Has rising inequality been bad for the poor? – Income inequality has risen sharply in the United States and some other affluent countries since late 1970s, with much of the increase consisting of growing separation between the top 1% and the rest of the population. Has this been bad for the incomes of the poor?In a relative sense, the answer is yes, at least in the United States. According to the best available U.S. data, from the Congressional Budget Office, the share of income going to households at the bottom has decreased. What about in an absolute sense? Would the incomes of low-end households have grown more rapidly in the absence of the top-heavy rise in inequality? If we look across the rich nations, it turns out that there is no relationship between changes in income inequality and changes in the absolute incomes of low-end households. The reason is that income growth for poor households has come almost entirely via increases in net government transfers, and the degree to which governments have increased transfers seems to have been unaffected by changes in income inequality. (For more detail, see my piece in the November-December issue of Challenge.)
Federal Debt and Interest Costs – CBO Director’s Blog – Recently, the federal government has been recording the largest budget deficits, as a share of gross domestic product (GDP), since the end of World War II. As a result of those deficits, the amount of federal debt held by the public has soared—surpassing $9.0 trillion at the end of fiscal year 2010 and equal to 62 percent of GDP. The interest the government pays on that debt is currently low by historical standards as a percentage of GDP but is expected to grow rapidly over the next several years as interest rates rise. In response to a request from the Senate Budget Committee, CBO prepared a study providing background material on federal debt and interest costs.
The GOP’s anti-employment Fed agenda – Once upon a time, liberals savaged Federal Reserve Chairman Ben Bernanke for not doing enough to combat unemployment. The Fed operates under a "dual mandate" to seek maximum employment and price stability (i.e., low inflation). But progressives have generally been suspicious of Bernanke’s commitment to spur job creation. How ancient those concerns seem now! Today, the primary assault aimed at the Fed is coming from Republicans, who believe that Bernanke is doing too much to combat unemployment. Some would like to simplify the Fed’s responsibilities by putting an end to the dual mandate. Bloomberg: Republican lawmakers have proposed stripping the Fed of its mandate to achieve maximum employment, so it would focus only on inflation … [Ron] Paul expressed concern last week that the central bank won’t be able to avert an acceleration of inflation. He also said he plans to "push for debating" whether the Fed should focus solely on policies that promote price stability.
Fed Watch: Turning Tide – For the past three years, it has paid to bet on the pessimistic side of the outlook. For the past few months, I have privately fretted that this bet would soon wear thin. And it sure looks like it has. The flow of data in recent weeks has been, on net, very positive, offering a vision of a sustainable recovery. The Fed, however, has not yet gotten that memo. From today’s FOMC statement: Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment. Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have continued to trend downward.The Fed remains locked into a forecast that anticipates output growth hovering near potential. Contrast this with rising expectations for, at a minimum, solid near term growth:
The Risk Tsunami – It is time for the G-20 to take seriously its mandate to agree on steps to stabilize the global economy and launch it on a more sustainable pattern of growth. Instead, the G-20 is behaving like a debating society, Meanwhile, capital is flooding into the higher-interest-rate emerging markets, causing inflationary pressures, driving up asset prices, and subjecting currencies to competitiveness-threatening appreciation – in short, distortions and policy headaches that require unconventional, defensive responses.Worryingly, QE2 appears to be viewed in the US as a growth strategy, which it isn’t, unless one believes that low interest rates will reverse the private-sector deleveraging process, raise consumption, and lower savings – neither a likely nor a desirable scenario. It also assumes that addressing structural constraints on competitiveness can be deferred – perhaps permanently. The view from outside the US is that QE2 is either a mistake with negative external effects, or a policy with the clear but unannounced intention of devaluing the dollar – a move whose main negative competitive and growth effects would most likely be felt in Europe, not in China, India, and Brazil. Unilateral action in this and other dimensions has undercut the G-20’s mission of identifying and implementing mutually beneficial policies in a coordinated way.
Last week, we learned that President Obama intends to push for comprehensive tax reform. We also learned that Peter Orszag, who until recently headed up the Office of Management and Budget (OMB), will be taking a top job at Citigroup. These two events may seem to have little in common, but unfortunately, they are intimately related.With comprehensive tax reform, as President Obama told us, everything is supposed to be on the table. That sounds great. As everyone knows, the tax code is a mess. It is full of items that may, at one time, have served a purpose, but now just hand money to powerful interest groups. Who could be opposed to cleaning up the muck?If the group of people designing a new tax code really had the public interest foremost in their thoughts, there is much good that could be done. The mortgage interest deduction in its current form is an utter absurdity. Most low- and middle-income people get little or nothing from this deduction. By contrast, millionaires often pocket tens of thousands a year in tax savings.
Corroding pipelines – — A natural gas pipeline exploded Sept. 9 in the San Francisco Peninsula suburb of San Bruno, shooting a wall of fire hundreds of feet into the sky for more than 90 minutes as Pacific Gas & Electric utility crews had to fight rush hour traffic to reach manual shut-off valves, one of them more than 30 miles from the blast. Many survivors in the surrounding area told reporters they had no idea that a 30-inch, high-pressure pipeline laid in 1956 ran through their neighborhood. Neither did city officials, says Mayor Jim Ruane, even though federal safety rules require that pipeline operators periodically alert residents to the presence of pipelines and train first responders. Nationwide, pipeline blasts and fires kill a person every three weeks and burn or injure someone more than once a week. Those are small numbers, as the pipeline industry emphasizes. But they reflect luck more than serious safety planning. As open spaces where pipelines were laid decades ago become developed, aging pipelines remain in use, and inspections have lagged, the risk of deadly blasts that can wipe out a block of homes, offices, stores or even schools and hospitals, grows.
Republican Members of FCIC to Promote Crisis Urban Legends, Shift Blame From Bank, by Yves Simth: Lordie, the Big Lie is with us in force. The New York Times reports that the Republican members of the Financial Crisis Inquiry Commission are going to pre-empt the report (due in mid-January) and issue their own 13 page screed later today focusing blame for the crisis on…Fannie and Freddie, and no doubt the CRA too. Let’s look at a few inconvenient facts. We had housing bubbles in the UK, Australia, Ireland, Spain, Iceland, Latvia, Canada, and a lot of Eastern Europe. Can we blame the CRA and Fannie and Freddie for that? How about the M&A boom, which resulted in a ton of leveraged loans being issued at super low spreads? If the Fed and other central banks had not driven rates to the floor, we’d see a good bit more distress and dislocation in this sector of the market. Oh, and how about the fact that banks in Continental Europe, which had no housing bubble in their home markets, and no evil Fannie or Freddie analogues, also nearly keeled over in the crisis? This whole line of thinking is garbage, the financial policy equivalent of arguing that the sun revolves around the earth. Yes, the US and other countries provide overly generous subsidies to housing, and curtailing them over time would not be a bad idea. But that’s been our policy for decades. Calling that a major, let alone primary, cause of the crisis, is simply a highly coded “blame the poor” strategy.
Jesse Eisenger and Andrew Ross Sorkin have both written about the surprising lack of convictions in the wake of the financial crisis. Surely someone made public statements of confidence immediately before the bank collapsed? I’m as surprised as anyone, mostly on political economy grounds. You’ve heard before on this blog some concern about the criminalization of corporate governance, and in my view, even the prosecutors of Enron could have done a better job explaining why the CEO and Chairman had to walk the plank, especially on honest services and obstruction of justice (the Supreme Court agreed on the former, too)). But they did go to jail, so did S&L executives numbering in the four figures – and the S&L crisis is one that many people blame more on Paul Volcker than on thousands of surprising concurrent cases of fraud. But the SEC and DOJ don’t always win these cases, as Peter Henning reports. He thinks that these cases really are difficult to win.
Iowa AG Miller Commits to Prosecution of Bank Execs, Seeking Principal Mods –– Yves Smith – We asked readers to sign a letter to Iowa attorney general Tom Miller, who is leading the 50 state probe into foreclosure and mortgage abuses. Here is the official report from National People’s Action, which was part of the group that met with Miller earlier today: Leader of 50 State Foreclosure Probe Tells Struggling Homeowners: “We Will Put People in Jail” Iowa’s Attorney General Miller also agreed that principal reductions, loan modifications, and compensation for defrauded homeowners are all on his agendaThe lead Attorney General in the 50-state foreclosure investigation, Iowa’s Tom Miller, told homeowners at risk of foreclosure today that he supports a settlement with the big banks that requires significant principal rate reductions, loan modifications, compensation for citizens defrauded of their homes, and criminal prosecutions against big bank executives who broke the law. “We will put people in jail,” Miller said, in response to questioning. “One of the main tools needs to be principal reductions, just like in the farm crisis in the 1980s…There should be some kind of compensation system for people who have been harmed…And the foreclosure process should stop while loan modifications begin. To have a race between foreclosures and modifications to see which happens first is insane.”