•Voodoo Economics Revisited – Simon Johnson

  • Voodoo Economics Revisited – Simon Johnson – 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
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    Capacity Utilization – One thing there is almost universal agreement on is that the US economy has very large excess capacity and that capacity constraints are unlikely to be a significant factor for the foreseeable future. But is it. In November capacity utilization in manufacturing rose to 75.2%. But this does not mean that the manufacturing sector has 25% of its capacity sitting idle waiting for demand to appear. If you look at the chart of capacity utilization it shows a downward trend of generally lower highs and lower lows across time. For example in the last cycle capacity utilization peaked at 81.7% in April, 2007 before plunging to a low of 68.2% in May, 2009. The average from the last peak to trough was 75.0% so with capacity utilization now at 75.2% the system is already over half way back to its previous peak.If you do a trend of the lower lows and lower highs the current trend is at 77.5%, so capacity utilization is only slightly below the long term trend at 97.0% of trend. This 97% figure is clearly a much more realistic measure of how much excess manufacturing capacity exist than the 75% observation being commonly cited.

     The contribution of human capital to China’s economic growth – This paper develops a human capital measure in the sense of Schultz (1960) and then reevaluates the contribution of human capital to China’s economic growth. The results indicate that human capital plays a much more important role in China’s economic growth than available literature suggests, 38.1% of economic growth over 1978-2008, and even higher for 1999-2008. In addition, because human capital formation accelerated following the major educational expansion increases after 1999 (college enrollment in China increased nearly fivefold between 1997 and 2007) while growth rates of GDP are little changed over the period after 1999, total factor productivity increases fall if human capital is used in growth accounting as we suggest. TFP, by our calculations, contributes 16.92% of growth between 1978 and 2008, but this contribution is -7.03% between 1999 and 2008. Negative TFP growth along with the high contribution of physical and human capital to economic growth seem to suggest that there have been decreased in the efficiency of inputs usage in China or worsened misallocation of physical and human capital in recent years.

    Forgetting about Demand, Once Again –Professor Mulligan asserts that the payroll tax cut will have little effect on output, even in sticky price Keynesian, and New Keynesian, models. He writes: In summary, the proposed payroll tax cut does not increase national employment in the sticky-price Keynesian model, regardless of whether the cut is aimed at employers or employees. The sticky-wage Keynesian model says that, because the cut is aimed at employees, it will not increase hiring in those sectors where wages are sticky — such as the market for low-skilled workers.  It is interesting that Professor Mulligan observes that sticky-price Keynesians believe in demand effects arising from payroll tax reductions, then quickly segues to Krugman’s model, and finally completely fails to deal with the demand argument, and focuses on the supply side. In this sense, Professor Mulligan remains completely predictable and consistent (see here, here and here).

     (Lack of) inflation watch – The latest estimte of the CPI was released today. Via the Atlanta Fed’s Inflation Project: Though most CPI indexes rose slightly in November, core measure remains near historical low, Atlanta Fed: The Bureau of Labor Statistics reported that the all-items consumer price index (CPI) rose an annualized 1.5 percent in November. The indexes for energy, food, and core prices all increased slightly. The core CPI edged up 0.1 percent in November after no change in the past several months. In fact, the core CPI is up only 0.7 percent from a year earlier, nearly its slowest year-to-year advance in more than 50 years. And, from the Cleveland Fed: Cleveland Fed Estimates of Inflation Expectations: The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.64 percent. In other words, the public currently expects the inflation rate to be less than 2 percent on average over the next decade. … Estimates are updated once a month, on the release date of the CPI.

    Motivating Miss Daisy –  The Obama Administration just successfully passed important small business legislation, for example, that has no value at all for tech startups. This probably shouldn’t surprise us: former President George W. Bush was clueless about this stuff, too. The good news is that none of this really matters a lot: tech startups will continue to happen in great numbers no matter what Congress and the White House do. The bad news is neither institution would know a tech startup if they saw it and there probably are ways that government could help but won’t. The new small business legislation intended to support startups is based entirely on debt — getting banks to lend money to small companies. But the only kind of debt that most tech startups know is credit card debt. Little tech companies grow by selling equity, not borrowing money. Short-term debt goes on plastic at 18 or 23 percent because no bank has — or will — lend to real tech startups in any significant amount.They’ll finance new Burger King franchises, but lend money for electric cars or new kinds of data storage or — shudder — software? Forget about it. Presidents Obama and Bush didn’t know this, Fed chairman Bernanke doesn’t know it, nor does Treasury secretary Geithner. None of these men have a minute’s experience with tech startups, yet our economy is almost entirely dependent on those startups for real recovery.

    This is how the GOP Congress will regulate Wall Street? – 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."  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. We don’t need to listen to the Alabama Republican’s words to understand just which master he intends to serve — all you need to do is watch his actions. 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.

    The New Era of Cooperation Between the White House and Big Business – Robert Reich – Jamie Dimon, chairman and CEO of JPMorgan Chase & Co., praises the President’s agreement with Republicans to extend the Bush tax cuts.“If we’re going to strengthen our economy and grow jobs, this type of outreach — and cooperation between the administration, Congress, and the private sector — are critical,” says Dimon. Dimon met last week with the President. Thirty other CEOs are meeting with him today. Dimon’s compensation over the last three years has averaged $21,991,394 a year. The tax deal agreed to between President Obama and the Republicans will give Dimon and extra $1,179,000 next year, according to an analysis by Citizens for Tax Justice.

    The Pitfalls of Economic Nostalgia – The United States faces economic problems as daunting as any seen since the 1930s. GDP growth and job creation remain slow in the early stages of the current recovery, when both should be strong.  Moreover, the pressures of globalization, along with technological advances, have reduced the capacity of American businesses to create new jobs even when demand is strong.  These changes have boosted productivity, but most people’s wages and incomes remain stalled.  And in the most dynamic sectors of our economy, those technological advances increasingly demand skills beyond those of most working Americans.   Yet, Washington continues to respond to these challenges through an economics of nostalgia.  The economic agenda of most conservatives today consists mainly of tax cuts for those at the top who earn, save and invest the most, resting on an unflagging faith that markets are self-correcting and invariably produce the best possible outcome.   After all, this approach seemed to work in the 1980s — even if its reprise under George W. Bush led to nearly a decade of historically anemic job creation and stagnating incomes, and culminated in a disastrous financial meltdown and long deep recession of 2007-2009.   The progressive response amounts mainly to a series of stimulative spending and tax measures bolstered by virtually unlimited and free loans for large financial institutions to stimulate their own lending.   And while similar approaches worked in the 1960s and 1990s, the current iteration has produced the weakest recovery in decades. 

    Can Rush Limbaugh kill the tax cut deal? – The U.S. Senate, after shrugging off amendments proposed by Jim DeMint and Bernie Sanders, voted overwhelmingly to approve the tax cut deal early Wednesday afternoon, 81-19. Attention now turns to the House, where some are wondering if Tea Party angst and Rush Limbaugh’s hectoring will sway enough Republicans to put passage of the deal in jeopardy. On Dec. 10, Limbaugh declared that "I now hope this tax deal fails. I say it directly and officially." Political scientist Jonathan Bernstein followed up by writing that he can’t recall "a lot of examples of House Republicans defying Rush Limbaugh on a high-profile vote over the last twenty years." But the consensus expectation of political analysts still holds that the tax deal will pass, regardless of the grousing. Democratic opposition in the House appears to be withering on the vine, and only a handful of Republican members have come straight out and declared that they will not vote for the deal under any circumstances.That roster of holdouts includes the usual suspects, the hardest of the hardcore: Indiana’s Mike Pence, Minnesota’s Michele Bachmann, Arizona’s Jeff Flake, Utah’s Jason Chaffetz, California’s John Campbell and New Jersey’s Scott Garrett. Spence fired the most recent broadside against the agreement Tuesday night, in an interview with Fox’s Sean Hannity.
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