•In Tax Cut Plan, Debate Over the Definition of Rich – NYTimes

In Tax Cut Plan, Debate Over the Definition of Rich – NYTimes – President Obama has proposed preserving the cuts for middle-class Americans and letting them expire for the top 2.5 percent of taxpayers — individuals who make more than $200,000 a year and families whose income exceeds $250,000. But others in Congress have questioned why ending what Mr. Obama frequently calls “tax cuts for millionaires and billionaires” should also raise taxes on families making $250,000. The Senate will not vote on the matter until after the midterm elections, and some Democrats are pushing for a compromise that would leave the cuts in place for those higher up the income scale. One proposal being discussed is a millionaires’ tax, which would create one or two additional tax brackets for the wealthiest Americans and eliminate the Bush tax cuts only for those who earn more than seven-figure incomes.

What drives reserve accumulation (and at what cost)? -Total foreign exchange holdings are larger than ever, largely due to reserve accumulation by emerging and developing economies. This column investigates the driving forces behind the accumulation of foreign exchange reserves and finds that exchange-rate smoothing, rather than precautionary stockpiling, is the main driver.

Two Cheers for the New Bank Capital Standards – On Sept. 12 the heads of the world’s major central banks and bank-supervisory agencies met to bless what is called "Basel III," the latest international agreement on bank capital requirements. Should we be applauding or frowning upon this agreement? A little of each. The first big achievement, and it is a big achievement, is that 27 countries, each with its own disparate views and parochial interests, were able to agree at all—just 18 months after many of them were still fighting the last acute phase of the financial crisis. But what about the substance of the agreement?

Martin Wolf, the Paradox of Thrift, and the Excess Demand for Money – Martin Wolf reminds us why good macroeconomic analysis is not always intuitive:Analysis of the economy is not the same thing as analysing a single household. What is true of the latter is not true of the former. The unwillingness to recognise this truth will lead to serious policy mistakes.The policy mistake to which Martin Wolf is referencing is the call for more economic austerity.  He notes that though increased austerity may be a good idea for a given household it is not necessarily true for the entire economy. He is alluding here to the Paradox of Thrift, the idea that if everyone tries to save–which makes sense individually–during a recession, then aggregate spending will fall.  In turn, this will lower both aggregate income and total saving (i.e. there would be less income from which to save). As a result, the economy will tank even more making it harder to service the existing debt.  Thus, Martin Wolf concludes more borrowing may be just what the economy currently needs.  


Fed officials voice differences on QE – FT – Divisions within the Federal Reserve about the merits of using more quantitative easing to boost the economy have been laid bare in divergent speeches by the presidents of three regional Federal Reserve banks.Eric Rosengren of Boston, Narayana Kocherlakota of Minneapolis and Charles Plosser of the Philadelphia Fed took different positions on everything from the inflation outlook to the effectiveness of quantitative easing – which means pushing cash into the economy by buying long-term assets – in boosting economic growth. At its September meeting the Fed’s rate-setting Open Market Committee signalled that it was looking at taking further action because inflation was below its comfort zone and the economy was not growing fast enough to bring down a 9.6 per cent unemployment rate.Differing views in the FOMC will shape the size and format of any new programme of quantitative easing but they do not mean the committee is likely to be deadlocked. The FOMC is likely to support Ben Bernanke, Federal Reserve chairman, if he judges that further QE is necessary at the Fed’s next meeting in November.

Three Fed Officials, Three Divergent Views –Three Federal Reserve officials are out today with divergent views on the economy and on whether the Fed should buy more Treasury bonds (which is known to some as quantitative easing) to push down long-term interest rates and stimulate growth.Two officials, the Minneapolis Fed’s Narayana Kocherlakota and the Boston Fed’s Eric Rosengren, had gloomy assessments of the economic outlook. Mr. Kocherlakota said he’s revising down his growth forecasts, which could be a leading indicator of the way the rest of the Fed is going. One official, the Philadelphia Fed’s Charles Plosser, wasn’t totally downbeat about the economy, but was hardly encouraging.All three came out differently on whether the Fed should do more to support growth. Mr. Kocherlakota’s discussion is especially intriguing. He’s been skeptical of doing more, but his gloomy forecast clearly has him looking intently at the Fed’s options.Here they are in digestible categories:

The Case for More Central Bank Action – The market has been seized by this all-encompassing notion that Ben Bernanke and his merry hipsters at the Fed are going to finally live up to his infamous nickname and start almost literally throwing money out of helicopters. You can see it everywhere: gold is surging, the dollar is plunging, stocks are rising, Treasurys are rallying.I almost feel bad for Bernanke. I’m sure that when he made the now-infamous helicopter speech in 2002, it was somewhat tongue-in-cheek (economist humor, as you may imagine, is rather subtle (search the speech for “printing press,” you’ll get the idea.)) But as the economy teeters between recovery and a tumble back into the muck, the Fed is being backed into a corner, by the state of the economy, gridlock in Washington, and pressure from the markets. Deflation looms overhead, fangs dripping with saliva. Somebody needs to step up here, but nobody is. I don’t think that the Fed thinks that there’s really much more it can do here; they’ve made noise to that effect. But make no mistake, if forced, the central bank will do something.

The Fed and the Corner It’s Being Painted Into –The debate within the Federal Reserve continues, with Eric Rosengren worrying about an “anemic” recovery, and Charles Plosser arguing that the Fed has done enough.My vote for most important speech of the week goes to Adam Posen’s remarks in London on Tuesday. Mr. Posen is an American economist serving as an adviser to the Bank of England. He’s worried that the global economy remains too weak and needs more help. You can read the whole speech here. By e-mail, I asked if he would elaborate, and he did. Here are his further thoughts: My basic argument is that the current macro policy discussion is mostly missing the point. Our situation (in the U.K., the U.S., and arguably in most of the major Western economies) is one where policy makers face a long uphill battle, in which monetary ease has an ongoing role to play, even if it may not deliver recovery on its own. Insufficient monetary action risks turning sustained low growth and near deflation into a self-fulfilling prophecy. This happened in Japan in the 1990s, and in U.S. and Europe in the 1930s. I don’t think things will be “that bad” in the sense of an outright depression, but we face a real risk of long-term stagnation with some distracting upward blips and slowly eroding capacity

Unserious Central Bankers – Paul Krugman – These days there seem to be two types of thinkers in the world of central banking. On one side there are serious people – people who believe that we should raise interest rates in the face of high unemployment and falling inflation, because, well, that’s what serious people do. On the other side there are unserious people, who believe that central banks should fight deflation as well as inflation, and try to prevent the current slump from turning into a quasi-permanent state of depression. How ridiculous can you get?In Sweden, my former colleague Lars Svensson, now at the Riksbank, is concerned about the desire of his colleagues to raise interest rates in the face of inflation far below target and an economy that is a long way from having fully recovered. But what does he know? He’s just one of the world’s leading monetary economists, having spent a great deal of time studying problems of monetary policy at the zero lower bound. In Britain, Adam Posen, on the Monetary Policy Committee, urges more action:But what does he know? He’s just the leading English-speaking expert on Japan’s lost decade.

From currency warfare to lasting peace – The ‘international currency war’ mentioned by Brazil’s finance minister poses massive dangers for the world trade and financial systems. This column by one of the world’s most respected international economist argues that there is a better way. The G3 should engage in quantitative easing so they all can export more to each other. For the emerging markets, the danger lies in inflation, asset bubbles and trade retaliation. To shield their key manufacturing sectors, they should encourage the domestic demand for manufactures.

World Bank President starts brawl about research – World Bank President Robert Zoellick gave a speech at Georgetown University today calling for the “democratizing” of development research.  Bob Davis at The Wall Street Journal reports some reactions:Nobel Prize-winning economist Michael Spence, who led a commission on economic growth, said Mr. Zoellick’s comments are “generally not only in the right direction, but very useful.” Harvard economist Dani Rodrik…. also praised the World Bank president. “The speech hits all the right notes: the need for economists to demonstrate humility, eschew blueprints…and focus on evaluation but not at the expense of the big questions,” Mr. Rodrik said.But the reaction wasn’t unanimous. New York University economist William Easterly…called Mr. Zoellick’s comments “amazingly presumptuous.” He says the current system of economic research, where ideas are picked apart by other economists, works well. If anything, he says World Bank economists are often the exception because their bosses pressure them “to reach the ‘right’ conclusions,”

Are We Nearing a Consensus on U.S. Competitiveness? – There certainly is a cyclical element to worries about American competitiveness: When the economy is faltering, we worry. When it isn’t, we don’t. Summers — who remains President Obama’s top economics adviser until January — figures that we’re currently overshooting on the worry front. "I am more optimistic than the American public," he said Tuesday, "much more optimistic than many of my friends." But beliefs about competitiveness have converged somewhat since 1990. Back then the debate was between worried business school professors, some corporate types, and an assortment of pundits on the one hand, and relatively blithe economists on the other. Economists of the center and right argued that private markets are better than governments (or keiretsu) at allocating resources, and economists of almost all political leanings pushed the doctrine of comparative advantage — which holds that we’re all better off when countries trade freely with one another and specialize in the economic activities that they’re relatively better at. A few economists on the libertarian right even went so far as to argue that America’s chronic trade deficits were even evidence of the country’s economic strength.

America Embraces Trade Discrimination –  Economists generally agree on the advantages of openness in trade. But the case for non-discrimination in trade is also a compelling one. So good trade policy should push for multilateral trade liberalization such as at the Doha Round, rather than preferential trade agreements (PTAs) such as free-trade areas (FTAs), and also ensure that any retreat into protectionism does not degenerate into discriminatory trade practices.The last G-20 meeting in Canada was a disappointment on the first front. At the insistence of the United States, an earlier reference by the G-20 to a definite date for completing the Doha Round was dropped. Instead, unwittingly rubbing salt into the wound, President Barack Obama announced his administration’s willingness to see the US-South Korea FTA through. On the second front, there are distressing recent reports that the US Commerce Department is exploring ways to strengthen the bite of anti-dumping actions, which are now generally agreed to be a form of discriminatory protectionism aimed selectively at successful exporting nations and firms.

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