J. Bradford DeLong's Blog, page 2136

The Drive to Construct a Better Financial Regulatory System Is Over

Mark Thoma:

Economist's View: How Will the GOP Regulate Wall Street?: Regulation is rarely flawless when it is first imposed. Adjustments are needed to make sure that the intent of the original legislation is carried out, and to plug any new holes that are discovered. However, any new regulatory initiatives will face a tough hurdle -- a Republican chairman of the House Financial Services Committee and Republican control of the House.

In fact, the battle will be to stop current regulatory initiatives from being watered down or eliminated. Democratic control of the Senate and White House should be able to prevent this from happening, and the outcome is likely to be a standoff. However, a standoff can still lead to watered down or ineffective legislation. Since there won't be any way to fix regulatory problems that emerge over time as the industry evolves and attempts to evade existing restrictions, or to fix new problems that are discovered, gridlock will work in favor of the banks.

And he sends us to Andrew Leonard:

Rarely do you see a politician quite this honest: Last Wednesday, just hours after securing the position of chairman of the House Financial Services Committee, Spencer Bachus, R-Ala., told the Birmingham News that:

in Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks.

In the very next paragraph, the newspaper reported that Bachus:

later clarified his comment to say that regulators should set the parameters in which banks operate but not micromanage them."

But the damage was already done.... The candor of Bachus' initial statement is eyebrow-raising, no doubt about it, but the fuss and bother over his revelation is a little bit disingenuous.... Together with his fellow Alabaman Republican, Sen. Richard Shelby, the powerful ranking member of the Senate Banking Committee, he's part of a dynamic duo of market fundamentalist crusaders who will likely set the tone for how banking reform and regulatory oversight aimed at Wall Street are implemented for the next two years. Immediately after the midterm elections were over, and long before his confirmation as chairman, Bachus got quickly to work on his anti-regulation agenda. The day after the election, in fact, Bachus sent a letter to the Financial Stability Oversight Council, that, as I wrote last month, was written as if dictated by bank lobbyists....

Let's recap: Who hates the Volcker rule the most? The banks. Who is most annoyed by the Consumer Financial Protection Agency? The banks. Whose agenda is Spencer Bachus already serving to the best of his ability? The banks'....

The most famous Alabaman to influence how Washington regulated Wall Street was probably Henry Steagall, whose name resonates through history from its inclusion as part of the name of the Glass-Steagall Act that separated investment and commercial banking for the better part of 60 years. Both Bachus and Shelby voted to repeal Glass-Steagall, and both of them have worked hard to make sure that the spirit of regulation birthed in the Great Depression, and revivified by the Great Recession, dies stillborn. Henry Steagall was no flaming liberal, but it is hard to imagine he'd be too pleased by today's Alabama agenda.

Mark Thoma Says It Very Concisely

(Lack of) Inflation Watch

Fiscal Policy and American Governance

As I have said often, one of Barack Obama's first moves as president should have been to announce that he would veto any bill that did not reduce the projected national debt in 2020--that that was the best way to set up the pool table to get us to policies that provide for short-term stimulative deficit spending to promote recovery and long-term budget balance to promote fiscal sanity. Obama, instead, prefers to talk about how the government must tighten its belt via discretionary spending caps and federal salary freezes in the short term while permanently extending tax reductions without regard to PAYGO for the long term.

The only saving grace is that he is not nearly as bad as his Republican counterparts.

Simon Johnson on the lack of grownups in American government:

Voodoo Economics Revisited: Democratic and Republican leaders in Washington are suddenly falling over themselves to agree on the need for major tax cuts – affecting not just middle-class Americans, but also very rich people (both living and when they die). Does this sudden outbreak of the long-desired bipartisan consensus indicate that a new, stronger America is just around the corner? Unfortunately, the opposite is true. What we are seeing is agreement across the aisle on a very dangerous approach to public finance: a continuation and extension of what President George H.W. Bush memorably called “voodoo economics.” Its consequences are about to catch up with America, and the world.

Bush was competing with Ronald Reagan for the Republican nomination in 1980. Reagan suggested that tax cuts would pay for themselves, i.e., actually raise revenue – a notion that became known as “supply side” economics. There’s nothing wrong with worrying about the disincentive effect of higher taxes, but the extreme version put forward by Reagan did not really apply to the United States. When you cut taxes, you get lower revenue, which means a bigger budget deficit. To be sure, no serious people are claiming the full Reagan effect today.... But there is a broader Reagan-type reasoning at work here....

Experience with fiscal policy over the past few decades is clear. It is worth stimulating the economy with discretionary fiscal policy only occasionally – specifically, when not doing so would be calamitous. Thus, it made sense to pursue a fiscal stimulus of some kind in early 2009.... [But today] a further fiscal stimulus may prove counterproductive, with the extra spending counterbalanced by the negative effect on the housing market of higher interest rates....

A year from now, what kind of economy will the US have? Any short-term “fiscal stimulus” effect will have worn off, unemployment will still be high, and there will no doubt be politicians clamoring for more tax cuts. The budget deficit will likely be in the range of 8-10% of GDP, even if growth comes back to some extent. And the bond markets will be much more nervous....

Some people expected Paul Ryan, a rising star within the Republican Party who will become Chairman of the House budget committee in the next Congress, to provide a fiscally responsible anchor to the next round of the deficit debate in the US. Writing in The Financial Times in early November, Ryan suggested, “America is eager for an adult conversation on the threat of debt.” But all indications are that he is just as childishly reckless on fiscal policy as most of his Republican colleagues since Ronald Reagan.

Unfortunately, there is no sign yet that the Democratic leadership is ready for a mature conversation about fiscal consolidation, either. Both parties’ leaders will get there – but only when dragged, kicking and screaming, by the financial markets.

On Tibor Moricz's "From Bar to Bar"

Gwyneth Jones:

What they say about From Bar to Bar interviews: From Bar to Bar is a fascinating and novel idea for the cyberspace interview: don’t change a word of the material the interviewee provided, but set your imagination free and change everything else! It’s an effect of lighting, decor and staging, provided (as, essentially, in all virtual worlds) by the word alone. Any writer (or any arts professional) who volunteers can be certain of gaining new insight into their own work, and seeing themselves in a new light, in the glittering refractions of the Bar to Bar hall of mirrors.

The Republican Party Has Always Been at War with Eurasia

Paul Krugman:

Orwell and the Financial Crisis: Barry Ritholtz catches AEI purging mention of deregulation from Peter Wallison’s bio. Wallison is co-director of AEI’s financial deregulation project; but he’s also one of the Gang of Four demanding that the Financial Crisis Inquiry Commission not so much as mention deregulation in its report. So Wallison’s history as an advocate of the policy that shall not be named must be expunged, I guess.

If this sounds familiar, it should. The same thing happened with Social Security privatization. There was a long effort by conservative groups to promote privatization, a term they themselves devised. Cato had a Project on Social Security Privatization. But then, when it turned out that the term polled badly, they began rewriting old records in an attempt to cover up the fact that they had ever talked about it.

As Brad DeLong says, I’ll stop calling these people Orwellian when they stop using Nineteen Eighty-Four as an operations manual.

Update: I wonder if Ezra Klein is serious when he asks whose interests are served by this. The right has always understood that the perceptions game is a long game, that you have to rewrite history on a sustained basis to shape the assumptions that govern politics. Work at it steadily, and you have even a liberal Democratic president believing that Social Security only covered widows and orphans at first, that Medicare started small, and that the Clinton-era productivity boom began under Reagan. So of course they’re working hard, right now, to expunge deregulation and shadow banking from the story of the 2008 crisis.

RomneyCare Reduces Uncertainty

David Leonhardt:

David Leonhardt: On the most basic level, the law will ensure that people can get health insurance, and thus medical care, even if they are not insured by their employer or their spouse’s employer. Today, many can’t. The people who try to buy policies in the individual market are disproportionately those who have reason to think they or their children will need medical care. Healthy people, on the other hand, often go without coverage — until they think they need it. So insurance companies charge sky-high prices for individual policies, to cover the high average costs of care. The new law takes two steps to solve the problem. First, it prohibits insurers from denying coverage or charging more because of a person’s health. Second, the law requires individuals to have insurance, spreading the costs of care among the sick and the healthy....

[T]he law is quite moderate. It is more conservative than President Bill Clinton’s 1993 plan or President Richard Nixon’s 1974 plan (in which the federal government would have covered anyone who wasn’t insured through an employer). It’s much more conservative than expanding Medicare to cover everyone. It is clearly one of the least radical ways for the United States to end its status as the only rich country with millions and millions of uninsured. But the law depends to a significant degree on the mandate. Without it, some healthy people will wait to buy coverage until they get sick — which, of course, is not an insurance system at all. It’s free-riding.

Without the mandate, the cost of insurance in the individual market would rise, perhaps sharply, because some healthy people would not be paying their share. Just look at Massachusetts. In 1996, it barred insurers from setting rates based on a person’s health but did not mandate that individuals sign up for insurance. Premiums then spiked. Since the state added a mandate in 2006, more people have signed up, and premiums have dropped an average of 40 percent.

It’s easy to look at the current debate and see an unavoidable trade-off between this country’s two economic traditions — risk-taking and security. But I don’t think that’s quite right. I think it is ultimately as misplaced as those worries about Social Security and Medicare equaling Bolshevism.

Guaranteeing people a decent retirement and decent health care does more than smooth out the rough edges of capitalism. Those guarantees give people the freedom to take risks. If you know that professional failure won’t leave you penniless and won’t prevent your child from receiving needed medical care, you can leave the comfort of a large corporation and take a chance on your own idea. You can take a shot at becoming the next great American entrepreneur.

Good News on Health Reform: The Massachusetts Individual Mandate Does Not Appear to Be Melting Down...

Austin Frakt:

Massachusetts coverage update | The Incidental Economist: The Massachusetts Division of Health Care Finance and Policy (MA DHCFP) has released the results of its 2010 household insurance survey. It’s very good news, and to tie it into current news, it continues to show the value of an individual mandate.

[N]ot only does Massachusetts continue to have the highest health insurance coverage rate in the nation, but that our state has seen gains even through an economic recession.

This year, more than 98 percent of Massachusetts residents have health insurance. These results are astonishing.

Some of the most exciting news is related to children and elderly adults, as the survey found that virtually all Massachusetts children have health insurance (99.8 percent) and nearly all elderly adults are covered (99.6 percent).

The survey, conducted by the independent Urban Institute on behalf of the Division, indicates that coverage is very strong for Massachusetts residents at all income levels, ranging from 96 percent for those with family income under 300 percent of the federal poverty level to over 99 percent of those with income above 500 percent of the federal poverty level.

Problem 4 on the Fall 2010 U.C. Berkeley Econ 1 Final...

The answer--or, at least, what I think the answer is (yes, it is cruel and unusual to ask fresh-men and -women and sophomores to do all all 8 parts in 2:30 for each part):

Let me tell you what I thought the answers to problem 4 were...

(4) Suppose that the number of espresso drinks demanded and supplied in the university city of Tall Stick are given by the equations:

Qd= 20,000 - 2000P

Qs= -10,000 + 8000P
 
(a) What is the market equilibrium price?

ANSWER: 30,000 = 10000P. P = $3/drink.

(b) What is the market equilibrium quantity?

ANSWER: 20000 - 2000(3) = Q. 14000 drinks

(c) What is the producer surplus?

ANSWER: The lowest-cost producer has a cost of $1.25. The highest-cost producer has a cost of $3. The average cost for producers is thus $2.12 1/2. A price of $3 gives average producer surplus of $0.87 1/2 per drink. Multiply by 14000 drinks and get $12,250

(d) What is the consumer surplus?

ANSWER: The highest-value consumer has a value of $10. The lowest-value consumer has a value of $3. The average value for consumers is thus $6.50. There are thus $3.50 of consumer surplus per drink. Multiply by 14000 drinks and get $49000.

(e) Suppose that the university students of Crony Capitalism University in Tall Stick, hyped up on caffeine, begin trashing the town and the city of Tall Stick imposes a $1 per drink graffiti clean-up tax on espresso drinks. What is the new market equilibrium price?

ANSWER: We now have 20000 - 2000(P+1) = -10000 + 8000P. 10000P = 28000. P = $2.80. (P to consumers is now $3.80)

(d) Suppose that the university students of Crony Capitalism University in Tall Stick, hyped up on caffeine, begin trashing the town and the city of Tall Stick imposes a $1 per drink graffiti clean-up tax on espresso drinks. What is the new market equilibrium quantity?

ANSWER: -10000 + 8000(2.80) = 12,400 drinks

(g) Suppose that the university students of Crony Capitalism University in Tall Stick, hyped up on caffeine, begin trashing the town and the city of Tall Stick imposes a $1 per drink graffiti clean-up tax on espresso drinks. What is the new total surplus assuming that $1 of government revenue has the same social value as $1 of consumer or producer surplus?

ANSWER: An extra-credit answer points out that we do not know whether the $1/drink tax is the right Pigouvian tax or not, and then goes on to solve the problem making some assumption about what graffiti-damage-per-drink is. An answer that gets full credit assumes that $1 per drink is the right Pigouvian tax, in which case we have:

Producer surplus: 12400 x (2.80 - 1/2 x (2.80 + 1.25)) = 9610

Consumer surplus: 12400 x (1/2 x (3.80 + 10) - 3.80)) = 38440

Graffiti damage: -12400

Value of cleanup: 12400

Total: 48010

(h) In (g), what must be the value of each $1 spent by the city of Tall Stick on graffiti cleanup for the decision to impose the $1 per drink tax and then spend all the revenue on graffiti cleanup to raise social welfare? 

ANSWER: Once again, an extra-credit answer points out that we do not know whether the $1/drink tax is the right Pigouvian tax or not, and then goes on to solve the problem making some assumption about what graffiti-damage-per-drink is. An answer that gets full credit assumes that $1 per drink is the right Pigouvian tax, in which case we have:

Surplus with tax: 48010 + (b-1)(government revenue), where b is the value of $1 spent on graffiti cleanup

Surplus without tax: 49000+12250-14000 = 47250

48010 + (b-1)(revenue) = 47250

760 = (1-b)12400

1-b = 760/12400

1-b = .06129

b = 0.9387

So as long as $1 of cleanup does at least $0.9387 worth of graffiti removal, the tax is a good idea (although not necessarily the best idea).

We Have a Winner in the Stupidest Economist Alive Competition: Keith Hennessey, Douglas Holtz-Eakin, Bill Thomas, and Peter Wallison

Shame on them. Hennessey and Holtz-Eakin were economists--once.

Mike Konczal:

Keith Hennessey, Douglas Holtz-Eakin vote to remove phrases “Shadow Banking”, “Interconnectedness”, “Deregulation” from FCIC Report: So the Financial Crisis Inquiry Commission (FCIC), the bipartisan panel created to study and issue a report on the financial crisis, imploded. The four Republican appointees – Peter Wallison, Keith Hennessey, Bill Thomas and Douglas Holtz-Eakin – have decided to go it alone and issue their own report Wednesday. Politico, and the Wall Street Journal have more. This will no doubt play into a “Democrats say one thing, Republicans say another thing, who can really tell?” narrative, but what is leaking out of the Republican worldview on the financial crisis is disturbing. Shahien Nasiripour, Financial Crisis Panel In Turmoil As Republicans Defect; Plan To Blame Government For Crisis, catches this gem:

During a private commission meeting last week, all four Republicans voted in favor of banning the phrases “Wall Street” and “shadow banking” and the words “interconnection” and “deregulation” from the panel’s final report, according to a person familiar with the matter and confirmed by Brooksley E. Born, one of the six commissioners who voted against the proposal.

“I think a number of us had really pulled for” bipartisan consensus, said Born, a Democratic commissioner who famously tried to regulate certain derivatives as head of the Commodity Futures Trading Commission. “But this action by the Republicans indicates they have decided to go their own way.”... Hennessey and Holtz-Eakin, for example, have missed about half of the commission’s meetings since [early August], according to a person familiar with the panel’s activities.

Oh. My. God.

I did an interview for the Atlantic Business section about the shadow banking system with Perry Mehrling last year, who has now written a fantastic book about the subject, The New Lombard Street.... Banks have well known problems, and one thing we’ve learned from the crisis is that you can provide maturity transformation – function just like a bank, have bank runs just like a bank – without hanging a sign with the words “bank” on your storefront. How to deal with this, how to fully understand it even, is crucial to understanding the crisis and the way forward.  Here’s Gillian Tett covering a fascinating (and detailed) report by the Federal Reserve Bank of New York Staff Reports titled “Shadow Banking.” Every person I know interested in this topic is reading it, trying to understand the complicated nature of the topic;  evidently that GOP would think this report shouldn’t be covered because of its name is really disturbing.

Even if you think this narrative is overplayed it needs to be discussed and examined. That they would vote to not even use the words says all you need to know...

Nouriel Roubini on Our Fiscal Follies

We need to loosen fiscal policy now and tighten fiscal policy later. That really does not look to be what we will do.

Nouriel Roubini:

Fiscal Follies by Nouriel Roubini: In the US, we have the worst of all possible worlds. On one hand, stimulus had become a dirty word – even within the Obama administration – well before the Republicans’ mid-term election victory ruled out another round altogether. On the other hand, medium-term consolidation will be all but impossible in America’s current atmosphere of hyper-partisanship, with Republicans blocking any tax increase and Democrats resisting reforms of entitlement spending. Nor is there any pressure from bond markets to concentrate the minds of policymakers.

In the periphery of the eurozone, the problem is the opposite: bond vigilantes are demanding that Greece, Ireland, Portugal, Spain, and Italy front-load fiscal consolidation or watch their borrowing costs go through the roof.... Markets don’t care that front-loaded fiscal consolidation is exacerbating recession and thus making the goal of reducing debt and deficits as a share of GDP near-impossible to achieve.

To avoid a persistent and destructive recession, the fiscal and structural reforms imposed by the bond vigilantes should be accompanied by other euro-zone policies that restore growth and prevent vicious debt dynamics. The European Central Bank should ease monetary policy in order to weaken the value of the euro and bootstrap the periphery’s growth. And Germany should cut taxes temporarily – rather than raising taxes, as planned – in order to increase disposable income and stimulate German demand for the periphery’s goods and services.

Alas, neither of the two biggest players in the euro zone is pursuing policies consistent with restoring sustained growth in the euro zone’s periphery. The ECB’s monetary policy is too tight; and Germany is front-loading fiscal austerity. Thus, the periphery is destined to a destructive deflationary and recessionary adjustment that will exacerbate the risks of recession, insolvency, eventual defaults and, possibly, exit from the euro.

In the United Kingdom, the new government gave several reasons for front-loading fiscal consolidation. The bond vigilantes might have woken up if early austerity was not implemented; the deficit was very large and the public sector bloated; and it is always politically easier to implement tough measures early in an administration, when popular support is still high and the next election is far off.... [T]he government could well end up with no plan B in case plan A – massively front-loaded austerity – leads to a double-dip recession...