Monthly Archives: March 2012

All Quiet on the Monetary Front

From the FOMC’s latest statement:

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects moderate economic growth over coming quarters and consequently anticipates that the unemployment rate will decline gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook. The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. […]

Arguments regarding credibility and how difficult it is to earn in the world of central banking are often brandished about. Central bankers often imply that it’s the most dear and precious thing, and that it should not be squandered at any cost. The Federal Reserve has a lot of said credibility insofar as they are really good at fighting inflation. But that’s where the problem presents itself: that inflation fighting credibility comes at the cost of unemployment fighting credibility (it doesn’t have to, and there are examples of this, but that’s been the popular policy stance in the U.S. and Europe).

Many observers expected a more hawkish stance from the Fed following the positive news of the past few months; that qualifies as bad central banking to me and displays a lack of the appropriate kind of credibility. If they’re going to make explicit remarks such as keeping rates near zero through 2014, which I think they should continue to do, they shouldn’t find it acceptable that people second-guess them. Especially now, when expectations are the primary policy tool! I would find it mighty troubling that an unambiguous and neutral statement–by the Fed’s standards–was interpreted to be good news simply because the bad decisions that were expected didn’t materialize.

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*Most* Signs Point to Continuing Recovery

The economy added a healthy 227,000 net jobs in February, marking the third consecutive month of job growth exceeding 200,000.  The unemployment rate remained unchanged at 8.3%, as the number of newly employed was essentially canceled out by those rejoining the labor force. Perhaps just as important, revisions to previous months’ numbers were significant: an additional 78,000 net jobs were added in December and January than was previously measured. All good news.

So will that continue? Some think we’re in for a few months of less than impressive growth in GDP, which would presumably result in a similar story for labor. Others aren’t convinced of that. Real gross domestic product involves a fair amount of inherent haziness, especially regarding productivity gains and losses. It’s just as likely that a shift in composition and geography of labor in some sectors could contribute to these future reductions in RGDP growth without sacrificing a commensurate number of jobs. For example, rising wages in outsource-destination countries, as well as further decline of the dollar, could lead to a repatriation of some jobs. Hence reduced GDP and more jobs.

A larger concern of mine, however, is one that many commentators share. Barring unforeseen oil induced shocks (ahem, dropping bombs on Iran…ahem), the biggest threat to a sustained recovery is an overzealous Federal Reserve. With core inflation hovering around the Fed’s now explicit target of 2%, it’s to be expected that inflation hawks on the FOMC will start getting louder. Moreover, we should expect certain prices to rise faster than some; an unabated recovery will naturally precipitate higher rent and gasoline prices. This shouldn’t be seen as distressing, although it certainly will. It will be the natural result of i) increased demand for oil as business activity increases and more people drive to work, and ii) pent-up demand for apartments and houses, which was subdued as a result of stagnate new household formation during the recession. There has at least been talk of QE3, or “Sterilized” bond purchases–which is a really informative and helpful thing to call it. If the Fed really wanted to put us over the top, this is the course of action they’d take, especially now. Expectations of QE3 are nearly nonexistent considering the recent improvements in the labor market and economy writ large. That’s why such a move would be unequivocal: the Fed stands behind this recovery.

While I don’t think that’s likely, it’s my hope that they’ll remain at least neutral, rather than tighten policy at a tragic time. There should be enough non-maniacs voting at FOMC meetings at any given time to prevent that.

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Depression and Total War, in Color

The Library of Congress recently released a huge collection of color photographs, taken by the Farm Security Administration (FSA) and later the Office of War Information (OWI), from the late 1930s and 1940s. Stunning stuff.

It’s all quite àpropos of current circumstances. Mobilization, also know as large and sweeping direct government spending in some circles, finally brought us back to full employment.

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New Name, New Look, Same Old

I’ve got a real problem when it comes to sticking with a publishing platform. I’ve decided to migrate back to WordPress (and might I add that things are looking really spiffy around here, nowadays). About all my posts from the old site have been moved over, although I had trouble with the importing tool so I had to do it manually and thus the dates are not reflective of when they were originally published. Hope that doesn’t throw people.

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Meaningful Long-term Budget Forecasts and Beating the Health Care Horse

When someone is talking about debt and deficits, they’re implicitly talking about future spending on health care. That’s the determining factor in forecasted long-run problems. Not trivialities like discretionary spending, not social security. Health care. But Mark Thoma asks whether or not those forecasts are logically sound. The math isn’t wrong, and it makes intuitive sense; extrapolating from where things stand now, health care spending will become an increasingly large part of the budget. But more fundamentally?

We can’t forecast very well beyond a 3 to 6 month horizon, yet we are relying upon projections for decades in the future as the basis for cutting social programs now. The CBO, for example, uses a 70 year projection for revenues and outlays, and that is the basis of a lot of the worry over the long-term budget picture. But, did we have any idea at all 70 years ago — in 1942 — what health care costs would be today?

The point is well taken. Hell, I’ll be very disappointed if I’m not half-machine by 2070. Essentially, a lot of things can happen to steer us off this path. We could suddenly stop consuming health care at the level we do now, meaning lower demand and prices. Technological progress could turn medicine into something vaguely resembling robiticized manufacturing—done by robots on the cheap.

So, what to make of all the talk of projections of this sort? This might sound slightly cynical, but… I think everyone sort of already understands this uncertainty on some level. Most of these fiscal doomsayers aren’t considering these forecasts as much more than political ammunition for propagating normative prescriptions.

Thoma goes on to quote Jeff Sachs, who rails against conservative tendencies in calling for an end to the welfare state based off this notion of imminent bankruptcy. Why bring pain to millions now because something might or might not happen seventy years from now?

One of the unshakable myths of the punditariat is that the federal government is going bankrupt because of entitlements spending, especially spending on Medicare and Medicaid. Each day we hear the drumbeat saying that either we cut entitlements now or we are finished as a nation.

I want to defend the obverse side of that coin. Why should we progressives wish to change health care as an institution? Maybe we’re in no danger of being run dry because of health care! Well, while we might not know how health care costs will manifest themselves seventy years from now, we do know, contra Thoma’s remark on our predictive capabilities, what it will cost ten to twenty years from now. I say that because regardless of what changes lay in front of us, minus the discovery of the fountain of youth, the health care sector is large and has inertia and won’t be radically and quickly changing course. Steering the Titanic, and all that. To wit, we know health care is going to stay expensive and get more expensive in the short- to medium-term. We should try to make that not so. The facts also show that our aggregate outcomes, in terms of better health, aren’t commensurate with our level of spending. That’s simply a waste of resources that could otherwise be directed to more socially beneficial undertakings. Secondly, and more importantly, the old standby: there is an immense amount of suffering and inequity that takes place in heath care markets—namely, insurance markets. Per the progressive view on the state and the role it should play in society, we can ameliorate this suffering and inequity.

Should the CBO and varying other parties even bother with these types of forecasts? Are they useful? In any prophetic way, not really. We don’t know how anything is going to play-out that far down the road. However, it’s useful in highlighting that we do suffer from a health care problem, even if its exigency is overstated. So, as they say, “When in Rome, use all estimates of future health care spending to your advantage.”

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How Does the Affordable Care Act Work?

Because of socialism and death panels.

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The United States of America Isn’t a Business

Atrios, stating the simple truth that being good at something doesn’t axiomatically make you good at something else, points to a Paul Krugman post regarding the ubiquitous sentiment that smart businessmen make good economic policymakers.

Leaving aside all the questions about what Mitt Romney did or didn’t do at Bain — and about his self-aggrandizing double standard — there’s an even broader question: why does anyone believe that success in business qualified someone to make economic policy?

For the fact is that running a business is nothing at all like making macro policy. The key point about macroeconomics is the pervasiveness of feedback loops due to the fact that workers are also consumers. No business sells a large fraction of its output to its own workers; even very small countries sell around two-thirds of their output to themselves, because that much is non-tradable services.

This makes a huge difference. A businessman can slash his workforce in half, produce about the same as before, and be considered a big success; an economy that does the same plunges into depression, and ends up not being able to sell its goods.

The answer to that question is probably rooted in the fact that [number far exceeding 90%] of people have never been privileged to a class on even rudimentary macroeconomics. (Also an explanation for why Ron Paul has so many followers when, literally, he has 19th century views on how the world operates).

I’m not saying that is necessarily a fault of their own. Contrarily, this chronic notion speaks to the continuing failures of American elites to be honest and forthright with the electorate.

That is, unless they actually believe this nonsense. That can’t be the case, though, right? 

Right?…

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The Following is Laced with Bitterness

Not actually, but I am slightly annoyed and confused.

The biggest problem facing my generation is a dysfunctional legislature handicapped by it’s own antiquated rules and procedures that no longer serve any meaningful purpose. It’s a problem that supersedes  the rest; it stifles our ability to tackle any other major issue successfully.

That was the question asked by the editors of The Nation for their annual student writing contest: what is the biggest problem facing your generation. What were selected as the winning essays are nothing more than filler, subjects barely worthy of having 800 words devoted to them—except one regarding climate change, but as has been evident, and like I’ve said, I double-dog dare you to do anything meaningful about climate change in a de facto 60-vote Senate.

I don’t have much to say regarding the first place entry, a beautifully written retrospective on the Virginia Tech shooting. While it would be deserving of publication on it’s own merits, it doesn’t really address the question.

Answers from the other essays include apathy, evidenced by low turnout on election day. That’s definitely a problem, but the biggest? This is universal; every generation, when its members were ages 18-24, was lazy and apathetic toward politics. (Save for the kids that were newly allowed to vote immediately following the passage of the 26th amendment, but that’s totally different). Another essay espoused the evils of mobile telephones, or technology, or rampant ADHD. Hard to tell what the point was, or how on Earth it could possibly be classified as THE biggest problem facing our generation.

There was, for what is probably the 1,000th time in the past couple months, a condemnation of mixed-market capitalism. That there are currently millions of unemployed and underemployed Americans isn’t a refutation of our economic system as much as it is a refutation of our policymakers and the institutions they inhabit. We’re in what essentially is a textbook financial crisis/balance sheet recession. There are policies that could have had us out of it by now, but unfortunately…well, see step one.

There was one other essay, on the terrible state of American journalism, that was poignant. Some may recognize it as “The Cult of Balance”. James Fallows of the Atlantic and Paul Krugman have been hitting at this for a long time. Climate Change, while existentially important, is obvious; it’s nice to see someone hit on a more subtle and nuanced topic.

I’m sticking to my guns, though. The political realities of today are incompatible with the political systems they must operate within. Is it really surprising, though, considering those systems were designed in the 1700s? Hardly.

There is an observable phenomenon here. It’s the inability to get an incredibly important point specifically related to congressional procedure across, regardless of effort; to be rendered mute by the popular discourse. It shall be christened henceforth as EKS, or Ezra Klein Syndrome, after its first victim (at least, the first victim I cared to notice). Read this interview he conducted with Matt Miller, who with many other equally naïve men and women have been crooning for a third-party candidate to run for the presidency. It’s a stunning example of the cognitive dissonance that inundates the airwaves and broadsheets.

People can talk all they want about how the passage of the PPACA was heated and controversial due to President Obama’s inability to sell it to the public, or because it wasn’t “bipartisan”. It’s all trash; Representatives and Senators are big boys and girls, and they hold the ultimate power in passing legislation. The truth is that the Senate has become a dysfunctional, paralyzed body wherein a dedicated and unflinching minority can halt everything and relax in full confidence, knowing that no political harm will be meted out. Better yet, not only has such a minority continued to steamroll every rule and norm that has been established over the entire history of the chamber, they will do so knowing that they’ll actually come out net positive thanks to the opaque and insipid nature of these tactics.

If only parliamentary procedure was sexy! Maybe then there would be some hope of doing something about it. Here’s to hoping that my generation has a moment of clarity and realizes our actual handicap. My losing entry for the contest follows, after the jump.

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Sucker for Signs, cont.

This awesome sign brought to you by courtesy of Matt Yglesias.

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Sucker for Signs

Homerun! Some serious recruiting needs done, unfortunately.

Paul adds one caveat:

Small quibble: under current conditions, with a large debt overhang, the AD curve should be upward-sloping!

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