We must prepare now for the likelihood of a recession [feedly]

We must prepare now for the likelihood of a recession
http://larrysummers.com/2019/01/09/we-must-prepare-now-for-the-likelihood-of-a-recession/

Excess austerity is a bigger risk than fiscal profligacy

When people are fundamentally healthy, they do not yet know what will cause their death. An economic recovery is healthy if it is not clear what will cause the next recession. By this standard, the recovery from the 2008 financial crisis, although disappointingly slow, has been healthy for most of the last decade.

This is now in serious doubt. Paul Samuelson's quip that the stock market has predicted nine of the last five recessions cautions against overreacting to recent stock market moves. But credit spreads have widened considerably, commodity prices have softened and investors have started demanding higher yields for short-term US bonds than for those with longer terms. Unlike equity markets, "yield curve inversions" have not historically tended to produce false recession predictions. The overall judgment of financial markets is that recession is significantly more likely than not in the next two years.

Real economic indicators for the world's largest economies, China and the US, also suggest considerable cause for concern. Almost every Chinese indicator in the last few months has come in below expectations. Beijing authorities now see the need for stimulus measures if they are to credibly report the attainment of growth targets. Revisions of economic forecasts tend to run in the same direction for protracted periods as forecasters adjust to emerging reality. This tendency is especially pronounced in China, given the extreme political sensitivity of economic statistics.

In the US, inflation is again running below the Federal Reserve's 2 per cent target and comparisons of the yields on ordinary and inflation-adjusted bonds suggest investors expect this to continue for the next decade. While jobs growth remains strong, employment is usually a lagging statistic. Forward-looking indicators of business and consumer sentiment suggest that growth is likely to slow.

Perhaps the US economy will enjoy a soft landing: jobs growth would slow towards long run sustainable levels, and productivity growth would accelerate enough to allow continued gross domestic product growth of 2 per cent and increased wage growth without accelerating inflation. But this would require both policy skill and great luck. Given that we are starting from very high debt levels and low unemployment, a recession is the more likely outcome.

It is almost inconceivable that the global economy will remain healthy in the face of serious economic problems in both China and the US, even leaving aside their conflicts over trade and technology. Europe lacks economic energy and the uncertainties associated with Brexit, French protests, German political transition and Italian populism mean the continent is more likely to be a source of problems than a solution.

Like generals fighting the last war, too many policymakers are focused on yesterday's problems. The global economy is much more likely to suffer from a downturn than from overheating in the next two years. There is more likely to be too little credit flow than too much, asset price deflation is more probable than a bubble and excess austerity is a bigger risk than profligacy.

The critical challenge for monetary and fiscal policy will be to maintain sufficient demand amid immense geopolitical uncertainty, increasing protectionism, high accumulated debt levels and structural and demographic factors leading to increased private saving and reduced private investment.

The Fed should signal that it is determined to avoid a downturn that would assure another decade of below target inflation. The People's Bank of China and other central banks should also make clear that they recognise that avoiding another recession is the most important thing they can contribute to financial stability.

Fiscal policymakers should realise the very low real yield on government bonds is a signal that more debt can be absorbed. It is not too soon to begin plans to launch large-scale infrastructure projects if a downturn comes. The largest economies should try to limit trade frictions and signal that they are committed to co-operating to support global growth by assuring adequate capital flows to emerging markets and avoiding a cycle of protectionism.

Even if my recession fears are excessive, a shift towards emphasising growth will contribute to bringing inflation up to target levels and can be reversed. If I am proved right, the costs of delay in the policy response could be catastrophic. It is the irony of our moment that prudence requires the rejection of austerity.

 -- via my feedly newsfeed

David Bacon: NewDay for Mexican workers

https://davidbaconrealitycheck.blogspot.com/2019/01/a-new-day-for-mexican-workers.html

--

John Case
Harpers Ferry, WV

The Enlighten Radio Player Stream, 

Sign UP HERE to get the Weekly Program Notes.

Check out Socialist Economics, the Enlighten Radio website

Enlighten Radio:Check out our new player!

John Case has sent you a link to a blog:



Blog: Enlighten Radio
Post: Check out our new player!
Link: http://www.enlightenradio.org/2019/01/check-out-our-new-player.html

--
Powered by Blogger
https://www.blogger.com/

PK: The Economics of Soaking the Rich [feedly]

The economics of Soaking the Rich
https://www.nytimes.com/2019/01/05/opinion/alexandria-ocasio-cortez-tax-policy-dance.html

The Economics of Soaking The Rich

What does Alexandria Ocasio-Cortez know about tax policy? A lot.I have no idea how well Alexandria Ocasio-Cortez will perform as a member of Congress. But her election is already serving a valuable purpose. You see, the mere thought of having a young, articulate, telegenic nonwhite woman serve is driving many on the right mad — and in their madness they're inadvertently revealing their true selves.

Some of the revelations are cultural: The hysteria over a video of AOC dancing in college says volumes, not about her, but about the hysterics. But in some ways the more important revelations are intellectual: The right's denunciation of AOC's "insane" policy ideas serves as a very good reminder of who is actually insane.

The controversy of the moment involves AOC's advocacy of a tax rate of 70-80 percent on very high incomes, which is obviously crazy, right? I mean, who thinks that makes sense? Only ignorant people like … um, Peter Diamond, Nobel laureate in economics and arguably the world's leading expert on public finance (although Republicans blocked him from an appointment to the Federal Reserve Board with claims that he was unqualified. Really.) And it's a policy nobody has every implemented, aside from … the United States, for 35 years after World War II — including the most successful period of economic growth in our history.

To be more specific, Diamond, in work with Emmanuel Saez — one of our leading experts on inequality — estimated the optimal top tax rate to be 73 percent. Some put it higher: Christina Romer, top macroeconomist and former head of President Obama's Council of Economic Advisers, estimates it at more than 80 percent.

Where do these numbers come from? Underlying the Diamond-Saez analysis are two propositions: Diminishing marginal utility and competitive markets.

Diminishing marginal utility is the common-sense notion that an extra dollar is worth a lot less in satisfaction to people with very high incomes than to those with low incomes. Give a family with an annual income of $20,000 an extra $1,000 and it will make a big difference to their lives. Give a guy who makes $1 million an extra thousand and he'll barely notice it.

What this implies for economic policy is that we shouldn't care what a policy does to the incomes of the very rich. A policy that makes the rich a bit poorer will affect only a handful of people, and will barely affect their life satisfaction, since they will still be able to buy whatever they want.

So why not tax them at 100 percent? The answer is that this would eliminate any incentive to do whatever it is they do to earn that much money, which would hurt the economy. In other words, tax policy toward the rich should have nothing to do with the interests of the rich, per se, but should only be concerned with how incentive effects change the behavior of the rich, and how this affects the rest of the population.

But here's where competitive markets come in. In a perfectly competitive economy, with no monopoly power or other distortions — which is the kind of economy conservatives want us to believe we have — everyone gets paid his or her marginal product. That is, if you get paid $1000 an hour, it's because each extra hour you work adds $1000 worth to the economy's output.

In that case, however, why do we care how hard the rich work? If a rich man works an extra hour, adding $1000 to the economy, but gets paid $1000 for his efforts, the combined income of everyone else doesn't change, does it? Ah, but it does — because he pays taxes on that extra $1000. So the social benefit from getting high-income individuals to work a bit harder is the tax revenue generated by that extra effort — and conversely the cost of their working less is the reduction in the taxes they pay.

Or to put it a bit more succinctly, when taxing the rich, all we should care about is how much revenue we raise. The optimal tax rate on people with very high incomes is the rate that raises the maximum possible revenue.

And that's something we can estimate, given evidence on how responsive the pre-tax income of the wealthy actually is to tax rates. As I said, Diamond and Saez put the optimal rate at 73 percent, Romer at over 80 percent — which is consistent with what AOC said.

An aside: What if we take into account the reality that markets aren't perfectly competitive, that there's a lot of monopoly power out there? The answer is that this almost surely makes the case for even higher tax rates, since high-income people presumably get a lot of those monopoly rents.

So AOC, far from showing her craziness, is fully in line with serious economic research. (I hear that she's been talking to some very good economists.) Her critics, on the other hand, do indeed have crazy policy ideas — and tax policy is at the heart of the crazy.

You see, Republicans almost universally advocate low taxes on the wealthy, based on the claim that tax cuts at the top will have huge beneficial effects on the economy. This claim rests on research by … well, nobody. There isn't any body of serious work supporting G.O.P. tax ideas, because the evidence is overwhelmingly against those ideas.

Look at the history of top marginal income tax rates (left) versus growth in real GDP per capita (right, measured over 10 years, to smooth out short-run fluctuations.):
Top tax rates and growthCreditTax Policy Center, BEA

Image

Top tax rates and growthCreditTax Policy Center, BEA

What we see is that America used to have very high tax rates on the rich — higher even than those AOC is proposing — and did just fine. Since then tax rates have come way down, and if anything the economy has done less well.



Why do Republicans adhere to a tax theory that has no support from nonpartisan economists and is refuted by all available data? Well, ask who benefits from low taxes on the rich, and it's obvious.

And because the party's coffers demand adherence to nonsense economics, the party prefers "economists" who are obvious frauds and can't even fake their numbers effectively.

Which brings me back to AOC, and the constant effort to portray her as flaky and ignorant. Well, on the tax issue she's just saying what good economists say; and she definitely knows more economics than almost everyone in the G.O.P. caucus, not least because she doesn't "know" things that aren't true.

The bad economics of PAYGO swamp any strategic gain from adopting it [feedly]

The bad economics of PAYGO swamp any strategic gain from adopting it
https://www.epi.org/blog/the-bad-economics-of-paygo-swamp-any-strategic-gain-from-adopting-it/

The obscure Congressional budget rule known as PAYGO ("pay as you go") has burst into the news lately. A PAYGO rule means that any tax cut or spending increase passed into law needs to be offset in the same spending cycle with tax increases or spending cuts elsewhere in the budget. Incoming House Speaker Nancy Pelosi has indicated that the House of Representatives will abide by PAYGO in the next Congress, and this decision has sparked much controversy.

Many Washington insiders assert forcefully that committing to PAYGO rules in the House for the next Congress is good politics. The argument is that it assuages fears of politicians who believe they must make public commitments to lower deficits to avoid being punished by voters who care deeply about this issue. If voters do indeed have strong preferences for reducing deficits, then policymakers—even those who want to use fiscal policy to reduce inequality by expanding public spending and investment—must first commit to PAYGO to convince these voters that budget measures can both reduce inequality and be fiscally "responsible."

The strength of evidence supporting this political claim is debatable. What's less debatable is that PAYGO really has hindered progressive policymaking in the not-so-recent past. For example, it was commitments to adhere to PAYGO that led to the Affordable Care Act (ACA) having underpowered subsidies for purchasing insurance and, even more importantly, having a long lag in implementation; the law passed in January 2010 yet the exchanges with subsidies only were up and running by 2014. This implementation lag meant that the ACA's benefits were not as sunk into Americans' economic lives by the time a hostile Republican Congress and administration began launching attacks on it following the 2016 elections. It is a real testament to how much better the ACA made life for Americans that it has been stubbornly resistant to these attacks. But it would have been helpful to have a couple more years to have it running smoothly, but that didn't happen largely because the ACA's architects wanted to meet PAYGO rules over the 10-year budget window.

Even more fundamentally, it is terrible economics to view federal budget deficits as always and everywhere bad. Making good policy in the future will require that voters be educated on this front. Why not start now? After all, our failure as a society to understand the economics of deficits and debt greatly contributed to the destructive impact of the Great Recession of 2008–09. The stakes of allowing history to repeat itself are high enough that we should take the time to quickly recap the history of how costly irrational deficit-phobia has been.

In the generation before the Great Recession, D.C.-based policymakers and analysts from both political parties cultivated an unhealthy degree of fear around federal budget deficits. This excess fear of deficits led them to miss the real dangers facing the economy as the Great Recession approached. The root of the economic crisis of 2008–09 was the deregulation that allowed an enormous housing bubble to inflate to levels guaranteed to cause a deep recession when it inevitably burst. Yet most Democratic criticisms of the economic stewardship of President George W. Bush stemmed instead around his presiding over run-ups in federal budget deficits. In 2006, for example, then-Senator Barack Obama voted against raising the nation's statutory debt ceiling to signal his disapproval of excessively high deficits and debt. It was bad enough that excess concern over deficits blinded policymakers to gathering economic storms elsewhere. It was even worse that this deficit fear-mongering was happening while the federal budget deficit was extremely small and shrinking rapidly: the budget deficit in 2006 and 2007 averaged less than 1.5 percent of GDP—an amount that is absolutely sustainable forever.

This excess fear around budget deficits became an economic catastrophe during the recovery from the Great Recession. Despite multiple warnings that the American Recovery and Reinvestment Act (ARRA) of 2009 would not be at sufficient scale to generate a full recovery, 2010 saw a pivot away from defending the need for expansionary fiscal policy (i.e., running deficits to finance measures to support the economy) and toward prioritizing measures to reduce deficits. A prime example was in the January 2010 State of the Union address—when the unemployment rate was 9.8 percent—when President Obama said:

"But families across the country are tightening their belts and making tough decisions. The federal government should do the same. So tonight, I'm proposing specific steps to pay for the trillion dollars that it took to rescue the economy last year…Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don't…"

Why am I taking you on this extended walk down the memory lane of irrational deficit-phobia? Because it had terrible consequences. The recovery from the Great Recession was the slowest in post-World War II history, and the degree of fiscal austerity canentirely explain its slowness. The figure below shows the growth in public spending per capita in the recovery following the Great Recession compared to previous recoveries. If this public spending following the Great Recession had followed the average path of the recoveries of the 1980s, 1990s, and early 2000s, a full recovery with unemployment around 4 percent would have been achieved by 2013.

 

Figure A

Now, this austerity following the Great Recession was largely driven by Republicans—both in Congress and in statehouses. But the generation of bipartisan fear-mongering about deficits surely helped Republicans hold the line on spending cuts and claim that this austerity was fiscally responsible, even as voters suffered the economic consequences. The fact that Republicans' embrace of deficit-reduction is complete hypocrisy and always takes a backseat to their desire to cut taxes for the rich is infuriating, but it doesn't change the fact that fueling excess fear about deficits (even when done in the service of good policy goals like fighting regressive tax cuts) has been terrible economics.

Some people claim that the economic evils of PAYGO are overstated. After all, any sensible Congress would waive it if the economy entered a steep recession and needed expansionary fiscal policy, right? Here, it helps to look at the previous figure again—most of that spending austerity shown in the figure happened after the official recession ended, but occurred while unemployment remained extraordinarily high. The necessity for expansionary fiscal policy is not confined only to official recessions. As the economy takes longer and longer to mount full recoveries after recessions, the need for fiscal policy to remain expansionary even after official recessions end is becoming clearer.

Further, it is debatable whether or not some forms of spending—particularly public investments—should be subject to PAYGO at all. "Golden Rule" public budgeting argues that investments can be funded through debt. This makes eminent economic sense—the textbook reason to think that federal budget deficits can cause harm when the economy is at full employment and starved of savings is that deficits can raise interest rates and hence cause a reduction in productive business investment. But if deficits finance productive public investment, then total economy-wide investment is unchanged (as public investment just substitutes for private investment), and no economic harm is done.

Does arguing against PAYGO rules mean budget deficits are never harmful or that we can spend all we want without ever having to raise revenue to finance it? No. Deficits can, in certain circumstances, potentially put a steady drag on long-run growth. And progressives need to be full-throated about the need for taxes to be higher to both penalize economic "bads" (like greenhouse gas emissions and financial speculation) and to compress the income distribution to make for more broadly shared growth. And, yes, over the long run the large majority of public spending should, on average, be financed by taxes.

The current debate over PAYGO in the new Democratic majority in the House of Representatives will have very little direct effect on policymaking. The Senate is still controlled by Republicans, so little major legislation will be able to pass a divided legislature. And whatever the House decides to do with its internal rules, there remains a statutory PAYGO requirement that can only be loosened by the House and Senate together. So in the end, embracing PAYGO or not in the next House of Representatives is a purely political decision. In the short run, nodding toward conventional notions of "fiscal responsibility" and adopting PAYGO will likely win approving nods from Beltway pundits. But there's a long game that matters here, too; eventually we need to get much smarter about the economics of debt and deficits, and teach voters that the goal of fiscal policy is not always and everywhere to make deficits smaller. Our failure to do this has cost us dearly in recent decades, and now would be a good time to start.

 -- via my feedly newsfeed

Tim Taylor: Steel Tariffs: An Utterly Unsurprising Cost/Benefit Calculation [feedly]

"Utterly unsurprising" -- to economists!  Indeed. But a few in labor, and the 'left' continue to cut off their nose to spite their face on trade. A trade-ADAPTED, not trade-OPPOSED, economy and labor movement are required. Education and a 'Pay the Losers' policy on transitions can get us there.

Steel Tariffs: An Utterly Unsurprising Cost/Benefit Calculation
http://conversableeconomist.blogspot.com/2019/01/steel-tariffs-utterly-unsurprising.html

The Trump administration imposed tariffs on imported steel back in March 2018, using the implausible excuse that it was necessary for national security (for some countries, the tariffs were later changed to import quotas with similar effect). The results are utterly unsurprising: profits for US steel companies have risen and some jobs for US steelworkers have been gained, but at an exorbitant cost for US consumers and for other US workers. Gary Clyde Hufbauer and Euijin Jung lay it out in "Steel Profits Gain, but Steel Users Pay, under Trump's Protectionism" (December 20, 2018, Peterson Institute for International Economics).

A protected industry benefits from less import competition. It uses that protection to raise prices for consumers and to earn higher profits. It should be emphasized that these higher price and profits are not an unexpected outcome--they are the mechanism through which import tariffs help domestic firms. To put it another way, if tariffs didn't help domestic companies charge more and raise their profits, there would be no point to having such tariffs in the first place.

Hufbauer and Jung write:

"Calculations show that Trump's tariffs raise the price of steel products by nearly 9 percent. Higher steel prices will raise the pre-tax earnings of steel firms by $2.4 billion in 2018. But they will also push up costs for steel users by $5.6 billion. Yes, these actions create 8,700 jobs in the US steel industry. Yet for each new job, steel firms will earn $270,000 of additional pre-tax profits. And steel users will pay an extra $650,000 for each job created."

Many studies over the years find that trade protectionism saves jobs, but at a high cost to consumers (For example, here's an example of how the Obama administration tariffs on imported tires cost consumers about $900,000 per job saved in that industry.) The underlying issue is that consumers aren't just paying higher prices to save US jobs--if that was the tradeoff, we could argue over whether it might be worth doing. But the higher prices are part of higher revenue for steel companies, which maybe used for purposes ranging from robots and automation to research and development, or higher profits for shareholders and higher bonuses for managers.

In addition, any jobs saved for US steelworkers are not a net gain for the US economy. The higher costs of steel are then passed along to products, leading to lower sales for those industries. The Whirlpool company offers a vivid example. The company strongly supported the Trump administration when it put tariffs on imported washing machines, which helped Whirlpool. But then when the Trump administration put tariffs on steel, driving up the price of making a washing machine in the US, it hurt Whirlpool. As the head of Whirlpool said: "the net impact of all remedies and tariffs has turned into a headwind for us." 

Hufbauer and Jung mention (without endorsing) some estimates that the steel tariffs could be a net loss in US jobs by the time that the effects of higher steel prices are passed through industrial supply chains, making many products more expensive to make within US borders.  And of course, these calculations don't take into account the economic effects of retaliation from other countries, and how that costs US jobs in other industries.

Again, this dismal cost/benefit calculation for the steel tariffs is utterly unsurprising. Steel tariffs are just an indirect subsidy to the steel industry. Sure, US steel tariffs also make foreign steel producers unhappy, but the happiness or unhappiness of foreign producers is not a useful goal for US economic policy.  The main costs of the steel tariffs are imposed on US firms that use steel (and will have a harder time selling inside and outside the US) and ultimately on US consumers (who will pay more than consumers around the world for products containing steel).   

 -- via my feedly newsfeed

Warren-Schakowsky Bill Is a Huge Step Toward Bringing Drug Costs Down [feedly]

Warren-Schakowsky Bill Is a Huge Step Toward Bringing Drug Costs Down
http://cepr.net/publications/op-eds-columns/warren-schakowsky-bill-is-a-huge-step-toward-bringing-drug-costs-down

Warren-Schakowsky Bill Is a Huge Step Toward Bringing Drug Costs Down

0 Comments

Dean Baker
Truthout, December 24, 2018

See article on original site

Martin Shkreli managed to make himself a household name a few years back. His claim to fame stemmed from the decision by Turing Pharmaceuticals, a company he founded and controlled, to acquire the rights to produce Daraprim. He then raised the price of the drug by 5,000 percent.

This was very bad news for the people who were dependent on the drug. Daraprim is an anti-parasitic drug that is often taken by people with AIDS to keep them from getting opportunistic infections. People with AIDS who are being successfully treated with Daraprim are not going to want to experiment with alternatives.

Daraprim was already a 60-year-old drug at the time Turing acquired it and had long been available as a generic. This meant that other manufacturers could in principle come into the market and compete with Turing's inflated price.

Shkreli made the bet that no other drug company would take advantage of this opportunity, because even for a generic drug, there are still substantial costs for entry. Since the market for Daraprim was small, a new entrant would be unlikely to recover these costs if Turing pushed the price back down somewhere near its original level. While Daraprim was his biggest "success," Shkreli was trying this strategy with a number of other drugs before the Justice Department put him out of business with unrelated charges of securities fraud.

Shkreli's days of price gouging in the generic drug world may be over, but he established a model that other ambitious entrepreneurs are likely to follow. Close to 40 percent of generic drugs have only a single manufacturer. This is partly a result of the failure of anti-trust policy to stem a wave of mergers in the industry. It is also a result of the fact that many drugs simply have very limited markets where it is difficult to support multiple producers.

Most generic producers have not tried to follow the Shkreli model and jack up prices of drugs that people need for their health or even their lives, but some have. The soaring price of insulin is one important example, EpiPen, the asthma injector, is another. Both involve well-known treatments that have long been used, but the limited number of suppliers has allowed for huge price increases in recent years.

This is the context for the public drug-manufacturing corporation being proposed in a bill by Senator Elizabeth Warren and Representative Jan Schakowsky. The idea is that the federal government should create manufacturing capacity (which could be privately licensed) that would allow it to quickly enter a market to compete with the next Martin Shkreli.

If a company tries to jack up its prices by an extraordinary amount, it would find itself soon competing with a government manufacturer that is selling the same drug for the cost of production, plus a normal profit. This is a great strategy, since simply the existence of this capacity should be sufficient to discourage the next Shkreli.

There will be little money in jacking up the price of a drug by 5,000 percent if it quickly results in the disappearance of their market. This should encourage the generic industry to keep its prices in line.

It is important to note a key difference between the generic industry and brand industry. The brand pharmaceutical companies, like Pfizer and Merck, could argue that they need high prices to pay for research. These companies hugely exaggerate their research costs and downplay the extent to which high profits just mean more money for shareholders, but they actually do research.

By contrast, the generic industry is not researching new drugs. They are manufacturing drugs that have been developed by others. In this sense they can be thought of like a company that manufacturers paper plates or shovels. They need a normal profit to stay in business, nothing more.

For this reason, the Warren-Schakowsky proposal is very much the right type of remedy for excessive prices in the generic drug industry. At the same time, we have to recognize that generic drugs are the smaller part of the problem with high drug prices.

Although generics account for almost 90 percent of prescriptions, they account for only a bit more than a quarter of spending on prescription drugs. The story of drugs costing tens or hundreds of thousands of dollars a year is almost entirely a story of brand drugs with high prices as a result of patent monopolies or related protections.

This will require a larger fix, likely along the same lines, with the government paying for research and allowing new drugs to be sold as generics. But the Warren-Schakowsky bill is a huge first step in bringing drug costs down and ensuring that people will not find themselves suddenly at the mercy of the next Martin Shkreli.

 -- via my feedly newsfeed