12, 2015 Posted by | Economic Growth, Mark Dayton, Scott Walker | , , , , , , , | 2 Comments

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