by Rebecca Wilder

Would Republicans Really Choose Default Over Raising Taxes? – Congressional Republicans don’t want any more deficit spending–unless it’s deficit spending done through the tax code.  They think they can play a good game of “chicken” when it comes to the statutory debt ceiling by refusing to raise it, as discussed in this AP story:  Some Republican lawmakers said Sunday they opposed raising the ceiling on the nation’s debt without tackling government spending, and President Barack Obama’s top economic adviser warned against “playing chicken” on the issue. To some conservatives, refusing to raise the limit on the federal debt could be an effective tactic to force lawmakers into cutting spending and facing such contentious issues as the rising costs of Social Security, Medicare and other entitlement programs. “This is an opportunity to make sure the government is changing its spending ways,” Graham said But hitting the debt ceiling won’t stop those “spending ways” because policymakers aren’t really willing to stop those “spending ways.”  It wouldn’t reform the Social Security and Medicare programs or automatically repeal any other kind of government spending (wasteful or otherwise).  Instead of being a magic brake on deficit-financed government spending, it would be a disastrous brake on financial markets and the entire U.S. and global economy.
 
Saving conservatives from themselves – I have a problem with several recent Forbes articles by John Tamny, who seems proud of his lack of expertise in the subject he writes about. In a new column, Tamny has accused me of calling anyone who favors the gold standard a “knuckle-dragger.” I don’t recall making that accusation (in this post), nor do I believe it to be true.  Indeed many highly intelligent economists favored the gold standard, as Tamny accurately points out.  Here’s the statement that led me to accuse Forbes magazine of anti-intellectualism:  if price stability were policy, it would still be the case that a phone call from Houston to Dallas would cost $15 for a half hour of conversation. It would similarly mean that we’d be paying thousands of dollars for flat-screen televisions, not to mention even more for computers that perform very few functions. When I tell other economists about this passage, even Tamny’s fellow libertarians, they break out laughing.  That’s not good.  I want libertarians to succeed.  We both favor small government. 
 
Tax Cuts Trump Deficit Reduction for House Republicans – Are House Republicans serious about dealing with the deficit? You could listen to their rhetoric — or you could read the rules they are poised to adopt at the start of the new Congress, . . . [which] suggest that the new GOP majority is determined to continue the spree of unaffordable tax-cutting,” the Washington Post’s lead editorial today explains. A report we issued just before Christmas takes a close look at the new rules: As the report notes, we’ve been here before. In the 1990s, when pay-as-you-go rules applied to tax cuts as well as spending increases and Congress used reconciliation solely to reduce deficits, the country went from large deficits to a balanced budget. But in the early 2000s, Congress set aside pay-as-you-go and used reconciliation to push through costly, unpaid-for tax cuts that contributed heavily to the return of large deficits after 2001. Now, House Republicans plan to restore the very type of permissive budget rules that caused much of the budgetary deterioration we’ve seen over the past decade
 

Downward to Stagnation: Wage policies in times of crisis – A new report produced by the ILO, Wage Policies in Times of Crisis, provides evidence on the decline in wage growth during the crisis, and highlights the particularly severe reductions that have occurred in industrialized countries. The world’s salaried employees suffered a decline in real wage growth from 2.2 percent in 2007 to 0.8 percent in 2008 and 0.7 percent in 2009. Real wages fell in 12 of 28 industrialized countries in 2008, including Australia (-0.9%), Germany (-0.4%), Italy (-0.7%), Japan (1.9%), Mexico (-2.6%), S. Korea (-1.5%) and the U.S (-1.0%).  And although some countries recovered in 2009 (in some cases due to the fall in inflation), real wage growth continued to be negative in Germany (-0.4%), Mexico (-5.0%), Japan (-1.9%), and S. Korea (-3.3%), whilst France (-0.8%), the U.K (-0.5%), and Russia (-3.5%), also entered into negative territory.  Moreover, these figures likely over-represent real wage growth, as job losses have been more concentrated on low-wage workers, who by no longer working are no longer considered in the sample. By 2009, the ranks of the unemployed had reached 210 million, a global unemployment rate of 6.4 percent.

How the Other Half Lives Yves Smith  – Even though most people face some form of financial stress in their lifetime, and the financial crisis upended the affairs of many who had been comfortable, the poor and near poor contend with ongoing difficulties. The Community Service Society conducts an annual survey, The Unheard Third, which catalogues some of the conditions poor and near-poor New Yorkers face. My impression is that New York has fared much better than the rest of the country in the aftermath of the crisis precisely because of the massive overt and covert subsidies given to the financial services industry, which is the foundation of the local economy. Thus I suspect if you were to conduct the same sort of survey in other US cities, the results would be even more grim. The survey focused on low income residents, with those defined as poor (household earnings at or below federal poverty standards, or FPL) sampled most intensively. Notice how many of the poor have trouble affording food (click to enlarge):  The near poor are better off, but not by much:  I encourage you to read the results in full. It is ugly out there.

Angus tries to be a one armed economist –  I’m not proud to admit this but I’m afraid of the House Republicans and the crazy sh*t they will no doubt try and pull. Yes I know, checks and balances and all that, but they worry me. If they go after the Fed, throw a lot of heat and light on rolling back HCR and the financial oversight bill, and try to shut down the government over the debt ceiling, we could be right back into economic doldrums. Look, I am not a big fan of the Fed or of HCR as currently constituted, but my advice to the Republicans would be to wait until after 2012 when the economy should be much sounder and maybe you also have the Senate to try and make your move. The biggest thing Washington could do right now to help the economy would be to take a 14 month vacation.
 
 I’ll Never Ration. Not Me. Not I. – Opposition to health-care rationing is a little like opposition to growing up. It sounds great. It’s just not very practical. A society’s resources are always limited. So we have to make choices about what we can afford and what we can’t. Not everyone can afford to own a vacation home — which means vacation homes are rationed. Not everyone can afford to live in towns with excellent public schools — which means that good public education is rationed. Similarly, we can’t afford to try every feasible medical treatment on every patient. Instead, we make choices. The most obvious form of rationing is the millions of Americans who lack health insurance today. Most of them get less medical care than they need and, in the process, keep down the nation’s total medical bill. But even those with health insurance experience rationing. How? In many ways.
 
Revealing Study of FOMC References to the Fed’s Mandate – John Taylor – Dan Thornton of the Federal Reserve Bank of St. Louis just completed a very revealing paper called What Does the Change in the FOMC’s Statement of Objectives Mean? in which he traces FOMC references to the Fed’s mandate over many years. He documents a historically significant recent shift in the language with important legislative and policy implications. Until very recently the FOMC policy statement did not explicitly mention the “maximum employment” part of the dual mandate in the Federal Reserve Act. But on September 21, 2010 the FOMC changed the policy statement by starting to refer explicitly to “maximum employment.” The change coincides with efforts to promote QE2 and thereby provides factual evidence that the dual mandate was a factor in gaining support for this unconventional large-scale asset purchase program, Dan Thornton finds no references to “maximum employment” from 1979, when Paul Volcker took over as Fed chair, until the language was inserted in the December 2008 Directive.
 

The IMF released its Q3 2010 Currency Composition of Official Foreign Exchange Reserves (COFER) report. The COFER database provides the breakdown of official central bank portfolio holdings by currency across advanced and emerging/developing market economies. The picture is roughly half complete, as 44% of the global reserve positions go unallocated. But the trend in reported FX holdings indicates that central banks are supporting the euro, giving it a lower bound. Furthermore, there has been a shift in portfolio holdings toward "other currencies" in advanced and emerging market central bank portfolios. According to the report, Q3 2010 total central bank reserve holdings increased to $9.0 trillion, up by $564.4 billion over the quarter. $317.7 billion of the increased asset holdings are not "allocated" a currency denomination ("unallocated reserves" in the charts below), but the rest, $247 billion new portfolio holdings, were denominated in the following currencies:

    • $107.7 billion in new assets denominated in US dollars
    • $3.4 billion in new British pound assets
    • $24.2 billion in new Japanese yen assets
    • $0.3 billion in new Swiss franc assets
    • $87.5 billion in new Eurozone euro assets
    • $23.6 billion in new "other currency" assets
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