November 10, 2012
Links for 2012-11-10
A few links to some items I found of interest.
Jeff Miller explains why some analysts are misinterpreting a graph from Jeremy Piger that seems to point to increased probability of recession. In addition to the issues Jeff raises, if you check the original source for this graph, you'll see it is based on data through October 29. I expect Professor Piger's implied probability to come back down when the November 2 revisions to nonfarm payroll estimates are incorporated.
Greg Mankiw suggests a compromise on the fiscal cliff that could allow both President Obama and Speaker Boehner to save face: raise tax revenue from the rich without raising marginal rates. Paul Krugman takes an incomprehensibly stupid and reckless position. Bill McBride offers his predictions of how this will turn out: the AMT patch will come, the top marginal rate will be raised, and no extension of the payroll tax cuts. But he thinks none of it will come until early January, or after we have gone over the fiscal cliff. He suggests we refer to it instead as the "fiscal slope" or the "fiscal bluff".
The Wall Street Journal reports that bonds of Exxon Mobil and Johnson & Johnson are trading with yields below those of comparable Treasuries, suggesting to me that investors attach some small probability that wrangling over the debt ceiling will result in payment glitches on Treasuries.
Michael Fleming calculates that the Fed's emergency lending facilities earned $22 billion income for the taxpayers during the financial crisis.
The recent health care legislation requires that that large companies either provide health insurance for full-time workers or pay a fee. But the Wall Street Journal reports that some are taking a third route-- shifting to more part-time workers.
Posted by James Hamilton at November 10, 2012 06:45 AMdigg this | reddit
Clicking on the Paul Krugman and Bill McBride links you provide, I'm puzzled. Krugman says that that President Obama should not compromise and let the fiscal cliff happen; McBride predicts that we'll go over the fiscal cliff and that tax rates on the rich will rise. It would seem that the way for the President to get to the outcome in McBride's prediction is to follow Krugman's advice, and that if we reach that result in early January the damage from falling over the cliff will not be great; also that higher marginal tax rates for rich folks is not a bad result--better would be adding a cap on deductions a la Mankiw. So how is Krugman being stupid and reckless? I'm betting you have good arguments, I just want to hear them.
Posted by: Frank Howland at November 10, 2012 07:45 AM
Wouldn't it be more accurate to say that some firms are experimenting with shifting to more part time workers.
I suspect that some industries -- like retail -- will expand part time workers, but it will not work in many industries. But retail has always relied heavily on part time workers.
Posted by: spencer at November 10, 2012 08:40 AM
I call to your attention the article in today's NY Times:
Tax increases for the top 20% are to average $14,000; for the top 1%, $121,000. Keep in mind, $350,000 HH income puts you in the top 1%.
And this doesn't pay for everything. This gets us back to maybe 19% of GDP. Obama's budget runs at 22.5% of GDP, so this much again of an increase in taxes is due over the next several years.
Now, Slugs or someone else is going to say that, well, this will be postponed, etc. But in truth, with a trillion dollar deficit and expanding social programs, the longer we defer, the bigger the hike has to be.
Simple as that. Now you understand why flags are flying upside down.
Posted by: Steven Kopits at November 10, 2012 08:46 AM
I agree with Howland. And I would hesitate ever to call anything Krugman writes "stupid" or "reckless". When confronted with an immovable object (the GOP) often extreme tactics are needed.
Posted by: Chris Marquesas at November 10, 2012 08:51 AM
Frank Howland Reread the Krugman post. That is not what he is saying. Krugman is making two arguments. His first point is that the immediate impact of going over the cliff will not be especially horrible. Not great, but not godawful-end-of-the-world either. The pain will be phased-in and won't really start to bite until early spring 2013. And when it does begin to bite the first order effects will probably hurt the GOP base more than the Democratic base, which will put some pressure on the House to strike a deal. For example, as JDH noted in an earlier post, it will be a lot easier for Republicans to swallow a de facto tax rate hike on upper incomes if those rates are allowed to increase automatically on 1 January. It will be very difficult for House GOP members to fight a tax reduction for the bottom 98% because they want to hold out for a tax cut for the top 2%.
Krugman's second point is that Obama shouldn't accept just any "compromise." As bad as a going over the fiscal cliff might be, it's not hard to imagine a deal that would be worse. For example, only accepting pretend and transient cut backs in deductions in exchange for deep cuts in Medicare or Social Security would be worse than no deal. Made even worse by the fact that cutting Social Security doesn't really do anything to help the debt problem because Social Security is funded differently. As a political matter Krugman is right to point out that a President cannot give into hostage taking. And not just for domestic political reasons. The day is not far off when foreign entities will have the ability to engage in hostage taking...pays us $1B or New York gets nuked. That sort of thing. In principle it's exactly the same; the only difference is that the actors don't have foreign names. Okay, in this case I guess Barack Hussein Obama does have kind of a foreign ring to it, but in this case he's the good guy. Obama has to be willing to say "no" to a bad deal, just as the President has to be willing to keep the military option on the table in dealing with Iran even though no one thinks the military option is a sane one. This is a political point, not an economic point.
Posted by: 2slugbaits at November 10, 2012 08:55 AM
"fiscal bluff", ha ha, Bill McBride is the best !
Posted by: Johannes at November 10, 2012 09:10 AM
I thank you for your elaboration of Krugman's argument with which I largely agree. I didn't make myself clear. I think Paul Krugman is making sense here and that backing down would be a bad idea. I'd like to hear from our blogger, James Hamilton, though--he should defend his stupid and reckless comment. Perhaps Hamilton can suggest a more constructive strategy which doesn't just cave in to the House GOP.
Posted by: Frank Howland at November 10, 2012 10:35 AM
I had not realized that James Hamilton was so prone to partisanship. Good to know, will factor in when assessing future posts/recommendations. Some of your delusional regular commenters should be pleased, though.
Posted by: Russell L. Carter at November 10, 2012 11:03 AM
Quick clarification on Piger's data - the data was accessed on 29 October 2012. If you did into the source data at FRED used to generate the chart, it actually only covers the period through August 2012. Other thoughts here.
Posted by: Ironman at November 10, 2012 12:08 PM
The comical thing is that if you eliminate the Bush tax cuts for the top two brackets you may generate $25-50 billion (not sure of exact amounts, but order of magnitude is right), which is a drop in a trillion dollar bucket. And that's before you reflect any defensive reactions by these taxpayers. This is strictly a political demand from Obama.
Obama enjoyed the prestige of being president, the golf, the parties, rubbing shoulders with Jay-Z and Beyonce. I don't think he's going to enjoy it during the next four years. At least the American people will have company.
Posted by: Rich Berger at November 10, 2012 12:51 PM
Frank Howland: What I find incomprehensible, for example, is Krugman's statement "Mr. Obama should hang tough, declaring himself willing, if necessary, to hold his ground even at the cost of letting his opponents inflict damage on a still-shaky economy. And this is definitely no time to negotiate a grand bargain on the budget that snatches defeat from the jaws of victory." As for my own proposal, you can find it here.
Posted by: JDH at November 10, 2012 01:05 PM
JDH I'm not seeiing how your view is significantly different than Krugman's. You quite specifically called for a piecemeal and incremental approach, which sounds to me like a rejection of any "grand bargain" negotiated over less than sixty days with lame duck actors. Krugman is simply reinforcing the point that a successful negotiation begins with a willingness to walk away at some point if you have to. Given Obama's penchant to cave too quickly in order to get a deal...any deal, I think Krugman is quite right to raise concerns. Some folks have misinterpreted Krugman as being against any deal and wanting to go over the cliff. That's a preposterous reading of what PK actually said, but such are the hazards of writing an op-ed column for the NY Times.
Posted by: 2slugbaits at November 10, 2012 02:58 PM
Krugman's blog at the NYT is called "The Conscience of a Liberal". I thus differentiate between his political arguments and his economic analysis. The column in question does a bit of economic analysis - that the "cliff" is a "slope", that its phase-in may hurt GOP constituencies more - and some political argument.
Why point this out? Because Krugman acknowledges that he is a liberal and that his political perspective means he sees things through that lens. He noted in another post that he wouldn't normally read "redstate.com". By acknowledging his bias in politics, he is able to - on the whole - be clear about the way he does economic analysis. Not all economists do this. Many if not most pretend to a kind of objectivity they don't have.
I find Krugman's economics very interesting. I know that sometimes he slices the data his way because that fits his perspective, but at least he is usually clear about that. I tend to discount his political advice, if only because I think he argues for a harder line than is ever possible.
Posted by: jonathan at November 10, 2012 03:10 PM
One may recommend reading the full methodology and purpose as expanded in the paper titled:
A comparison of the real-time Performances of Business Cycle dating method.
Marcelle Chauvet Jeremy Piger
Two main characteristics and aims of the models, accuracy and real time ad equation with the business cycles. When comparing three models addressing business cycles picks and through, two of them are much faster than the NBER output by a time interval of 249 days or eight months. Reading the NBER model output is far from purchasing today, the newspaper content of the day after tomorrow. The Fed St Louis is supplying an update of the referred model output under the item:
U.S. Recession Probabilities Series from Jeremy Piger Added to FRED
Those models are drawing on the same data set as used by the NBER that is:
Non farm payroll employment, industrial production, real manufactures and trade sales, real personal incomes including transfer payment.
Out of the four variables the non farm payroll has the track record of being the most volatile data and is subject to review along the following lines, when better than expected one may expect a downward revision, when as expected the same.
It is worth as well going over the last Econbrowser series where the fiscal cliff is covered "The Fiscal Cliff: International Implications"
Econbrowser latest posts on payroll data
The cross reding of data,models and papers implications are multiple and may be negative when it comes to address the actual state of the global economy.
Posted by: ppcm at November 10, 2012 07:13 PM
"As for my own proposal, you can find it here."
Here is what JDH thinks is a bargaining chip necessary to prevent catastrophic US fiscal disaster:
"For example, if funding for Planned Parenthood or specific regulatory agencies become stand-alone line items to which the House has to give its approval, the Republicans are brought in on some of the issues on which they hold the strongest views"
I cannot believe that I gave as much respect to JDH as I did. I knew the tort reform tic and the raising the retirement age tic were odd things to obsess about given the overall challenges but I had no idea they gave an all too common insight into the privileged white male viewpoint. Very disappointing.
Posted by: Russell L. Carter at November 10, 2012 08:17 PM
Rich Berger: By that logic, then, we should just get rid of all the Bush tax cuts; they only amount to $192 bn/year (getting larger each year), of which $56 bn is accounted by the high income tax cuts (according to Goldman Sachs).
Of course, sensible people might say one would be concerned about the growth impact, and you are right that eliminating the tax cuts for the high income households has an almost imperceptible impact on growth in 2013, according to CBO.
Posted by: Menzie Chinn at November 10, 2012 11:26 PM
@Russell Carter : If you are disappointed reading this blog and even have lost respect for James, why don't you change over to www.zerohedge.com ?
Posted by: Johannes at November 11, 2012 02:13 AM
Thanks for confirming the relatively minor role of the tax increases on the wealthy. That appears to be Obama's only non-negotiable demand. CBO notwithstanding, those increases will not raise as much revenue as you estimate.
Posted by: Rich Berger at November 11, 2012 03:52 AM
2slugbaits and others: The title of Krugman's piece was "Let's Not Make a Deal". You're suggesting that his intended real message was, "Let's Do Make a Deal"?
But even if you want to read Krugman's piece as just staking out an absurd position in order to better negotiate away from it, I still think it has no intellectual merit on that basis. The key point to remember, as I used as the beginning organizing principle in my previous post, is that every single act of legislation that gets passed into law over the next two years, and likely the next four years, is going to have to be agreed to by both a Democratic President and a Republican House. You really think you can bluff and bluster your way through that entire process with strategies like this?
I further submit that adopting as a negotiating strategy that your plan is to put the economy into recession unless taxes are raised on the rich is morally reprehensible and intellectually ridiculous. What exactly is the greater good that higher taxes on the rich are supposed to achieve, to justify such a strategy?
Krugman's position is indefensible.
Posted by: JDH at November 11, 2012 07:12 AM
I would say that you have put together a great list of articles but for one thing. They are all true and so depressing that it makes me want to find a place to hide but there is no where to go. A Menzie points out in his earlier article our crash over the fiscal cliff will impact the whole world. I only wish this were not true. I am actually not going to have it too bad but I really hurt for my kids.
Posted by: Ricardo at November 11, 2012 07:44 AM
JDH The title of Krugman's piece was intended to catch eyeballs; it wasn't the summation of his argument. A more accurate title would have been "Let's Make A Smart Deal, Not Just Any Deal." I don't think anyone could read his piece and conclude that he was doing anything other than trying to stiffen backbones against giving away too much. Krugman has been pretty clear that he thought the Simpson-Bowles agreement was tilted too much towards cuts in Social Security (which wouldn't do anything to fix the debt problems) and cuts in Medicare/Medicaid without any matching strategy to cut healthcare costs in general.
You really think you can bluff and bluster your way through that entire process with strategies like this?
No one is making that argument. The argument is that all of the Bush tax cuts will disappear on 1 January. Maintaining those tax cuts are more important to Republicans than to Democrats, so Obama should not be too quick to give away his strongest negotiating position. On the other hand, there will be spending cuts as well. Half of those spending cuts are near and dear to the hearts of Republicans (i.e., Defense) and the other half are precious to Democrats. So both sides will have to give, but the "giving" does not have to be 50/50 and it shouldn't be 50/50. Krugman is worried because Obama has shown a willingness to go for a 75/25 split with spending cuts taking the big hit.
unless taxes are raised on the rich is morally reprehensible and intellectually ridiculous.
Would you apply that same principle to arms control negotiations? Or pressuring Iran on nuclear weapons? Or trade negotiations? Or the old strategic doctrine of MAD that guided US Cold War policy for two generations? Krugman is making an argument about political dangers as well as the morality of caving into hostage taking. That's been his point all along.
Krugman is not just arguing for raising taxes on the rich. He has consistently argued for raising taxes on the middle class after the economy fully recovers. He has also called for a 2%-3% VAT that would hit the lower and middle classes. And he has argued for Medicare cuts as well; but those cuts would be conditioned on getting overall medical costs under control. For example, Obamacare allows for the possibility of pushing out the minimum age because it reduces the problem of people on the cusp of Medicare without health insurance deferring treatment until they're old enough for Medicare.
Let's do a hypothetical. Suppose Obama and the GOP agree to a deal in which Medicare benefits are cut, Social Security benefits are cut, the FICA tax holiday is not renewed, the Bush tax rates are made permanent, spending is maintained at current levels and the debt ceiling is not extended. In other words, the GOP gets virtually all of what it wants. In exchange for this the GOP agrees to capping deductions along the lines of those proposed by Gov. Romney. Is that a deal that Obama should take? Because unless Obama is willing to go nuclear that's the deal he will be forced to accept. My view is that it would be morally reprehensible to accept that deal because we just had an election that decisively rejected such a deal. It would also be bad economics because immediately after the deal was struck the GOP would go about the business of reinstating those tax deductions for the rich or once again threaten default on the debt when the ceiling has to be raised.
Posted by: 2slugbaits at November 11, 2012 08:15 AM
I further submit that adopting as a negotiating strategy that your plan is to put the economy into recession unless taxes are cut on the rich is morally reprehensible and intellectually ridiculous.
Yet not a single peep of condemnation from JDH during the last four years of Republican terrorist hostage taking.
Four years ago, when the economy was in free fall, JDH cried tears of anguish for every single dollar that was spent on the stimulus bill to save the economy. But now, all of a sudden, as the fiscal slope looms and a reasonable pathway out of the debt he obsessed about appears, he panics. I don't get it.
Posted by: Joseph at November 11, 2012 09:55 AM
I think $120,000 increased tax bill for the top 1% is a staggering amount. I would be hard pressed to believe this would have no impact on small business hiring.
Further, even this adjustment, assuming Rich is way too pessimistic, is only 12% of the deficit, assuming no avoidance or other economic impacts. It simply doesn't move the needle materially.
Now, I am inclined to sensibly side with Jim in this matter, but this hole is enormous. It's not a couple of thousand dollars here or there on a tax return. It's five and six figures, well into the demographic pie.
I am concerned this amount cannot be finessed. We are, it seems to me, largely bankrupt. The longer we defer adjustment, the worse it gets. We are well on track to losing control over not only the finances of the country, but indeed, civil society itself.
Whether we adjust or defer, the matter I think comes down to one's belief about the importance of oil. If oil is a binding constraint, as Jeffrey and I have argued, then adjusting now, however painful, is better than delaying the matter.
Posted by: Steven Kopits at November 11, 2012 04:31 PM
Joseph: Are you referring to when I said "Making a political game out of the debt ceiling is playing with fire"? Permit me also to remind you of the reasons I gave for supporting fiscal stimulus here, and the links therein to my specific policy proposals.
Posted by: JDH at November 11, 2012 10:11 PM
You have to realize that these are the same people who are running Illinois and Chicago's economic policies. Welcome to the United States of Chicago.
Chicago survived by sucking the life from Illinois. Illinois is not surviving by sucking the life from the United States. Who will the United States suck life from? How long become life just slips away?
Posted by: Ricardo at November 12, 2012 05:10 AM
Can you make the numbers work with GDP growth at 2% and a recession every (let's be charitable) seven years?
What do the Federal budget numbers look like then, in terms of revenues, expenses, and tax increases required by quintile + Top 1%? Under such circumstances, to what extent is it possible to grow our way out of this current situation; to what extent must taxes be raised?
Posted by: Steven Kopits at November 12, 2012 05:43 AM
I hadn't realized that so much of the fiscal cliff consisted of tax increases. I think Boehner should insist on a greater share of spending cuts, maybe 2:1. How about going back to the spending levels of FY2007. The wars are over, aren't they?
Posted by: Rich Berger at November 12, 2012 08:37 AM
JDH, okay, I apologize.
Posted by: Joseph at November 12, 2012 10:00 AM
Boehner can't insist on anything. The fiscal cliff is coming and unless he gives the Democrats everything they ask for he will be blamed for the destruction. But guess what? If he gives the Democrats everything they ask for there will be destruction anyway and good old Boehner will be blamed anyway.
Sadly we just have to face it. We have lost. The crash is coming.
Posted by: Ricardo at November 12, 2012 10:26 AM
Mark Thoma points to an Ezra Klein post:
What the graphs show is something that everyone should know, but people often seem to forget. Setting aside heathcare costs (i.e., Medicare & Medicaid), the path to a balanced budget is no big deal. Most projected spending is flat. It's a manageable problem. And most of the structural deficit today is due to the Bush tax cuts, so returning to the Clinton era tax rates would solve the problem. The problem is entirely on the heathcare side. Medicare and Medicaid are going to eat our lunch. So we cannot fix the budget problem without first fixing healthcare costs.
Interestingly, JDH pointed to an article claiming that some businesses may move towards more part time employment in order to avoid some of the provisions of Obamacare. Over the long run this might be a good news story because it will shift more enrollees into the healthcare exchanges. Eventually that will crowd out employment based health insurance and move us towards a Canadian-style single payer system. Remember, Obamacare started out as Romneycare, which was originally a Heritage Foundation alternative to HillaryCare. The fundamental choices still haven't changed even if the names of the programs have changed. If businesses undercut Obamacare, then this will push us to HillaryCare with a Canadian accent. And that might be the way we ultimately get control of healthcare costs. A single payer system may be the only way to cut payments to doctors, hospitals and medical labs.
Posted by: 2slugbaits at November 12, 2012 12:34 PM
One of the problems with the Obamacare argument is the misalignment of needs. As 2slugs indicates here: " Medicare and Medicaid are going to eat our lunch. So we cannot fix the budget problem without first fixing healthcare costs." A budget i9ssue? Yes. Medicare and Medicaid are only part of the "healthcare" cost problem.
Remember Obamamcare was sold on reducing health costs for the average family. Ain't going to happen by concentrating on the federal programs.
Also Spencer and several others are citing the need for businesses to convert to more part time workers, but the problem is greater than that. Many, many service businesses are talking of converting to 1009 subcontractor employees. This is common in the trades, but not fully expedited in the many other services.
A 1099 employee will provide their own work facilities, transportation, tools, and most importantly benefits. Health retirement and employee taxes are all part of that cost to those new 1099 employees. Worse, many employers will lease the excess equipment previously supplied to the newly fired full time employees.
Are workers going to feel happy with the end result of this administration's policies? Dunno, just asking.
Posted by: CoRev at November 12, 2012 02:32 PM
Do not take counsel of your fears. The Republicans need to make an accurate, sober assessment of why they lost a very winnable race against a failed president. There's too much at stake to give up on this struggle.
When you a good laugh read a few of sluggo's posts. You will feel better.
Posted by: Rich Berger at November 12, 2012 03:29 PM
Anyone else find Ricardo's hysterics, well, hysterical?
Posted by: Nick at November 13, 2012 07:17 AM