The Blinder-Zandi Report

A paper by economists Alan Blinder, an economist at Princeton and a former vice chairman of the Federal Reserve, and Mark Zandi, the chief economist at Moody’s Analytics, finds that without the Troubled Asset Relief Program (TARP) that bailed out the nation's financial sector, the bank stress tests, the emergency lending and asset purchases by the Federal Reserve, and the Obama Administration’s fiscal stimulus program - the much maligned American Recovery and Reinvestment Act of 2009 (ARRA) - the nation’s gross domestic product would be about 6.5 percent lower this year.

Additionally, Dr. Blinder and Dr. Zandi find that the US economy would have lost an additional 8.5 million jobs, on top of the more than 8 million lost so far; and the economy would be in the midst of a deflationary asset spiral, instead of low inflation. Overall, they conclude that the aggregate effects of the TARP and the ARRA "probably averted what could have been called Great Depression 2.0." I am not quite sure why economists apart from Paul Krugman always seem to forget about the Panic of 1873, a five-year long financial downturn marked by deflation, price instability and the first sustained period of mass unemployment in world history.

More on the Blinder-Zandi report from the New York Times:

Mr. Blinder and Mr. Zandi emphasize the sheer size of the fallout from the financial crisis. They estimate the total direct cost of the recession at $1.6 trillion, and the total budgetary cost, after adding in nearly $750 billion in lost revenue from the weaker economy, at $2.35 trillion, or about 16 percent of G.D.P.

By comparison, the savings and loan crisis cost about $350 billion in today’s dollars: $275 billion in direct cost and an additional $75 billion from the recession of 1990-91 — or about 6 percent of G.D.P. at the time.

But the new analysis might not be of immediate solace to officials in the Obama administration, who have been trying to promote the “summer of recovery” at events across the nation in the face of polls indicating persistent doubts about the impact of the $787 billion stimulus program.

For one thing, Mr. Blinder and Mr. Zandi find that the financial stabilization measures — the Troubled Asset Relief Program, as the bailout is known, along with the bank stress tests and the Fed’s actions — have had a relatively greater impact than the stimulus program.

If the fiscal stimulus alone had been enacted, and not the financial measures, they concluded, real G.D.P. would have fallen 5 percent last year, with 12 million jobs lost. But if only the financial measures had been enacted, and not the stimulus, real G.D.P. would have fallen nearly 4 percent, with 10 million jobs lost.

The combined effects of both sets of policies cannot be directly compared with the sum of each in isolation, they found, “because the policies tend to reinforce each other.”

Oddly enough, the New York Times failed to link to the report but here it is: How the Great Recession Was Brought to an End (pdf). The title is perhaps a bit over optimistic given that we are not quite out of the economic doldrums as yet but I do think their conclusion is inescapable:

It is clear that laissez faire was not an option; policymakers had to act. Not responding would have left both the economy and the government’s fiscal situation in far graver condition.

Still no one has ever won an election with the argument that it could have been worse. 

Understanding GOP Economics, An Exercise in Futility

Though I largely hold that trying to understand Republican economics is an exercise in futility, credit Martin Wolf, the chief economics commentator at the Financial Times, for writing the single most brilliant takedown of the GOP's economic approach that I've read perhaps ever. In a column entitled The Political Genius of Supply Side Economics details the transformation of the GOP from the party of the responsible frugality of Dwight D. Eisenhower to the party of the irresponsible profligacy of Ronald Reagan and George W. Bush.

To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: “supply-side economics”. Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue.

The political genius of this idea is evident. Supply-side economics transformed Republicans from a minority party into a majority party. It allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch?

How did supply-side economics bring these benefits? First, it allowed conservatives to ignore deficits. They could argue that, whatever the impact of the tax cuts in the short run, they would bring the budget back into balance, in the longer run. Second, the theory gave an economic justification – the argument from incentives - for lowering taxes on politically important supporters. Finally, if deficits did not, in fact, disappear, conservatives could fall back on the “starve the beast” theory: deficits would create a fiscal crisis that would force the government to cut spending and even destroy the hated welfare state.

In this way, the Republicans were transformed from a balanced-budget party to a tax-cutting party. This innovative stance proved highly politically effective, consistently putting the Democrats at a political disadvantage. It also made the Republicans de facto Keynesians in a de facto Keynesian nation. Whatever the rhetoric, I have long considered the US the advanced world’s most Keynesian nation – the one in which government (including the Federal Reserve) is most expected to generate healthy demand at all times, largely because jobs are, in the US, the only safety net for those of working age.

True, the theory that cuts would pay for themselves has proved altogether wrong. That this might well be the case was evident: cutting tax rates from, say, 30 per cent to zero would unambiguously reduce revenue to zero. This is not to argue there were no incentive effects. But they were not large enough to offset the fiscal impact of the cuts (see, on this, Wikipedia and a nice chart from Paul Krugman).

Indeed, Greg Mankiw, no less, chairman of the Council of Economic Advisers under George W. Bush, has responded to the view that broad-based tax cuts would pay for themselves, as follows: “I did not find such a claim credible, based on the available evidence. I never have, and I still don’t.” Indeed, he has referred to those who believe this as “charlatans and cranks”. Those are his words, not mine, though I agree. They apply, in force, to contemporary Republicans, alas,

Since the fiscal theory of supply-side economics did not work, the tax-cutting eras of Ronald Reagan and George H. Bush and again of George W. Bush saw very substantial rises in ratios of federal debt to gross domestic product. Under Reagan and the first Bush, the ratio of public debt to GDP went from 33 per cent to 64 per cent. It fell to 57 per cent under Bill Clinton. It then rose to 69 per cent under the second George Bush. Equally, tax cuts in the era of George W. Bush, wars and the economic crisis account for almost all the dire fiscal outlook for the next ten years (see the Center on Budget and Policy Priorities).

Today’s extremely high deficits are also an inheritance from Bush-era tax-and-spending policies and the financial crisis, also, of course, inherited by the present administration. Thus, according to the International Monetary Fund, the impact of discretionary stimulus on the US fiscal deficit amounts to a cumulative total of 4.7 per cent of GDP in 2009 and 2010, while the cumulative deficit over these years is forecast at 23.5 per cent of GDP. In any case, the stimulus was certainly too small, not too large.

The evidence shows, then, that contemporary conservatives (unlike those of old) simply do not think deficits matter, as former vice-president Richard Cheney is reported to have told former treasury secretary Paul O’Neill. But this is not because the supply-side theory of self-financing tax cuts, on which Reagan era tax cuts were justified, has worked, but despite the fact it has not. The faith has outlived its economic (though not its political) rationale.

The sad fact remains that too many Americans believe that taxes are too high (reality: among OECD countries only Mexico, Turkey, Korea, and Japan have lower taxes than the United States as a percentage of GDP) and perhaps worse too many Americans believe that the only road to economic prosperity is cutting taxes. In this they have been duped by the GOP but we too are culpable in that we have not successfully made the case that a progressive tax scheme not only produces a more egalitarian country but a more broadly prosperous one.

There's more...

C is for Contrafibularity, R is for Refudiate, I is for Irrational

In the above scene from the BBC comedy Blackadder Series 3, Dr. Samuel Johnson arrives at the palace, having completed his life's work, to present the now finished dictionary of the English language to the daft and not quite all there Prince Regent played by Hugh Laurie when Blackadder played by Rowan Atkinson throws Dr. Johnson for a loop by offering him his contrafibularity, a made up word meaning congratulations. One wonders what Dr. Johnson might have thought of our newest wordsmith from Wasilla, Sarah Palin. However unlike in Blackadder, the linguistic creativity of Sarah Palin is no laughing matter. 

This is far from the most important news of the day, the truth is that Washington Post story on the national security apparatus built up since 9/11 with little oversight and seemingly little coordination is a much more important story, and yet writers across the world have devoted inordinate time and space to the Palin story. At one point this morning, "refudiate" was the second most searched topic on Google. As I write this, it is currently ninth.

Over at The Atlantic, Marc Ambinder finds that Palin "is getting quite savvy as a politician: when she makes a mistake, or appears to do something dumb, she is quick to exploit her own misfortune ... not in a way that excuses her original mistake, but that alludes to the improbable fact that there is some in-joke, some secret code that the rest of us aren't getting." He adds:

"Palin knows how to humanize herself. That's a rare talent for a politician to cultivate, and one that she's getting better at every day. What's more, she humanizes herself by somehow ascribing her misfortune to the establishment that's trying to tear her down. Her audience loves it.

It is certainly true that "her audience loves it." As I noted in my first post on this topic to her adoring base, no transgression can melt the polar adulation they have for her. The only time that there have been rumblings of discontent heretofore was over her endorsement of Carly Fiorina over the more conservative Chuck DeVore in the California GOP Senate primary. But the problem for Palin is that is only her audience who is eating this up. Say what you will about elitist publications but it is not a good thing that The Economist, on the Samuel Johnson Blog on Language no less, would take to criticize Palin. Over the course of the day, the mockery has been incessant. Twitter feeds on Movies with Refudiate or Shakespeare twists such as "The Laming of Shrew" or "Mid Summer's Night Moron" have a deleterious effect even if her supporters circle the wagons around her. The blind leading the blind, or in this case the dumb leading the dumb and dumber, isn't exactly a recipe for success.

But there is another point that needs to be made plainly evident and it is a serious character flaw that requires frank, explicit talk. Sarah Palin is psychologically incapable of admitting a mistake. She could have chalked this up to a simple typographical error (though her slip of the tongue earlier in the week would have left doubts) but no instead we got an unbounded narcissism. Rather than admit an error she compares herself to the greatest playwright in the English language, a language which she does not even master.

The inability to admit a mistake is, of course, a common conservative trait, though this is not to suggest that all conservatives are incapable of admitting errors. Mitch Daniels, the Governor of Indiana, for example reversed himself on the privatization of Indiana's welfare system cancelling a $1.34 billion contract with IBM noting that the state could do a better job of handling welfare claims. But among the more ideological members of the GOP, politics means never having to admit a mistake much less having to say you're sorry.

Just look at where we are now: the budget deficit this year will amount to 12.5 percent of GDP; 40 percent of the Federal budget is credit financed with more than half of that financing now coming from overseas. In 2011, the debt to GDP ratio will exceed 100 percent. Social inequality now matches levels not seen since before the Great Depression. The U6, the broadest measure of unemployment, is at 16.5 percent. In at least five states, the U6 is over 20 percent. A record number of Americans have been unemployed for 27 weeks or longer. For young African-American males, the unemployment rate is over 40 percent. Foreclosures rates are still climbing though they are expected to peak by year's end. And yet the GOP prescription is more of the same policies - lower taxes, fewer regulations, and a redistribution of wealth upwards - that put us in this predicament. Since 1976, 58 percent of all income gains have accrued to the top one percent of US households. Meanwhile, 25 percent of American workers earn a wage that puts them at or below the poverty level. 

One would have thought that after the near collapse of the US financial sector and the steepest economic decline in 80 years, the debate over market fundamentalism - the belief that unfettered, unregulated markets can deliver economic prosperity and a secure lifestyle for all Americans - would lead to at least some introspection and reflection over what went wrong. But no, what's the Speaker-in-waiting John Boehner's response to the rather lukewarm financial regulations that just passed? To repeal them. 

They have a blind faith in free markets but the blindest of them all are those closely associated with Tea Party movement, the Sarah Palins, the Michele Bachmans, the Sharron Angles, the Rand Pauls. Their faith in markets isn't rational. And their inability to admit even the most innocuous of errors suggests if entrusted with political power, they will drive us off a cliff for they are that committed to the failed policies of the past and are incapable of making any adjustments in their thinking. In short, they are irrational.

Greenspan on the Bush Tax Cuts: "Let Them Lapse"

Former Federal Reserve Chairman Alan Greenspan, whose backing of George W. Bush’s 2001 tax cuts was instrumental in persuading Congress to pass them, said lawmakers should allow the reductions to expire at the end of this year in an interview with Judy Woodruff to be aired this weekend.

The story from Bloomberg News:

“They should follow the law and let them lapse,” Greenspan said in an interview on Bloomberg Television’s “Conversations with Judy Woodruff,” citing a need for the tax revenue to reduce the federal budget deficit.

The former U.S. central bank chairman also said the economy is in “a temporary slump” and would emerge with a “sluggish” 3 percent growth rate in the second half of the year. He said banks’ lending will remain constrained because financial markets are pressing them to maintain higher capital levels and predicted the Wall Street regulatory measure the Senate passed yesterday will reduce credit available for low- income consumers.

Greenspan’s comments on taxes, to be broadcast today and over the weekend, place him in the middle of an election-year struggle over extending Bush’s trillions of dollars of tax cuts.

President Barack Obama campaigned for election in 2008 on a promise of extending the Bush tax reductions for families earning up to $250,000 while eliminating the cuts for higher- income Americans, a position also embraced by most congressional Democrats. Republicans have pressed for continuing the cuts for higher-income families, arguing that a weak economy is no time for a tax increase.

House Majority Leader Steny Hoyer, a Maryland Democrat, stoked the debate with comments on June 22 that permanent extension of the middle-class tax cuts may no longer be affordable because of the growing U.S. debt burden.

If by "temporary slump" Greenspan means a decade plus, then I suspect he may be right. The other big economic news of the day comes from Ezra Klein who published a Brookings Institute chart that shows that "adding new jobs at a rate of 200,000 a month would take us 150 months -- or 12.5 years -- to get back to normalcy." Normalcy being a pre-recession level of employment. The bad news is that so far this year only in April did the economy generate 200,000 new jobs.

You can read the full Job Gap report written by Michael Greenstone and Adam Looney here. As of June, employment numbers, the job gap stands at almost 11.3 million jobs.

Tackling Inequality

Yves Smith over at Naked Capitalism has a post with a rather spectacular statistic as a headline: "58% of Real Income Growth Since 1976 Went to the Top 1% (and why it matters)". That's a pretty devastating statistic though it clearly points to the salient development in the American economy, a widening, and dangerous in my view, social inequality.

That stat comes courtesy of the Financial Times' Martin Wolf who in turn is citing the work of the Indian born economist Raghuram Rajan, now a professor at the University of Chicago but previously the Chief Economist at the IMF. Dr. Rajan, who is a rather unorthodox economist even if he does lean right on regulatory reforms, has a new book out called Fault Lines: How Hidden Fractures Still Threaten the World Economy which is the subject of both Smith and Wolf posts.

From Martin Wolf:

In his book, Prof Rajan points to domestic political stresses within the US. Related stresses are emerging in western Europe. I think of it as the end of “the deal”. What was that deal? It was the post-second-world-war settlement: in the US, the deal centred on full employment and high individual consumption. In Europe, it centred on state-provided welfare.

In the US, soaring inequality and stagnant real incomes have long threatened this deal. Thus, Prof Rajan notes that “of every dollar of real income growth that was generated between 1976 and 2007, 58 cents went to the top 1 per cent of households”. This is surely stunning.

“The political response to rising inequality ... was to expand lending to households, especially low-income ones.” This led to the financial breakdown. As Prof Rajan notes: “[the financial sector’s] failings in the recent crisis include distorted incentives, hubris, envy, misplaced faith and herd behaviour. But the government helped make those risks look more attractive than they should have been and kept the market from exercising discipline.”

There's more...


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