Ten Pieces Worth Reading, Mostly Economics: February 26, 2010
1) Martin Feldstein: How Safe Are Your Dollars?:
[T]he big risk to any investor is the possibility that inflation will virtually annihilate a currency’s value. That happened in a number of countries in the 1970’s and 1980’s. In Mexico, for example, it took 150 pesos in 1990 to buy what one peso could buy in 1980. That is not going to happen in the US. Large budget deficits have led to high inflation in countries that are forced to create money to finance those deficits because they cannot sell longer-term government bonds. That is not a risk for the US. The rate of inflation actually fell in the US during the early 1980’s, when the US last experienced large fiscal deficits. Federal Reserve Chairman Ben Bernanke and his colleagues are determined to keep inflation low as the economy recovers....
Looking forward, investors can protect themselves against inflation in the US by buying Treasury Inflation-Protected Securities (TIPS), which index interest and principal payments to offset the rise in the consumer price level. The current small difference between the real interest rate on such bonds (2.1% for 30-year bonds) and the nominal interest rate on conventional 30-year Treasury bonds (now 4.6%) implies that the market expects only about 2.5% inflation over the next three decades. So the good news is that dollar investments are safe. But safe doesn’t mean the investment with the highest safe return. If the dollar is likely to fall against the euro over the next several years, investments in euro-denominated bonds issued by the German or French governments may provide higher safe returns. Even if the dollar is perfectly safe, investors are well advised to diversify their portfolios.
2) M.S.L The stimulus and jobs bills: Tax cuts can in fact create jobs:
SEE what you think of this argument: it's impossible for tax cuts to create jobs. When the government cuts taxes, it simply has to borrow more money to cover its spending. This sucks money out of capital markets, which means financial institutions have less money to lend to businesses. That means businesses can't start up or expand. Whatever jobs are created by tax cuts, an equal number will be destroyed by increased borrowing; all the government is doing when it cuts taxes is taking money from one place and giving it to another. Most people would agree that this is a silly argument. But it is nearly the same argument that the Heritage Foundation's Brian Riedl and University of Chicago economist John Cochrane are currently making against the effectiveness of last year's American Recovery and Reinvestment Act (the stimulus). The CBO thinks the ARRA, which included $288 billion of tax cuts and $499 billion of spending, added between 1m and 2.1m jobs to the American economy by the end of 2009. Moody's, IHS Global Insight, and Macroeconomic Advisers think it added between 1.6m and 1.8m jobs. Mr Riedl and Mr Cochrane don't just argue that this figure is too high. They argue that the ARRA has created no jobs whatsoever, and that, moreover, it is theoretically impossible for the government to reduce unemployment. Deficit spending, they say, simply soaks up capital which would otherwise have been spent by the private sector. They are thinking of deficits created by spending hikes rather than tax cuts, but there is no reason why this should make a difference to their argument: all government deficit spending does, to quote Mr Cochrane, is "take money from one place and give it to another," which cannot create jobs. This way of thinking about the economy makes no sense.... Indeed, the model seems to make it impossible for private borrowing and spending to create jobs, since this activity simply takes money from one place and gives it to another. No economists apart from Eugene Fama appear to agree with Messrs Riedl and Cochrane....
You can make all kinds of potentially valid arguments against stimulus... that government is exceptionally unwise in its spending decisions... that private actors will spend the money in ways that generate more employment... that government programmes generally take years to get underway.... What you can't really do is make a serious, extended argument that it is theoretically impossible for the government to create jobs. Yet that is what Messrs Cochrane and Riedl have been doing. It sounds vaguely logical, in a common-sense sort of way, and it might be convincing to many voters who lack a solid background understanding of how the economy works. It is, in other words, a politically useful argument. But it's hard to see how it can be made sincerely by people who do have a solid background understanding of how the economy works.
The problem with such arguments is a political one. They won't influence serious economists, because they don't make sense. But they can influence the political sphere, because they can gain currency among partisan voters. It's the responsibility of serious people to stay away from such arguments...
FIFTEEN BILLION DOLLARS: I'm honestly not sure why they bothered, as "looking like we're doing something about jobs" is not the same as actually doing something about jobs.
4) Jim Hamilton: Treasury Supplementary Financing Program (SFP):
The SFP, the U.S. Treasury's program for assisting with the balance sheet of the Federal Reserve, is making a sudden and dramatic comeback. First a little background. Whenever the Federal Reserve buys an asset or makes a loan, it simply credits new reserve deposits to the account that the receiving bank maintains with the Fed. The bank would then be entitled to convert those deposits into physical dollar bills that it could ask the Fed to deliver in armored trucks. Banks currently hold $1.2 trillion in such reserves, or more than a hundred times the average level of these balances in 2006, and more than the total cash the Fed has delivered since its inception a century ago. The traditional way the Fed would bring those reserves back in (and thus prevent them from ending up as circulating cash) would be to sell off some of its assets. The Treasury's Supplementary Financing Program was introduced in the fall of 2008 to assist the Fed in its massive operations to prop up the financial system at the time. The SFP represents an alternative device by which the Fed could reabsorb the reserves it created. Essentially the Treasury borrows on behalf of the Federal Reserve, and simply holds the funds in the Treasury's account with the Fed. When a bank delivers funds to the Treasury for purchase of a T-bill sold through the SFP, those reserve deposits move from the bank's account with the Fed to the Treasury's account with the Fed, where they now simply sit idle, and aren't going to be withdrawn as cash. In a traditional open market sale, the Fed would sell a T-bill out of its own portfolio, whereas with the SFP, the Fed is asking the Treasury to create a new T-bill expressly for the purpose. But in either case, the sale of the T-bill by the Fed or by the Treasury through the SFP results in reabsorbing previously created reserve deposits.
The Treasury's press release says only this: "Treasury anticipates that the balance in the Treasury's Supplementary Financing Account will increase from its current level of $5 billion to $200 billion. This will restore the SFP back to the level maintained between February and September 2009. This action will be completed over the next two months in the form of eight $25 billion, 56-day SFP bills. Starting tomorrow, SFP auctions will be held each Wednesday at 11:30 a.m. EST, unless otherwise noted." So this is going to be implemented immediately and on a large scale. But why? If the goal were indeed to drain reserves, the Fed could do this by selling some T-bills out of its own holdings, currently some 3/4 trillion, or could do this with reverse repos or the Term Deposit Facility, not to mention selling some of its trillion dollars worth of MBS. And just two weeks ago Fed Chair Ben Bernanke seemed to be saying that such steps were still far in the future, and did not even mention the possibility of a surge in the SFP.
5) Alexander Bolton: Brown helps Reid win on jobs bill:
Senate Majority Leader Harry Reid (D-Nev.) scored a victory Monday when Sen. Scott Brown and four other Republicans helped to advance his $15 billion jobs bill. The procedural vote was approved 62-30 and allowed Democrats to move toward passage.... Republican Sens. Olympia Snowe (Maine), Susan Collins (Maine), Kit Bond (Mo.) and George Voinovich (Ohio) joined Brown (Mass.) in voting with the bulk of Democrats to end debate. Sen. Ben Nelson (Neb.) was the lone Democrat to vote against the motion to end debate. Democrats are blocking any amendments to the bill, and final passage is expected as early as Wednesday.
Brown released a statement Monday that said he was disappointed with the way the process was handled, but acknowledged Republicans and Democrats have to work together to get the economy back on track. “I came to Washington to be an independent voice, to put politics aside, and to do everything in my power to help create jobs for Massachusetts families,” Brown said in the statement. “This Senate jobs bill is not perfect. I wish the tax cuts were deeper and broader, but I voted for it because it contains measures that will help put people back to work.”...
Lawrence Mishel, head of the union-affiliated Economic Policy Institute, called the Senate jobs bill “small, puny.” The jobs bill includes four components: a tax credit to employers who hire new workers; a provision giving small businesses more leeway to write off the cost of capital investments; the Build America Bonds, which would subsidize the borrowing costs of state and local governments; and a one-year extension of surface transportation authorization funding. Democratic lawmakers have tried to address the concerns of allies by promising to pass additional legislation. “This is not the end of our debate on creating jobs through legislation this year, it’s the beginning of that debate,” said Sen. Ben Cardin (D-Md.). “There will be another package a few weeks from now, and another package [after that],” said Sen. Jeff Merkley, a Democrat from Oregon, which has an 11 percent unemployment rate...
6) DELONG SMACKDOWN OF THE DAY: HTML Mencken::
When I hear the phrase “latte-sipping elitist,” I think of several things. Culturally, I think of scenesters or scenester wannabes, arbiters of taste, awful people very much on the make, navel-gazing yuppie scum… Fuck it; I could go on and on, but here’s a good shorthand: I think of people who write for Gawker. Politically, I think of people in the professions, some of them moving in and out of government, or otherwise involved in policy-making, who are very attuned to and conscientiously follow conventional liberal positions on cultural issues but are clueless — and often more than a little callous — when it comes to class issues. The shorthand here is “Brad DeLong.” I myself never use “latte-sipping elitist” but I have and do use “technocrat elitist,” in the exact same spirit I recognize in the former phrase, when describing such people who regard their poor countrymen with only a bit more humanity than Trevelyan and Lord John Russell had for the Irish.
7) GRAPH OF THE DAY:
8) BEST NON-ECONOMICS THING I HAVE READ TODAY: Ta-Nehisi Coates: The Meaning Of Newsweek's "Terrorism Debate":
I think Glenn Greenwald is right to be outraged by Newsweek's debate around whether the IRS bomber is a terrorist or not. Take this example from Michael Isikoff: "ok, just to weigh in on this -- I think some of the comments miss what I take to be the fundamental distinction. The underpants bomber, for all his ineptitude, was equipped and dispatched by a foreign enemy -- Al Qaeda in the Arabian Peninsula-- whose ultimate leader (bin Laden) has declared war on the United States and who has demonstrated his willingness and intent to inflict mass casualties on our civilian population. That makes underpants man a terrorist and had he been captured overseas, would have made him an enemy combatant-- and why the Obama administration dispatches the U.S. military and Predator drones to destroy the people who sent him here. Similarly, the Fort Hood shooter may have been a disturbed 'lone wolf' but he was in ideological alignment and in communication with a member of the same foreign enemy. That makes them both terrorists. The Austin tax protestor, the anthrax scientist wacko, the Unabomber-- all did heinous things that we can describe any way we want -- certainly what they did were terrorist acts-- but they all remain a very different kettle of fish, which is why Mr. underpants man gets more attention that Austin tax protestor flying plane into building."
I have a great respect for Isikoff as a reporter, but this strikes as really weak logic. Isikoff concedes that the "Austin Tax Protester" committed "terrorist acts," but then claims he's not a terrorist. Under what circumstances could one commit "murderous acts" and not be murderer? In what instance could one commit an act of rape but not be a rapist? How does one commit an act of burglary, and yet not be labeled a burglar? The implications are chilling. By Isikoff's lights--and by the lights of several of his colleagues--the Ku Klux Klan, an organization responsible for the murder of thousands of innocent people, the men who turned Birmingham into "Bombingham," who hurled molotov cocktails into the homes of Detroiters who dared moved west of Woodward, who lynched black men in the streets, who brought food, children and wives to the spectacle, who smiled next to smoking corpses in post-cards for far-off relatives, who displayed the knuckles and testicles of black men in pickle jars, were not terrorists, but "Ethnic Intrusion Protesters." This is not merely about semantics. I deeply suspect that our inability to grapple with and understand our own history of home-grown terror, indeed defining it as something else, inhibits our understanding of the very terror we now face and claim to be at war with. I wish I could claim that Newsweek reporters, in embracing a vocabulary wish allows a murderer to be transformed into "The Austin Tax Protester," were betraying an ancient trust. In fact, who knows the history of black people in this country, knows that that the white press crumbled, and was at times even complicit, the Klan's century-long reign of terror. This notion that the press has "fallen," that the news medium has reached a new singular low, is belied by black history. I guess I should be happy. At least the press is debating whether he's a terrorist. Fifty years ago they would have been looking the other way. No. They would have egged him on.
9) STUPIDEST THING I HAVE READ TODAY: Rich Lowry and Ramesh Ponnuru, as observed by The League of Ordinary Gentlemen:
As a fan of Rich Lowry and Ramesh Ponnuru, I was dismayed to read (in a piece that made some good points) their un-conservative and off-handed attack on mass transit: "The Left’s search for a foreign template to graft onto America grew more desperate. Why couldn’t we be more like them — like the French, like the Swedes, like the Danes? Like any people with a larger and busier government overawing the private sector and civil society? You can see it in Sicko, wherein Michael Moore extols the British national health-care system, the French way of life, and even the munificence of Cuba; you can hear it in all the admonitions from left-wing commentators that every other advanced society has government child care, or gun control, or mass transit, or whatever socialistic program or other infringement on our liberty we have had the wisdom to reject for decades..."
Can people please stop bringing forward Ramesh Ponnuru as a "reasonable conservative" now?
10) HOISTED FROM THE ARCHIVES: DeLong (2003): And They Say the FAA Has No Sense of Humor:
The following items must not be used on this aircraft:
- Portable radios
- Portable televisions
- Cellular telephones
- Remote radio-controlled toy cars
