US Economy

Why We Are Trapped in Recession

We're trapped because this recession is actually works like the Great Depression, and not like other recessions. But what's the trap?


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Unemployment  (About 17 Million in January 2012)

From the end of 2007 until the end of Bush's last budget in Sept. 2009, America lost 10 million jobs. And, we're still missing those 10 million jobs. On top of that, the 7 million that are typically unemployed, now must look much longer for work.
 


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The Super Rich

Our leaders have asked for “shared sacrifice.” But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched. While the poor and middle class fight ... Warren Buffet explains tax loopholes for the rich.


Taxes

Democrats tax and spend. Republicans borrow and spend, which explains the deficit. As it turns out "tax and spend" is how you are supposed to govern. But there is method to the Republican madness. If you care about America, you might want to understand.


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Inflation

  Hyperinflation has been a popular conservative topic since 2008 (Glenn Beck, Peter Schiff), but really, can you get any sillier? Trillions of dollars ago, at the start of the recession (Dec. 2007), inflation was about 2.4%. Now (Dec. 2011) it's about 2.1%. Hyperinflation? No, just ...>>


Wall Street Reform

So why did half the Republicans and most of the Democrats bail out Wall Street?  Because Wall Street was holding a gun to America's head — Don't bail us and we'll wreck the economy. So the real question, why did some of the worst bandits get to keep a lot of the money. The answer is the same as for: Why can't we pass tough Wall Street regulations now? 
 


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Social Security

There is a tiny splinter group, of course, that believes you can do these things [abolish social security]. Among them are ... a few other Texas oil millionaires, and an occasional politician or business man from other areas. Their number is negligible and they are stupid [President Eisenhower]. Not much has changed. The Texan is Ron Paul, and the business men are the Koch brothers.
 


 

Why Recession?

We're in a "Liquidity Trap"

 Free-market economies have recession about every 4 to 8 years, and they usually last only about six months. Well that's how they count it to be optimistic. That's really just the time it takes to hit bottom, but after about 3 years thinks are usually headed strongly in the right direction.

Why not this time?  Because the usual method of getting out of recession is broken. The usual method is for the Fed to lower interest rates. That makes it easier for people to buy house and for businesses to buy more office space, factories and equipment. All this is called investing. It's also called demand-side stimulus. Economists call buying stuff "demand."

The trouble is, the interest rate started out near zero and the Fed soon pushed it so close to zero you can't tell the difference, but that wasn't enough. That's because interest rates started lower and this recession is bigger than usual.

The way the Fed reduces interest rates is to make more money available—economists call that more "liquidity." But interest rates can't go below zero because it makes no sense to pay someone to borrow your money. So the zero limit on interest rates is the trap. Hence, the "liquidity trap."


What to Do?

  There are two basic ways to increase demand: (1) Monetary policy, and (2) Fiscal policy. Monetary policy means the Fed increases the money supply, and fiscal policy means the government buys things or cuts taxes to get us to buy things. Back in the 1960's and 70's there was a huge debate between conservative economists, like Milton Friedman, who said to use Monetary policy for recessions and liberal economist, who said to use fiscal policy. Fiscal policy is also called Keynesian policy because Keynes developed the theory for why it is sometimes needed.

Regarding normal recessions, Monetary policy is quicker and cheaper than fiscal policy. But by the time Obama took office, the economy was already in a liquidity trap and Monetary policy could do very little. So a month after talking office, Obama passed the stimulus bill—that's fiscal policy, and it worked. But it was too small, and due to Congressional nonsense it was not well designed. Still, as you can see, it hastened the recovery, and according the Congressional Budget Office, it add a couple of million jobs.

Unfortunately, as the stimulus ran out, jobs were cut. This is anti-stimulus and that began, far too soon, near the end of 2010. Anti-stimulus should not occur until the economy is growing rapidly, and can absorb workers laid off as the stimulus ends.


Good Economics Is Not about Punishing Bad Economies

June 28, 2010. Half of those who write to me about the national debt think the country has been bad and needs to be punished. And that means "cut government spending," which means fewer jobs. Fewer jobs! Can you think of a worse time to cut back on jobs? Well, can you?
This is well-meaning, moralistic nonsense. If someone's back goes out because they weren't strong enough to lift what they tried to lift, we wouldn't say "you've been slacking on your exercise, you must start lifting weights immediately." First, we let their muscles heal. Then we prescribe the necessary exercise.
In the U.S., conservatives are slightly ahead on in the nonsense game, but relatively liberal European is right in step with our conservatives. Go figure. But what is frightening, is that this exact same nonsense -- "cut spending to prevent inflation" -- carried the day through the Great Depression, which is why it lasted 12 years. Only when WWII cut through the silliness and the government spent like crazy, did we pull out of it.
Moralistic Nonsense
OK, lets take a look at specifics:
1. People were spending too much based on phony house prices. So we need a recession to get them back in line.
Wrong because the recession is mainly a matter of unemployment and the people who are hurt are generally not those who speculated on house prices.
2. Wasteful government spending is bad so the government should stop spending.
Nonsense. Of course wasteful government spending is bad. But if you notice you are wasting money on TV channels you don't watch, do you cut your spending across the board? No you cut the waste so you can spend the money on something you really need.
3. Inflation will get us if we don't cut government spending now.
Not too bright. Government spending can cause inflation by over-heating the economy. But an economy cannot be overheated and in recession -- that's a contradiction. So first the spending would have to get us out of the recession. Exactly what we want! When we see that, then we cut back on spending and raise interest rates to avoid inflation -- not a problem.

Lost Jobs: Whose Fault?

10 Million Jobs — Why Did They Disappear?

fall in housing starts led to recession
click image to enlarge

What killed off the jobs? As the graph shows the housing starts first increased, then crashed to 1/4 of their peak. That put millions of construction workers out of work.

You may blame the rich or the poor for bad loans, but either way this was not the fault of the construction workers, yet they are the ones who suffer. And, when they get laid off, they spend less—they don't buy that pickup they wanted.

That's why auto sales fell off (see graph) even though there was no bubble in car sales. And, of course these millions of laid off construction and auto workers spend less in restaurants, on clothes, and on just about everything. That caused more layoffs.


Stimulus

May 21, 2012.  Market "sentiment improved after G8 leaders ... stressed over the weekend that their "imperative is to promote growth and jobs." —Reuters. This is a reversal of their previous austerity/budget-cutting position. The result? "Nasdaq's best 1-day percentage gain since December 2011." The market always favors stimulus over austerity — because it works.


How We Get Out of the Great Depression II

By Steven Stoft, March 2, 2009
Here we go again:   Hoover got us in, and WWII got us out.  Bush got us in, and

to his credit, started trying to get us out. Though, mostly he threw money at bankers.
In the Great Depression, Roosevelt tried deficit spending, but he was too timid. Then he stopped in 1937 and the economy nose-dived. It took the humongous deficits of WWII to pull us out of the Great Depression. Those deficits blasted the economy from depression into overdrive.
Of course after the war, we had to pay off a huge national debt, but during that time, from 1946 to 1980, the economy was mainly quite prosperous. We hit a bad recession when Reagan took office, and his early deficit spending made sense (though he didn't know it). But then he continued to drive up the debt through the boom years that followed. See a graph of just how disastrous that was.
We are now headed into the worst slump since 1938, and you better hope Obama can fix it because that was not a pretty time. Unfortunately, as in the Great Depression, the extreme conservatives would rather trash the country than have our government succeed. They are much worse than Bush.

The main thing to remember is that, with consumer spending going down, business is going to lay people off—not hire them. You can't blame business for this. It's just a vicious cycle that the economy gets into. And you can't blame consumers for not spending in bad times. The only way out of this, if we don't want to wait 10 years, is for the government to spend, pay unemployment insurance, or give tax breaks to people who will spend (not the rich). Of course there's also the problem of the banks. Obama should stop saving the bankers, and just take over the bad banks. Once they're working they can be sold back to the private sector.

What Tea-Party Policies Did to Ireland 

Jun 29, 2010.  Learn from Ireland xlnk.gif, or we will make the same mistake.
 

  This is what we could have faced had we not run up a deficit xlnk.gif.
 
 

  China Did it Right 
May 31, 2010.  Buoyed by massive government spending programs and a flood of easy credit from state-controlled banks last year, China’s economy recovered rapidly from the global financial crisis. Buoyed by an expected growth rate of around 10 percent this year, China is poised to overtake Japan as the world’s second-largest economy, after the United States, sometime this year.  full storyxlnk.gif
 
 

 
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Why Borrow and Spend for Economic Stimulus?

July 11, 2009.  Money flows in circles: you get paid; you spend it, and the store pays someone else, who spends at another store. But what if everyone spent 90% and saved 10% in the bank? The circular flow of money would dwindle away to nothing, all the money would end up in the bank, the stores would shut and we'd all be out of work.
We do save some, so why doesn't this happen? Because other people and businesses borrow and spend what the borrow. That's good. It keeps things going.
But in a recession, like now, businesses don't want to borrow and invest. and right now people are saving more than they have in years. So the circle of money is dwindling and people are losing their jobs. (click the graph to see how many.)
If the recession isn't a bad one, and it's usually not, this problem can be fixed by the Federal Reserve. They just lower the interest rate, and businesses or people that want to build a new home, say—Hey, that's such a great deal, I can't pass it up. So they borrow and spend, and the economy starts to recover, and then people get more optimistic and it takes off.
That's all great, except in a really bad recession—like right now. The Fed has pushed interest rates as close to zero as it can get them, and people are still saving more than others are borrowing. Everyone is just too pessimistic to borrow and spend. So the economy is slowly running down. It's losing about half a million jobs per month relative to keeping up with labor force growth.
That's making people more pessimistic. So they feel less like borrowing and spending. We're in a trap. In the Great Depression we stayed in the trap for about 12 years. We've only been in this one a year, but that's hurt an awful lot of people. Even in the Depression the economy never pulled itself out. It was the enormous deficit spending for World War II that got us out.  Take a look.
So the only way we know to get out is for the U.S. government to borrow the money that you and I are saving and spend it for us. If they spend it fast enough, it will create enough jobs to turn this economy around.
And if they spend it on infrastructure and projects to build things our kids will need or enjoy, then even though they have to pay back the debt, they will have gotten their money's worth. But even if the money is totally wasted (from an economic point of view) as it was of World War II (double check -- I am not dissing WWII), even if the spending does not grow our domestic economy, it's still better than sliding into a depression. That's even worse for our future.
 
 

  A Texas Analogy for Fixing the Financial Crisis
 
 

  Basics of Depression Economics
By Steven Stoft, March 12, 2009
The housing-bubble burst, banks and the stock market have collapsed, but a new economic danger has now taken control. Consumers have cut spending like a no time since the Great Depression. Worse yet, they've got excellent reasons to spend less, and that's not about to change.
People aren't buying, so business isn't selling, so employees are getting laid off—by the millions. At this rate we could be at 10 percent unemployment by early June. That's getting close to depression territory. The Great Depression was horrible and went on for 12 years. We can't let this happen again.
But do we know what to do? Amazingly, we do. Banking is complicated, but lack of demand (buying) is pretty simple. The solution was figured out in the depression and applied from 1940 to 1944. And it worked like you would not believe.
The GDP grew 75% in those four years. Five times faster than under Reagan-Bush, three times faster than under Clinton. Never before nor since has the U.S. economy grown this fast, and I don't think any other economy has either. Starting from the Great Depression, the U.S. build the mighty industrial machine that won World War II.
So what was the trick? Enormous, wasteful government spending.
In those four years, the government borrowed and spend the equivalent of $15 trillion in today's economy. And the spending was for economically useless battleships and bombs. These do not make our economy one tiny bit more productive. Economically, no spending is more wasteful.
Now I'm not suggesting, useless spending is a good idea. We should spend as wisely as possible. But spending itself is what works in a depression. Other times we should pay down the debt—like Clinton did and Bush did not. And always we should spend wisely.
Why does deficit spending work even if it's wasteful? In bad times, when jobs are lost, savings in homes and stocks is lost, people spend less. And they should. For there own good, they must. But this hurts local stores, local repair men and construction workers, and national industries like autos and computers.
The situation is simple: Individuals must and should spend less, but this is terrible for businesses and their employees. We cannot ask individuals to spend what they can't afford or do not have. To get us out of this trap, we must ask our government to do what we cannot do ourselves. This is why we have a government.
The great danger
"It's time for government to tighten their belts and show the American people that we 'get' it." (CBS xlnk.gif) House Republican Leader John Boehner, March 8, 2009.
Boehner is saying, the government should cut back on spending just like we are forced to. But if the government spends less that means it lays people off and buys few goods from private companies, so these companies will lay people off. In a recession, this is just insane.
This is also the same conservative ideology that kept us in the great depression for 12 years. It restrained Roosevelt who did too little and only got us half way out until World War II. This thinking also influenced Roosevelt and made him more timid.
The craziest part of Boehner's view is that accepting it would destroy capitalism, while Keynes, Roosevelt, and their modern equivalents A Survival Plan for Capitalism xlnk.gif, are trying to save capitalism.
So fight for wiser spending and more accountability. But please don't buy the crazy idea, that if we all spend less, including the government, that's good for business.
 
 

 


Notice that the short-term interest rate is back to where it was in 1941 just before the Great Depression (GD) ended.
That's why we need depression economics. There are two ways to stimulate an economy (1) monetary policy (lower interest rates), and (2) fiscal policy (government spending). But when the interest rate goes down to zero monetary policy becomes impossible.
That leaves government spending, or we can just stay in GD II for ten years or more. Both are bad choices, but staying in a depression is much worse, so the choice is simple.

 

Depression ?

Good Economics Is Not about Punishing Bad Economies
June 28, 2010. Half of those who write to me about the national debt think the country has been bad and needs to be punished. And that means "cut government spending," which means fewer jobs. Fewer jobs! Can you think of a worse time to cut back on jobs? Well, can you?
This is well-meaning, moralistic nonsense. If someone's back goes out because they weren't strong enough to lift what they tried to lift, we wouldn't say "you've been slacking on your exercise, you must start lifting weights immediately." First, we let their muscles heal. Then we prescribe the necessary exercise.
In the U.S., conservatives are slightly ahead in the nonsense game, but relatively liberal Europe is right in step with our conservatives. Go figure. But what is frightening, is that this exact same nonsense -- "cut spending to prevent inflation" -- carried the day through the Great Depression, which is why it lasted 12 years. Only when WWII cut through the silliness and the government spent like crazy, did we pull out of it.
Moralistic Nonsense
OK, lets take a look at specifics:
1. People were spending too much based on phony house prices. So we need a recession to get them back in line.
Wrong because the recession is mainly a matter of unemployment and the people who are hurt are generally not those who speculated on house prices.
2. Wasteful government spending is bad so the government should stop spending.
Nonsense. Of course wasteful government spending is bad. But if you notice you are wasting money on TV channels you don't watch, do you cut your spending across the board? No you cut the waste so you can spend the money on something you really need.
3. Inflation will get us if we don't cut government spending now.
Not too bright. Government spending can cause inflation by over-heating the economy. But an economy cannot be overheated and in recession -- that's a contradiction. So first the spending would have to get us out of the recession. Exactly what we want! When we see that, then we cut back on spending and raise interest rates to avoid inflation -- not a problem.
 

Slow Day in Texas

(This is not about the main cause of the greate recession. But it shows how the credit markets can affect the real economy.)

It's a slow day in a little East Texas town. The sun
   is beating down, and the streets are deserted. Times
   are tough, everybody is in debt, and everybody lives on
   credit. On this particular day a rich tourist from
   back east - is driving through town.

   He stops at the motel and lays a $100 bill on the desk -
   saying he wants to inspect the rooms upstairs in order to
   pick one to spend the night.

   As soon as the man walks upstairs, the owner grabs the bill and
runs next door to pay his debt to the butcher.

   The butcher takes the $100 and runs down the street to
   retire his debt to the pig farmer.

   The pig farmer takes the $100 and heads off to pay his bill at the
supplier of feed and fuel.

   The guy at the Farmer's Co-op takes the $100 and runs to
   pay his debt to the local prostitute, who has also been
   facing hard times and has had to offer her "services" on
   credit.

   The hooker rushes to the hotel and pays off her room bill
   with the hotel owner.

   The hotel proprietor then places the $100 back on the
   counter so the rich traveler will not suspect anything.

   At that moment, the traveler comes down the stairs, picks
   up the $100 bill, states that the rooms are not
   satisfactory, pockets the money, and leaves town.

   No one produced anything. No one earned anything.

   However, the whole town is now out of debt and now looks to  the
future with a lot more optimism.
   And that, ladies and gentlemen, is how the United States
   Government is conducting business today.

We Are Family

It's popular to say the country is like a family—when we're in financial trouble we should save not spend.

But the country is like one big extended family, and that makes all the difference. We work for each other, and pay each other, and give loans to each other. But, it’s all in the family.

Suppose part of the family has a catastrophe – their houses burn down. So they tighten their belts and lay off some relatives that did their gardening and remodeling. Now those relative tighten their belts and stop eating out at Mom’s Diner—and she’s trying to save up because her house burned down. Etc., etc. Now we’ve got a family recession. If they all tighten their belts, they will all put each other out of work.

So the extended family needs the rich uncle Sam to start spending on gardening, remodeling and eating out. Then those folks will have income and keep spending.

The problem with the small-family, belt-tightening metaphor is that this family is a tiny part of a big outside world, that it can turn to for employment and income. If it stops spending outside, it only hurts the outside and not itself. But a nation is an extended family and when we stop buying things we hurt our relatives who are making and selling those things.

Once you see that our country is all family, then you see that spending always helps someone else in the family, and not spending always hurts a relative. If we all stop spending, we will all be out of work.

Reagan=Keynesian

Even Reagan understood that Keynes was fundamentally right. When defending Nixon's failure to implement austerity in a recession he said:

"Could the president, in the economic dislocation that accompanied his anti-inflation fight, and the transition from a war to a peace-time economy, shut off spending by the world's biggest buyer of goods and services (the US government) without risking a full scale depression."  from Reagan in His Own Hand (Just "search inside" for "Keynesian".)

Reagan was fully aware that this was Keynesian economics, but argued is was not the over-done version of the Dems. He was always careful to spin everything, but he was perfectly clear that Keynes's main point was correct. (The quote above was hand-written by Reagan.)

Supply Side Econ

Supply-Side Theory

Supply-side theory was cooked up on Wall Street in conversations between a Wall Street Journal opinion editor and a young economic theorist who had worked in government. The basic idea is this. When some part of the economy goes into a slump, say housing or auto,

  • it is not because people decide to buy fewer houses or autos (too little demand),
  • it's because government regulations make them too expensive (supply-side problems).

But that would mean that the reason house-construction started to crash clear back in 2006, was because George Bush and his Congress suddenly imposed extremely expensive new housing regulations. Nothing like that ever happened. And, once the economy really started to slide, people stopped buying cars in 2008, but the supply siders claim it was because the government (George Bush again) imposed harsh new regulations on the auto industry. This is just nuts. Of course the supply siders don't actually look at the details, like when did it happen and what did George Bush actually do, they just say "The government did it; it's the government's fault; they are hurting the supply side."

Cut Taxes and Regulations?

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David & Charles Koch

Republicans say cut government regulations and taxes to create jobs. Did people stop building houses in 2007 because of all the new housing taxes and regulations imposed by five years of Republican rule? That's just crazy. Will cutting regulations on house building fix the housing market? Don't be ridiculous. Business is off because people aren't buying. And that's exactly what [#business is saying].

So who's behind the Tax-and-Regulation myth? The biggest money behind that myth comes from the Koch brothers, who have been fined for pollution from their oil business and for cheating the federal government on oil extracted from Indian land. They've spent, literally, hundreds of millions (starting with founding the Cato Institute in 1977) on lobbying for lower taxes and no regulation. David Koch even ran against President Reagan in 1980. In 2005 they started organizing the Tea Party


Stimulus

Wall St. Jornal headline: Stocks, Treasurys Soar After Fed Keeps Stimulus. This happens every time the Fed turns toward stimulus, and stocks drop every time it turns away. There can be only one conclusion. Business is sure that Fed stimulus is good for business.

Unemployment

job-loss-gain.pngJob Losses and Gains

Bush handed Obama the worst economy since the great depression. Obama immediately passed a job-stimuls bill which helped stop job losses faster than during the milder 1st Bush recession. Click to the graph and you can see how much faster.
 


unemployed-discouraged.png17 Million Unemployed

By the end of Bush's last budget, Sept. 30, 2009, there 14.1 million unemployed and another 3.2 million that had given up looking for work, and so were not counted, for a total of 17.3 million. This is 10 million more than just a year and three quarters earlier.
 


jobs-Clinto-Bush-Obama.pngJobs: Clinton: +20, Bush: –2, Obama +3

During Clinton's 8 budget years, 20 million jobs were added. During Bush's 8 budget years, 2 million jobs were lost. During Obama's first 2 budget years 2 million jobs were added.
 


unemployment-rate.pngUnemployment Rate: 8.2% or 11.7%

  As of March, 2012, the headline unemployment rate is down to 8.2% from 10.1%. But counting discouraged workers, the unemployment rate is still 11.2%, down from 12.3%.
 


 

Job Losses

Job-loss-gain.png

  The economy was collapsing at its fastest rate since the Great Depression when Obama took office. In his second month he got Congress to pass a jobs stimulus bill worth about $900 billion. This helped stop the collapse and heightened the first spike in job growth. But the Republicans blocked more stimulus and by August 2010, falling stimulus spending began reducing job growth.


 

Number unemployed

total-unemployment.png1

Note that during Clinton's eight years, jobs increased by 20 million, while during Bush's 8 budget years, they decreased by 2 million. Under Obama, jobs have increased by 2 million, but that is still much to small to fixed the unprecedented destruction of jobs under Bush. 

Jobs

You can't blame Bush for jobs lost in the first few months of his presidency, before he could pass a budget or affect the economy. The same thing holds true of all other presidents. So it's best to judge a president by [#his budget years]. These start on October 1st. The graph below shows the result for budget years.

The Obama stimulus package was completely out of the ordinary and started to take effect before October 1st, which means he helped slow job losses during the last six months of Bush's final budget year. But to be consistent, I'm giving Bush credit for that reduction in job losses—until October 1st.

jobs-Clinton-Bush-Obama

Never, since the Great Depression, has the US economy suffered such a loss of jobs. But it's not the 2 million jobs lost during the Bush years that has hurt so many, it's the fact that 9 million new jobs were needed just to keep up with the growth of the workforce. During Obama's budget years, from Sept. 2009 -- March. 2012, the economy added 3.1 million jobs.


[#PopNotes]

[=his budget years] Yes, the House initiates the budget bill. But first the President sends his budget request, then he exercises a lot of political influence, and finally he has veto power. In the end budgets come out remarkably close to what Presidents request — usually within a few percent. Under Reagan and Bush senior it was within 2.5% every year.
[=PopNotes] Just hover over green-underline links above to see the "pop" notes.

 

Unemployment rate

unemployment-rate.png

Minimum Wage

Not it Sweden

  According to conservative "economics" raising the minimum wage causes unemployment and the US should cut its $7.25 minimum wage to something much lower. But Sweden being a so-called "socialist" country has minimum wage of about $19/hour. So, let's see, Sweden's unemployment rate is 7.5% while the US unemployment rate is 8.6%. So more than doubling the minimum wage is, hmmm catastrophic?

From the LA Times (4/10/11).  Laborers in Swedwood plants in Sweden produce bookcases and tables similar to those manufactured in Danville. The big difference is that the Europeans [Swedes] enjoy a minimum wage of about $19 an hour and a government-mandated five weeks of paid vacation. Full-time employees in Danville start at $8 an hour with 12 vacation days — eight of them on dates determined by the company.

What's more, as many as one-third of the workers at the Danville plant have been drawn from local temporary-staffing agencies. These workers receive even lower wages and no benefits, employees said.


Complexities

  Of course, there is a downside to raising the minimum wage. Companies hire somewhat fewer workers when they cost more. On the other hand, a higher wage may mean that some families don't need two full-time jobs, so that may make more jobs available. On balance, the minimum wage in the U.S. has done more good than harm.

Super Rich

Stop Coddling the Super-Rich

By WARREN E. BUFFETT
Published: August 14, 2011

OUR leaders have asked for “shared sacrifice.” But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched.

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as “carried interest,” thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.

These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species. It’s nice to have friends in high places.

Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine — most likely by a lot.

To understand why, you need to examine the sources of government revenue. Last year about 80 percent of these revenues came from personal income taxes and payroll taxes. The mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. It’s a different story for the middle class: typically, they fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot.

Back in the 1980s and 1990s, tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.

I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.

Since 1992, the I.R.S. has compiled data from the returns of the 400 Americans reporting the largest income. In 1992, the top 400 had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2 percent on that sum. In 2008, the aggregate income of the highest 400 had soared to $90.9 billion — a staggering $227.4 million on average — but the rate paid had fallen to 21.5 percent.

The taxes I refer to here include only federal income tax, but you can be sure that any payroll tax for the 400 was inconsequential compared to income. In fact, 88 of the 400 in 2008 reported no wages at all, though every one of them reported capital gains. Some of my brethren may shun work but they all like to invest. (I can relate to that.)

I know well many of the mega-rich and, by and large, they are very decent people. They love America and appreciate the opportunity this country has given them. Many have joined the Giving Pledge, promising to give most of their wealth to philanthropy. Most wouldn’t mind being told to pay more in taxes as well, particularly when so many of their fellow citizens are truly suffering.

Twelve members of Congress will soon take on the crucial job of rearranging our country’s finances. They’ve been instructed to devise a plan that reduces the 10-year deficit by at least $1.5 trillion. It’s vital, however, that they achieve far more than that. Americans are rapidly losing faith in the ability of Congress to deal with our country’s fiscal problems. Only action that is immediate, real and very substantial will prevent that doubt from morphing into hopelessness. That feeling can create its own reality.

Job one for the 12 is to pare down some future promises that even a rich America can’t fulfill. Big money must be saved here. The 12 should then turn to the issue of revenues. I would leave rates for 99.7 percent of taxpayers unchanged and continue the current 2-percentage-point reduction in the employee contribution to the payroll tax. This cut helps the poor and the middle class, who need every break they can get.

But for those making more than $1 million — there were 236,883 such households in 2009 — I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more — there were 8,274 in 2009 — I would suggest an additional increase in rate.

My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice.

Warren E. Buffett is the chairman and chief executive of Berkshire Hathaway.


In 1915, toward the of the time of the Robber Barons, the top 1% earned about 18% of the country's income. Today they earn about 24%.  

  CENTER FOR EQUITABLE GROWTH Director Emmanuel Saez just got the MacArthur award.

http://www.americanprogress.org/events/2012/01/krueger.html

Taxes

Here's and excellent slide show on taxes and tax rates. Business Insider

The Radical Republican Agenda on Taxes. A major contributor to the increasing inequality in America has been tax cuts for the wealthy. This trend started even before Reagan and has accelerated again under Bush II. But it's also important to look at what taxes have been cut to understand what's at stake.

Next Steps in the Radical Republican Agenda  Bush is headed towards a radical revision of who pays taxes and how much they pay, where labor is taxed but not capital, social services are cut and the federal government shrinks in size.

Who Benefits? Cutting the Tax Rates
It cost the rich a lot to elect Bush, but they've already recouped a lot of their investment.  The big cuts were for millionaires.

The Effect of the Tax Cuts
The tax cuts cause trouble now but their long-term effect is even more damaging.
 


 

http://www.cbpp.org/8-25-04tax-fact.htm

http://www.newyorker.com/printable/?fact/040906fa_fact

Radical Agenda

Even before the recent tax cuts, incomes were growing fastest at the top of the income scale.  Beginning with Reagan, the series of Republican tax cuts has over-whelmingly benefitted the rich.

"An April 2004 CBO study showed that between 1979 and 2001 (the last year CBO examined), the average after-tax income of the top one percent of households rose by 139 percent ($409,000) after adjusting for inflation, compared to a 17-percent ($6,300) increase for the middle fifth of households and an 8-percent ($1,100) increase for the bottom fifth." Full Story.

The magnitude of the income tax cuts and the change in tax rates under the Reagan-Bush-Bush regimes is important but there is more to the story.  It's also important to look at what  taxes have already been cut:  capital gains tax rates; taxes on dividend income; repeal of the estate tax in 2010; increased business depreciation schedules etc.  Each of these changes favors those with investment income over those with labor income, thus magnifying the effect of the reduction of income tax rates.

 

Next Steps

  The conservative economists who advise Bush want more than just more tax cuts. And the press is missing the story.

"When the President pledges to create an “era of ownership,” he is not talking merely about encouraging people to buy their own homes and start small businesses. To conservative Republicans who understand his coded language, he is also talking about extending and expanding the tax cuts he introduced in his first term; he is talking about allowing wealthy Americans to shelter much of their income from the I.R.S.; about using the tax code to curtail the government’s role in health care and retirement saving; and, ultimately, about a vision that has entranced but eluded conservatives for decades: the abolition of the graduated income tax and its replacement with a levy that is simpler, flatter, and more favorable to rich people."  Full Story.

Who Benefits

Tax Cuts: Who Benefits and Who Pays For Them
The American people have been told that Bush's tax cuts will "give people their money back."  But this report shows that each year  these cuts save less than $1,000 for households making less than $50,000, but save $136,000 for households making more than $1 million.  Link to PDF

Also see: Simple table of who benefits from Bush's tax cuts xlnk.gif

Tax Cuts

 Tax Cuts Decrease Federal Revenue by $1.7 trillion
Making the 2001, 2002, and 2003 tax cuts permanent would reduce revenues by $1.7 trillion through 2014.  If we include the added interest payment to national debt, this figure rises to $2.0 trillion.  Tax revenues pay for programs like health care, education and national security.  So in order to finance this loss in tax revenue, we have two choices: 1) cut social spending or 2) increase the national debt. Link to Brookings Fact Sheet 
  Making Tax Cuts Permanent would cost $2.5 trillion from 2005-2014
Making tax cuts permanent would cost $2.5 trillion from 2005-2014 and more than twice that amount from 2015-2024.  Link to PDF 

What happens if the tax cuts are made permanent?  (104k PDF)

Auerbach 2002 Bush Tax Cut  (145k PDF)
Promoters said that Tax Cut I that gave the wealthy more tax breaks in retirement plans would increase national savings.  But no... analysis shows that like most tax cuts this one in reality will increase spending and reduce national savings. PDF

Sources for Tax Analysis

Sources: 

1. "G.E.'s Strategies Let It Avoid Taxes All Together," The New York Times, March 24, 2011  http://www.moveon.org/r?r=207259&id=26713-2958099-wlhWCLx&t=3

3. "After Paying Zero Income Taxes, GE Plans To Ask Its Union Workers To Make Wage and Benefits Concessions", ThinkProgress, March 28, 2011  http://www.moveon.org/r?r=207260&id=26713-2958099-wlhWCLx&t=5

4. "UPDATE: GE Doubles CEO Immelt's Compensation, Shrinks Board", Smart Money, March 14, 2011  http://www.moveon.org/r?r=207261&id=26713-2958099-wlhWCLx&t=6

5. "G.E.'s Strategies Let It Avoid Taxes All Together," The New York Times, March 24, 2011  http://www.moveon.org/r?r=207259&id=26713-2958099-wlhWCLx&t=7

6. "NACHC Statement in Response to the Budget from the House Appropriations Committee," National Association of Community Health Centers website, February 9, 2011  http://www.moveon.org/r?r=206514&id=26713-2958099-wlhWCLx&t=8

7. "Bye Bye, Big Bird. Hello, E. Coli.," The New Republic, February 12, 2011  http://www.moveon.org/r?r=206104&id=26713-2958099-wlhWCLx&t=9

8. Based on an annual teacher's salary of $42,500, as noted in the Payscale website (updated March 19, 2011), accessed March 30, 2011  http://www.moveon.org/r?r=207263&id=26713-2958099-wlhWCLx&t=10

Inflation

But What About Hyperinflation?  Yikes!!!

  Hyperinflation has been a popular conservative topic since 2008 (Glenn Beck, Peter Schiff), but really, can you get any sillier? Trillions of dollars ago, at the start of the recession (Dec. 2007), inflation was about 2.4%. Now (Nov. 2011) it's about 2.1%. Hyperinflation? No, just hyperventilating.

inflation-cpi-core.png

Hyperinflation, according to the business dictionary is a "ruinously high increase (50 percent or more per month) in prices." The case the scare-mongers always cite is Germany between August 1922 and November 1923 — in the German Weimar Republic. Then, the inflation rate reached 322% per month. But, due to compounding, even 50% per month is over 12,000% per year (that's a 120 times price increase). So to think that the US in in danger of jumping from 2% to 12,000% is sheer lunacy. Such folks can be safely ignored on all topics.

You don't need to be an economist to figure this out why we're not having inflation. Say you manage a local restaurant, and you read about the deficit. So you think OMG inflation! I better raise the price of a steak and fries. So you "explain" this to the owner, who says, What have you been smokin'. Business is down from the recession; our competition is having more specials, and you think our customers will pay more because the national debt went up?!

No, believe me. Any business that raises prices because of the national debt, died a long time ago. A booming economy lets them raise price. A recession—yes that's what's going on—makes it hard to sell things, so prices get cut. That's why inflation is down.  But, what I can't figure (can you?) is why people stay so mixed up?


What Drives Inflation?

November 7, 2009.  The Federal Reserve has promised not to reignite inflation, but what about the debt? Could that cause inflation anyway?

It's true, the money supply controls the price level in the long run, but it does not do so directly. No one raises any price because they heard the money supply was up. Inflation is only caused by tight markets -- both labor and commodities.

(Oil price increases cause a 1-time price increase not inflation, unless the oil price keeps going up forever.)

So will the market get too tight? Not until the unemployment rate gets back down to about 4.5 to 5%. And then? Then the fed will decide how tight they want it. They might try to devalue the debt with inflation.

But I wouldn't bet on it. High inflation, might cause China etc. to sell there debt, but I don't think we want that. International monetary economics is, unfortunately beyond me, so I think I don't have much value to trade in that area.

What the Fed Says about Inflation

May 5, 2009. BERKELEY, Calif. (Dow Jones)--The end of the recession is in sight, although the recovery could prove long and slow, the San Francisco Federal Reserve Bank's top official said Tuesday. ...

Yellen said she's more concerned about lower inflation and deflation, than about runaway inflation when the economy recovers. She said she expects inflation to fall below last year's 2% level, to as low as 1.5% in 2009 and possibly lower in 2010.

"If deflation were to occur with the funds rate near zero, the effects could be severe," Yellen said. But she added that she doesn't expect a "deflation problem."

Meanwhile, Yellen discounted fears that inflation could accelerate once the credit markets ease and the economy picks up steam. The Federal Reserve "is well aware" of the need to tighten its stance on monetary policy when the economy recovers and "is readying the tools even now," she said.

The prevailing fear is that overly weak economic activity will lead to deflation, but some worry the Fed's extraordinary interventions could fuel a future inflation boom.

A potential tool the Fed could use to tighten monetary policy while also supporting financial markets would be to issue interest-bearing debt broadly to private investors, Yellen said. Such debt issuances would have to be authorized by Congress, but it's a common tool used by other central banks, she said.

Yellen noted that the Fed's efforts to ease financial conditions and lower interest rates appeared to be working, and that positive effects from the billions of dollars in federal aid included in the stimulus package will likely be felt this quarter.

 

Wall St. Reform

This is serious

The U.S. economy is in real danger. It might pull through on it's own, but no one knows—no one. Least of all Michael Moore or Mike Huckabee. They and the naive democrats and the more numerous extreme republicans are a danger.
I'm an economist—but finance is not my field. During the California electricity meltdown I attended a meeting with several high-level financial economist about how it was turning into a financial crisis. This was their message: It is extremely dangerous and can move very fast without warning. Basically, a financial market, without enough government stabilizers, can self distruct in a flash.

What's going on

It's complex, but it's also simple. From 1870 -- 1934 we had a banking crisis every ten years. Banks and financial markets work well when people have confidence in them. But when something goes wrong in one corner, it's impossible to know how widespread it is, and people lose confidence. They want to grab their money and put it somewhere safe -- that's sensible for the individual, but it causes a financial panic that is self perpetuating.
In the Great Depression the government began requiring deposit insurance, and limiting banks leverage. This gives people confidence even when something goes wrong in one corner. No more bank panics. The government makes the market work, the market makes the country work.
But financiers don't like to pay for insurance and like to leverage their investment. Market fundamentalism--the idea that all we need is markets--began to spread because the markets were working well (no more bank panics). Eventually the financiers found ways around the government stabilizers and now we are back into pre-depression instabilities. But today it more global and more complex.

But Wall Street is Ripping off Main Street !!!

Yes there was some of that going on. And there will be more of it in the $700 B bailout. But when the ship is sinking it's the wrong time to dock the captain's pay. Focus on saving the ship. Sure, improve the bailout plan from what Paulson presented. Get more collateral for the bailout money. But pass a bailout bill and pass it now.
There were a lot of stupid Michael-Moore Democrats against it, but a lot of them just didn't want to get beat up by all the Republicans who voted against it and would then blamed the Dems for what will be a messy bailout. Truth is, the conservative Republicans who tanked the bailout (on the first round) are the same Republicans that always vote against regulations to stabilize the financial sector. The Huckabee Republicans were the bigger problem before and again now.

Then What?

In the long run, Republicans need to stop demonizing the government, and Democrats need to stop demonizing the market. In my view Obama is the best antidote to both Michael Moore and Mike Huckabee

 

Deregulation

$5 BILLION IN POLITICAL CONTRIBUTIONS BOUGHT WALL STREET FREEDOM FROM REGULATION, RESTRAINT, REPORT FINDS

Steps to Financial Cataclysm Paved with Industry Dollars

March 4 - The financial sector invested more than $5 billion in political influence purchasing in Washington over the past decade, with as many as 3,000 lobbyists winning deregulation and other policy decisions that led directly to the current financial collapse, according to a 231-page report issued today by Essential Information and the Consumer Education Foundation.

The report, "Sold Out: How Wall Street and Washington Betrayed America," shows that, from 1998-2008, Wall Street investment firms, commercial banks, hedge funds, real estate companies and insurance conglomerates made $1.725 billion in political contributions and spent another $3.4 billion on lobbyists, a financial juggernaut aimed at undercutting federal regulation. Nearly 3,000 officially registered federal lobbyists worked for the industry in 2007 alone. The report documents a dozen distinct deregulatory moves that, together, led to the financial meltdown. These include prohibitions on regulating financial derivatives; the repeal of regulatory barriers between commercial banks and investment banks; a voluntary regulation scheme for big investment banks; and federal refusal to act to stop predatory subprime lending.

"The report details, step-by-step, how Washington systematically sold out to Wall Street," says Harvey Rosenfield, president of the Consumer Education Foundation, a California-based non-profit organization. "Depression-era programs that would have prevented the financial meltdown that began last year were dismantled, and the warnings of those who foresaw disaster were drowned in an ocean of political money. Americans were betrayed, and we are paying a high price -- trillions of dollars -- for that betrayal."

"Congress and the Executive Branch," says Robert Weissman of Essential Information and the lead author of the report, "responded to the legal bribes from the financial sector, rolling back common-sense standards, barring honest regulators from issuing rules to address emerging problems and trashing enforcement efforts. The progressive erosion of regulatory restraining walls led to a flood of bad loans, and a tsunami of bad bets based on those bad loans. Now, there is wreckage across the financial landscape."

12 Key Policy Decisions Led to Cataclysm

Financial deregulation led directly to the current economic meltdown. For the last three decades, government regulators, Congress and the executive branch, on a bipartisan basis, steadily eroded the regulatory system that restrained the financial sector from acting on its own worst tendencies. "Sold Out" details a dozen key steps to financial meltdown, revealing how industry pressure led to these deregulatory moves and their consequences:

  1. 1. In 1999, Congress repealed the Glass-Steagall Act, which had prohibited the merger of commercial banking and investment banking.
  2. Regulatory rules permitted off-balance sheet accounting -- tricks that enabled banks to hide their liabilities.
  3. The Clinton administration blocked the Commodity Futures Trading Commission from regulating financial derivatives -- which became the basis for massive speculation.
  4. Congress in 2000 prohibited regulation of financial derivatives when it passed the Commodity Futures Modernization Act.
  5. The Securities and Exchange Commission in 2004 adopted a voluntary regulation scheme for investment banks that enabled them to incur much higher levels of debt.
  6. Rules adopted by global regulators at the behest of the financial industry would enable commercial banks to determine their own capital reserve requirements, based on their internal "risk-assessment models."
  7. Federal regulators refused to block widespread predatory lending practices earlier in this decade, failing to either issue appropriate regulations or even enforce existing ones.
  8. Federal bank regulators claimed the power to supersede state consumer protection laws that could have diminished predatory lending and other abusive practices.
  9. Federal rules prevent victims of abusive loans from suing firms that bought their loans from the banks that issued the original loan.
  10. Fannie Mae and Freddie Mac expanded beyond their traditional scope of business and entered the subprime market, ultimately costing taxpayers hundreds of billions of dollars.
  11. The abandonment of antitrust and related regulatory principles enabled the creation of too-big-to-fail megabanks, which engaged in much riskier practices than smaller banks.
  12. Beset by conflicts of interest, private credit rating companies incorrectly assessed the quality of mortgage-backed securities; a 2006 law handcuffed the SEC from properly regulating the firms.

Financial Sector Political Money and 3000 Lobbyists Dictated Washington Policy

During the period 1998-2008:

  • Commercial banks spent more than $154 million on campaign contributions, while investing $363 million in officially registered lobbying:
  • Accounting firms spent $68 million on campaign contributions and $115 million on lobbying;
  • Insurance companies donated more than $218 million and spent more than $1.1 billion on lobbying;
  • Securities firms invested more than $504 million in campaign contributions, and an additional $576 million in lobbying. Included in this total: private equity firms contributed $56 million to federal candidates and spent $33 million on lobbying; and hedge funds spent $32 million on campaign contributions (about half in the 2008 election cycle).

The betrayal was bipartisan: about 55 percent of the political donations went to Republicans and 45 percent to Democrats, primarily reflecting the balance of power over the decade. Democrats took just more than half of the financial sector's 2008 election cycle contributions.

The financial sector buttressed its political strength by placing Wall Street expatriates in top regulatory positions, including the post of Treasury Secretary held by two former Goldman Sachs chairs, Robert Rubin and Henry Paulson.

Financial firms employed a legion of lobbyists, maintaining nearly 3,000 separate lobbyists in 2007 alone.

These companies drew heavily from government in choosing their lobbyists. Surveying 20 leading financial firms, "Sold Out" finds 142 of the lobbyists they employed from 1998-2008 were previously high-ranking officials or employees in the Executive Branch or Congress.

*  *  *

Essential Information is a Washington, D.C. nonprofit that seeks to curb excessive corporate power. The Consumer Education Foundation is a California-based nonprofit that supports measures to prevent losses to consumers.

Economics

Markets and Efficiency (this section is just barely started and now paused for the election)

I'm an economist. I design and modify electricity markets, and I believe markets are the best tools for solving many economic problems. But, by themselves, they can't solve many important economics problems. With some clever external controls, they can solve a wider range of problems. This view is not uncommon, but many fundamental mistakes are made by those who criticize markets as well as by market fundamentalists who believe markets can solve nearly every economic problem and quite a few others. Allow me to explain some well accepted, but often misunderstood economic principles.

What is economic "efficiency," and why it means less than often supposed.

The central concept of economics is "economic efficiency.” The economic meaning is almost the same as in English, but one key aspect of the economic concept causes misunderstanding between economists and others. Efficiency covers both production and distribution, and the confusion lies on the distribution side.

If eight people divide a pie and each gets a 1/8th slice, the pie is divided efficiently. I am using the word in its economic sense and will continue to. What may surprise some, is that giving one person the whole pie and the others nothing is also economically efficient. This is because it is what economists call a Pareto optimal distribution of the pie. In this case “Pareto optimal” and efficient mean the same thing. A distribution is Pareto optimal, PO, if no one can be made better off without making someone worse off. Once one person has been given the whole pie, no one can be given any without making the first person worse off, hence giving all to one is PO and, technically speaking, efficient.

When Idi Amin owned everything in Uganda, that was economically efficient. Of course egalitarian distributions are also efficient. So what is inefficient. If we divide the pie into nine pieces, give one piece to each of the eight people, and drop the last piece on the floor, that is inefficient. The point is that when an economist say a certain scheme is efficient, that does not mean it’s good. It just means that nothing is utterly wasted, it may still be horribly unfair.

Graphs

Reconciliation
Chart of the "Number of Charts in Year-End Chart Round-ups, in One Chart"  J
Washington Post
http://www.washingtonpost.com/blogs/ezra-klein/post/reconciliation/2011/12/21/gIQAGkc49O_blog.html
 
Economic experts explain 2011 in charts (18 charts)
Washington Post
http://www.washingtonpost.com/business/economy/economists-explain-2011-in-charts/2011/12/21/gIQAT3lg9O_gallery.html
 
The Most Important Graphs of 2011
The Atlantic
http://www.theatlantic.com/business/archive/2011/12/the-most-important-graphs-of-2011/250240/
 
2011 in 11 charts
Washington Post
http://www.washingtonpost.com/blogs/ezra-klein/post/2011-in-11-charts/2011/08/25/gIQAXQXJMP_blog.html
 
2011 Charts of the Year
Reuters
http://alphanow.thomsonreuters.com/2011/12/2011-charts-of-the-year/
 
2011 in nine charts
The Economist
http://www.economist.com/blogs/graphicdetail
 
The Best of CBPP Graphs: Guideposts on the Road Back to Factville
Jared Bernstein, On the Economy
http://jaredbernsteinblog.com/the-best-of-cbpp-graphics/
 
11 telling charts from 2011
Economic Policy Institute
http://www.epi.org/publication/11-telling-charts-about-2011-economy/
 
The 4 Scariest Economic Graphs I've Seen This Year
The Atlantic
http://www.theatlantic.com/business/archive/2011/08/the-4-scariest-economic-graphs-ive-seen-this-year/242997/
 
The 7 most illuminating economic charts of 2011
The American (the conservative AIE)
http://blog.american.com/2011/12/the-7-most-illuminating-economic-charts-of-2011/
 
Best Graph of 2011: The Inequality Dragon
Project Economic Refugee
http://www.economicrefugee.net/best-graph-of-2011-the-inequality-dragon/
 
Top economists reveal their graphs of 2011
BBC
http://www.bbc.co.uk/news/in-pictures-16090055
 
The best economy graphs of 2011
Anorak
http://www.anorak.co.uk/305572/money/the-best-economy-graphs-of-2011.html/
 
And some others
 
Overworked America: 12 Charts That Will Make Your Blood Boil
Mother Jones
http://motherjones.com/politics/2011/06/speedup-americans-working-harder-charts
 
Economic Performance of Presidential Administrations
Academy Computer Services
http://www.academycomputerservice.com/economics/charts.htm
 
Who Rules America
William Domhoff
http://www2.ucsc.edu/whorulesamerica/power/wealth.html
 
BBC
The eurozone's crisis
         http://www.bbc.co.uk/news/business-13366011
What really caused the eurozone crisis?
         http://www.bbc.co.uk/news/business-16290598
 
 

Krugman Dictionary

 Just getting started. Krugman explains most of this, but it can be hard to find.  (How Krugman changed the NYTimes.)


Austerians vs. Keynesians:  Most of Krugman's posts pertain to this epic battle. Austerians (some of whom subscribe to Austrian economics) believe that cutting public spending (austerity) will cure a depression, while Keynesians believe that more public spending will do the trick. In other words, Austerians believe the cure is the hair of the dog that bit you, while Keynesians say that when the problem is unemployment and too little spending, the government should spend and hire. ( PK, )

Austerity:  A government policy of reducing spending. In a recession, people and corporations earn less and pay less in taxes, while unemployment insurance payouts increase. So the government has less income and more outgo and, hence, runs bigger deficits and must borrow more. Very Serious People think that big deficits cause recessions because of a lack of business confidence (see Confidence Fairy), so they advocate cutting spending (imposing austerity). In the absence of a business response (that is, because there is no Confidence Fairy), austerity makes the recession worse (see Keynesian Policy).

Bond Vigilantes:  Make frequent appearances in WSJ. (May 2008Nov. 2011, PK).  As the WSJ explains (May 2009), "They're back. We refer to the global investors once known as the bond vigilantes, who demanded higher Treasury bond yields ... whenever inflation fears popped up, ...  they appear to be returning with a vengeance now that Congress and the Federal Reserve have flooded the world with dollars to beat the recession. After three years, the WSJ's bond vigilantes have had no luck whatsoever; interest rates having trended lower over the whole period.   (see Invisible Bond Vigilantes).

Chicago School:  The same group of economist that are often referred to as fresh-water economists. This school has been centered at the university of Chicago since at least the 1960's when Milton Friedman was the de facto dean of the school. Back then the it was Monetarist, now it is dominated by "rational expectations" theorists, prominently including Lucas and Cochrane. These two rant against Keynesian economics, which they do not understand and have consequently been caught with their pants down (PK).

Confidence Fairy:  The fairy (photo) who makes businesses hire more people and perhaps makes the public spend more when government reduces its spending and thus its future debt. In spite of the photo, there is no evidence of the powers attributed to her. K-Links: Introduced, Best example

Debt:  You know what it means literally, but Krugman argues that since we Americans owe it too ourselves, it would mean nothing economically if it weren't for that American debtors cut their spending more than American lenders increase their spending. This is not always true, but when the recession hit, it became true. Also it's not dollar debt that matters, but national debt relative to the size of the economy. (PK, PK, PK, PK,) more >>

FRED:This is where Krugman gets most of his data—the Federal Reserve board of St. Louis' Economic Data. (PK, FRED)

Fresh-water economists:  See Chicago School and Salt Water Economists. (PK, PK, PK)

Invisible Bond Vigilantes:  Bond vigilantes are invisible for the same reason leprechauns are, and it is quite rude of Paul to point this out. (Nov. 2009, June 2010, Dec. 2010, May 2011.)

Income Inequality: No need to define it, but here are links to some of Krugman's best gaphs. (PK, PK, PK, PKPK

IS-LM:

Keynesian policy:  When the economy is in a serious slump, and interest rates are so close to zero that Monetary policy loses its power, Keynesian policy recommends temporary fiscal policy lasting until the economy is back close to full employment. Fiscal policy can be tax cuts or government spending, but spending (which requires borrowing) is a stronger and more reliable policy. Krugman links to Brad DeLong's 1997 explanation/prediction.

Keynesian models:

Krugman's predictions: In 2005 Powerline attacking him for predicting "a catastrophic collapse in home prices."

Macroeconomics:  The economics of nations — growth, unemployment, national debt, etc. (Microeconomics covers how business compete or exercise market power, and consumer behavior.)

Minsky moment: "the point at which margin calls force deleveraging" —PK. (PK, Wiki)  A MM occurs when over-indebted investors are forced to sell the assets they've gone into debt to purchase (houses, securities, whatever) to pay back their loans. This causes the asset value to fall, which causes more selling, sometimes because of margin calls. So the MM is the beginning of  a major sell-off and precipitous collapse in asset prices.

Rational Expectations:  The hypothesis that enough people are so rational that they make unbiased forecasts of the impact the government policies will have for decades to come, and as a consequence, monetary policy (as recommended by Milton Friedman) and fiscal policy (as recommended by Keynes) will have no effect. The hypothesis is based on a ludicrous assumption and extremely sophisticated mathematics.

Ricardian equivalence:  "The proposition that the timing of taxes doesn’t matter for consumer spending, so that temporary tax cuts don’t change spending." 

Salt-water economist:  Economists on the East and West Coast tend to be Keynesians, while "fresh-water economists, at places like the University of Chicago tend to dislike and not understand Keynesian economics. (see "Chicago School")

Very Serious People (VSPs):  (a.k.a. policy elite) Those with power who are taken seriously because they pretend to be serious, but who just spout popular nonsense. A surprising number have PhDs in economics.

Say's Law:  The proposition that income must be spent, so that shortfalls of demand are impossible, and government spending in particular cannot add to demand. (PK, )

WSJ:  Wall Street Journal.

Zombie ideas (aka zombie lies):  Original definition (Nov. 2007) — "Many politically charged topics are overrun with zombie ideas — false stories that refuse to die, and just keep coming back."  Zombies are people (usually VSPs) that spread zombie lies. (Structural unemployment.)


[#PopNotes]

[=not our problem] China has foreclosed on no mortgages and recalled no loans.
 
[=PopNotes] Just hover over green-underline links above to see the "pop" notes.

 

Debt

Why Debt Matters:  Say I borrow $10 from you. I'm in debt to you and your in ____ to me. We're missing a word, and perhaps that's why everyone forgets that, for the most part, we are in debt to ourselves.

Forget that China has lent us some money, that's [#not our problem]. So what's wrong with owing each other money? Krugman say the problem is that debtors now feel they need to save and the lenders don't feel like spending any extra. So, on average, people are saving more and spending less. That's good for them individually, but it's not good for business. Business needs people to buy things.

Going Up or Down:  Reagan said the US debt was its highest ever in 1980, and every reporter fell for this. It was true in dollar terms, but what matters is the size of the debt relative to the economy. Relative to the economy the debt in 1980 was that lowest it had been in 50 years — it was not a problem at all. Conservatives are still playing this trick. Spain's debt  was low and falling, at the start of the recession.

Krugman's debt model (wonkish)


[#PopNotes]

[=not our problem] China has foreclosed on no mortgages and recalled no loans.
 
[=PopNotes] Just hover over green-underline links above to see the "pop" notes.