Friday, October 22, 2010

Today's Best Reads

1--Geithner calls for reducing trade imbalances, Calculated Risk

Excerpt: From a letter .S. Treasury Secretary Timothy Geithner sent to his G-20 counterparts:

“First, G-20 countries should commit to undertake policies consistent with reducing external imbalances below a specified share of GDP over the next few years, recognizing that some exceptions may be required for countries that are structurally large exporters of raw materials. This means that G-20 countries running persistent deficits should boost national savings by adopting credible medium-term fiscal targets consistent with sustainable debt levels and by strengthening export performance.

Conversely, G-20 countries with persistent surpluses should undertake structural, fiscal and exchange rate policies to boost domestic sources of growth and support global demand....(Geithner politely informs China that currency manipulation will no longer be tolerated)

2--British fashion victims, Paul Krugman, New York Times

Excerpt: The ... British government seems determined to ignore the lessons of history. Both the new British budget announced on Wednesday and the rhetoric that accompanied the announcement might have come straight from the desk of Andrew Mellon, the Treasury secretary who told President Herbert Hoover to fight the Depression by liquidating the farmers, liquidating the workers, and driving down wages. Or if you prefer more British precedents, it echoes the Snowden budget of 1931, which tried to restore confidence but ended up deepening the economic crisis.

The British government’s plan is bold, say the pundits... But it boldly goes in exactly the wrong direction. It would cut government employment by 490,000 workers — the equivalent of almost three million layoffs in the United States — at a time when the private sector is in no position to provide alternative employment. It would slash spending at a time when private demand isn’t at all ready to take up the slack...

What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it. (The Brits have created the perfect lab experiment which will prove that Keynes was right after all)

3--The tax cut that failed, Ezra Klein, Washington Post

Excerpt: This is a great opening line by Michael Cooper: "What if a president cut Americans’ income taxes by $116 billion and nobody noticed?"

It happened, of course. But the nobody noticing was by design. The Making Work Pay tax credit was built for stealth. Working off of economic evidence suggesting that people are more likely to save a one-time windfall than a small increase in wages, the tax cut was used to lower the amount of tax withholding in people's weekly paychecks. The hope was that they would spend it, and it would thus do more to stimulate the economy.

4--Not letting it happen here--Japan's "lost decade", Modeled Behavior

Excerpt: This is not just sub-prime, this is not just housing. This will get much worse before it gets better.”...The reason I point this out is that the basic path of the recession was totally foreseeable if you paid attention to the incoming data on liquidity demand.

This is key because we are now engaged in a great debate on how to get out of this crisis. I maintain that the type of analysis that foresaw a crisis of this exact nature coming should be given extra weight....

Please, lets not get hung up on whether tax cuts are an excuse to hand out money to the rich. We can cut payroll taxes. We can even provide a payroll tax credit where you get back the first 5000 your family paid in payroll taxes.

I am indifferent to the structure. What matters is that we get funds into the hands of consumers. What matters is that we end the liquidity crisis and reverse the upward trend in unemployment.

5--What should replace Bretton Woods 2?, The Economist

Excerpt: Some suggest that world in which the dollar's role is balanced by other reserve currencies would be more stable. Here's Yang Yao:

In the end, a solution to replace the so-called “Bretton Woods 2” that may naturally emerge from the current world order is the competition, and hopefully cooperation, among several major currencies. Besides the dollar, the euro has played a significant role in global trade and finance. The Japanese yen and the British pound are also around although they have not reached significant primacy. The Chinese yuan may take some share if the Chinese authorities open up the country’s capital account. Currencies in other emerging markets also have hope. The competition among several major currencies will help preventing liquidity from concentrating in a few countries and will constrain irresponsible behaviour in the management of individual currencies.

On top of that, some binding multilateral mechanism is needed to coordinate the exchange rates among the major currencies, especially in bad times. The G20 is a potential venue for such a mechanism. However, the current floating system is inadequate for this mechanism to function; it gives a “legitimate” reason for the US to dump its domestic problems to the rest of the world by devaluing the dollar.

6--As Dollar’s Value Falls, Currency Conflicts Rise, New York Times

Excerpt: Even as Washington chides Beijing over the renminbi, critics accuse the United States and other rich nations of waging an international currency war that harks to the protectionist policies of the 1930s, when nations looked out for themselves rather than working together.

“Today, there is a risk that the single chorus that tamed the financial crisis will dissolve into a cacophony of discordant voices, as countries increasingly go it alone,” Dominique Strauss-Kahn, managing director of the International Monetary Fund, said during a speech in Shanghai this week. “This,” he said, “will surely make everybody worse off.”

The abrupt decline in the dollar — by about 10 percent since early June against major currencies — is upsetting the delicate balance of world economies still recovering from the shocks of the financial crisis.

7--Jobless benefits about to crash,

Excerpt: With no end in sight to the nation’s high unemployment, the government program to help the jobless is heading for a crash....

The program, which splits funding with the states, is financed through federal and state taxes paid by both employers and employees. Like other forms of insurance, the idea is that the revenue builds up in the good times and is drawn down in bad. The federal government makes up for any temporary shortfall in a bad recession, with loans to the states that have typically been paid back quickly when surpluses return during economic recoveries.

The problem really started after the 1991 recession, when a “jobless recovery” failed to generate the typical unemployment insurance surpluses, leaving states playing catch-up. Another jobless recovery after the 2001 recession set states back further...If nothing is done, current law will require the states to either dramatically cut benefits or dramatically increase taxes, at a time when they are facing larger budget crises that are forcing huge cuts and giant tax increases already

8--Handoff, or Fumble, Noam Scheiber, The New Republic

Excerpt: The question—really more like a nagging terror—is whether something has happened since the recent financial crisis to fundamentally change the way consumers behave, rendering the administration’s model moot. As it happens, there’s a school of wonks that worries this is the case. The godfather of this group is a Japanese economist named Richard Koo, whose framework for thinking about this appears in a book he modestly titled The Holy Grail of Macroeconomics. (Paul Krugman, among others, has identified himself with some of Koo’s ideas.)

Koo’s view is that consumers and businesses who take on enormous debt during a bubble abruptly shift gears once the bubble bursts, spending very little while they pay off loans. Moreover, this stinginess continues until the process of debt-repayment (economists call it “deleveraging”) is complete, creating a huge drain on the economy. In the case of Japan, whose real estate and stock markets collapsed in the early ’90s, this took over a decade. During that time, Koo argues, the only force propping up the economy was massive amounts of government stimulus. He tells a similar story about the Great Depression.

Whereas Carroll assumes people base their saving decisions on the same factors both before and after the crisis, Koo says the way they make decisions beforehand tells you little about their behavior afterward. The crash doesn’t just pummel the value of their assets (like housing). It creates a kind of psychological trauma that preoccupies them with paying down debt before they can think about borrowing again. If you accept Koo’s premise, the data of the last 40 years is of little help in guiding us through the current situation. The episodes we’re talking about—Koo calls them “balance-sheet recessions”—simply didn’t happen at any point in that time-frame.

9--Why French Protestors Have It Right, Mark Weisbrot, counterpunch

Excerpt: France’s retirement age was last set in 1983. Since then, GDP per person has increased by 45 percent. The increase in life expectancy is very small by comparison. The number of workers per retiree declined from 4.4 in 1983 to 3.5 in 2010. But the growth of national income was vastly more than enough to compensate for the demographic changes, including the change in life expectancy. The situation is similar going forward: the growth in national income over the next 30 or 40 years will be much more than sufficient to pay for the increases in pension costs due to demographic changes, while still allowing future generations to enjoy much higher living standards than people today. It is simply a social choice as to how many years people want to live in retirement and how they want to pay for it.

If the French want to keep the retirement age as is, there are plenty of ways to finance future pension costs without necessarily raising the retirement age. One of them, which has support among the French left – and which Sarkozy claims to support at the international level -- would be a tax on financial transactions. Such a “speculation tax” could raise billions of dollars of revenue – as it currently does in the U.K. – while simultaneously discouraging speculative trading in financial assets and derivatives. The French unions and protesters are demanding that the government consider some of these more progressive alternatives.

It is therefore perfectly reasonable to expect that as life expectancy increases, workers should be able to spend more of the lives in retirement. And that is what most French citizens expect.

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