Posts Tagged ‘obama’

Barack Hoover Obama? (updated Dec. 4)

13 November 2009

The administration has apparently ditched Keynesian economics in favor of Philistine economics, calling for a domestic spending freeze or even spending cuts in the midst of double-digit unemployment.

The Associated Press has the story here.

Focusing on deficit reduction during a depression did not work for Herbert Hoover in 1932, and I’m at a loss to see why Obama’s economists are embracing spending cuts now.  The article does quote budget director Peter Orszag as saying cutting spending too fast could undermine the recovery, so I can only hope that they do not mean to make these cuts until recovery is well underway.  (Then again, the article implies that Obama’s budget next February will ask every agency for spending freezes or 5 percent cuts.)  Given the dim prospects for a rapid recovery, the economy may not be ready to absorb any deep spending cuts for many years to come.

Perhaps a better analogy than Hoover in 1932 is Franklin D. Roosevelt in 1936-37.  At that time the U.S. economy had been recovering for about four years (after bottoming out in early 1933) but was still in depression, with unemployment above 9%.  But FDR, deciding it was time to focus on the budget deficit instead of the economy, cut spending and raised taxes (as the Fed doubled bank reserve requirements to soak up the vast excess reserves out there — which also sounds like a recent conversation), and the economy nosedived.  Had FDR and the Fed been less leery of deficits and excess reserves, the depression might not have lasted until World War II.

UPDATE, 18 November 2009:  Edward Harrison of Credit Writedowns, writing on the Naked Capitalism site, makes a similar argument with a lot more detail.

UPDATE, 21 November 2009: Krugman has an excellent piece on the matter here, and a “wonkier” one on deficits and interest rates here.

By the way, I changed the heading from “Barack Hoover Roosevelt?” to the current one, because FDR is so widely associated with pro-active steps like the Works Progress Administration and other jobs programs, fixing and reforming the banking and financial system, and ending the early-’30s deflation by going off the gold standard.  While his budget-balancing disaster of 1936-37 and his too-small budget deficits in other years show that he was no Keynesian when it came to fiscal policy, I’d be delighted to see Obama commit to policies that created three million relief jobs per year, as FDR did.  The stimulus is creating a fraction of that number, which seems unsurprising considering that the job creation is indirect:  rather than create new agencies to directly employ workers in various projects, the government is handing out money to lucky companies in the hope that they’ll hire people.  The fear of creating new federal government employees seems even stronger than the fear of deficits.

UPDATE, 4 December 2009:  Obama may have talking out of school when he said that last month.  In an interview yesterday just prior to the jobs summit, he said the following:

He ruled out an immediate effort to reduce the $1.4 trillion budget deficit until the economy rebounds further and the 10.2% unemployment rate begins to decline. Focusing on the deficit too soon, he said, could risk a “double-dip recession.”

“If we move too abruptly in that direction and we’re not thinking about all the people out there who aren’t working and businesses who aren’t making money, then we’re going to be in a negative spiral that I think would be very destructive,” the president said.

Instead, Obama said, any additional spending and tax cuts intended to spur job growth should be balanced later with deficit-reduction efforts. “The most important thing we could do for our deficits is to have robust economic growth and have people working and businesses selling products and they’re paying taxes,” he said. “That’s a hole that we can fill.”

On the other hand, he also said, “It is not going to be possible for us to have a huge second stimulus, because frankly, we just don’t have the money.”  Apparently the government jobs initiatives that the article mentions will somehow not involve government money.  Nice free lunch if you can get it.

So what we have is a mixed bag, but I’d say the bag is more empty than full.  While it is a relief to hear the president say that he’s aware that sudden deficit-reduction measures could trigger a double-dip recession, he has yet to retract his earlier remark, i.e, this one to Fox News:

“It is important though to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession,” he said.

Yes, if in a spontaneous shower of sparks, holders of U.S. Treasury bonds suddenly decided that mid-1990s debt/GDP ratios (like we have now) were completely unacceptable and decided to dump their T-bonds, interest rates would go up and the economy would go south.  Except the economy has already gone south.  And the debt-doomsday scenario (which some people have been predicting for decades) just ain’t very plausible.  What is plausible, and seems to be the consensus forecast of economists, is that unemployment stays in double digits well into next year and even rises (despite the good news for November).  By ruling out any more stimulus spending to counter that unemployment, Obama seems to be ruling in a depression.

The problem with banker pay

21 September 2009

Krugman’s latest column is a gem.  The problem, he says, is not the level of financial-industry pay but its asymmetry — lavish rewards for short-term profits, no responsibility for long-term losses or systemic damage — and the perverse incentives that result.  Once again, it’s a case of “privatize the profits, socialize the losses.”

Judging from the quote from President Obama, it doesn’t look like this administration is going to do anything about it, though.  Sigh.

Health care: out of options?

16 August 2009

Economist Richard Thaler has a thought-provoking, argumentative piece in today’s NYT that takes a critical look at the current debate about a public option, or government-run option, for health insurance. The gist of Thaler’s column is that having a public option is unlikely to make much of a difference, at least if it is required to break even. Interesting stuff, especially coming from a sometime Obama adviser and top behavioral economist.

Democratic National Committee Chairman Howard Dean has a new book out about health care which says a public option is absolutely essential for serious reform, but evidently Obama and Health and Human Services Secretary Kathleen Sebelius have backtracked on that one or were not so keen on it in the first place. Thaler reminds us that the two key issues here are (1) covering the uninsured and (2) bringing down costs. Whether and how that can be done with health insurance cooperatives, the leading proposed alternative to a public option, will be two of the big questions in the weeks to come.

UPDATE, August 18: Rethinking the Economy has a pointed rebuke to Thaler.  So does Dean Baker.  Both suggest he dismisses the public option much too blithely.

Down for U is up

9 August 2009

For the first time since the recession officially began in December 2007, the unemployment rate fell last month, from 9.5% to 9.4%. Professional optimists had already been declaring the recession over, and this welcome news added fuel to their fire. How good is this news, anyway?

As always, the first place is to look is the original report from the Bureau of Labor Statistics (BLS).   First, a few important component numbers:

  • -155,000 = change in total employment from June to July
  • -267,000 = change in total unemployment “
  • +637,000 = change in total number of people not in the labor force “

The first two numbers look good: the decline in employment is much smaller than in previous months, and the ranks of the unemployed fell by more than a quarter million. But the last number is the largest and strongly suggests that hundreds of thousands of people have simply given up looking for work. Small wonder, when there are 5.0 million Americans who have been unemployed for six months or more.  (That’s more than the total number of unemployed just a few years ago, I believe.)


The next Federal Reserve Chairwoman

8 August 2009

. . . would of course be the first Federal Reserve Chairwoman.  But the word on the street is that San Francisco Federal Reserve Bank President Janet Yellen is said to be on the very short list of possible Fed Chair nominees, along with Larry Summers and a Ben Bernanke re-appointment.

Yellen is an intriguing possibility.  Hands-on experience as S.F. Fed president (including a seat right now on the Federal Open Market Committee, the Fed’s policy-making group), stints on the Fed Board of Governors and as chair of the Council of Economic Advisers during the Clinton Administration, longtime tenured economics professor at Berkeley. I’ve read a few of her papers on macro theory and policy, and she writes unusually well for an economist.  (Her review article on efficiency-wage theories of unemployment was probably the clearest thing I read in my entire first year of grad school.) And for what it’s worth, she’ll have good advice at the breakfast table: she’s married to economics Nobel laureate George Akerlof. (Democrats are big on the whole “two for the price of one” concept, no?)


Should Bernanke stay or should he go?

1 August 2009

His term ends in early 2010.  Obama’s decision on his fate will probably come much sooner. I tend to think he should be reappointed, not least because the apparent alternative is Larry Summers.  I’d like to see some other macro/policy economists get consideration — Brad DeLong, for example — but I’ve heard basically no other names mentioned besides Bernanke and Summers.

I think many if not most economists would give Bernanke about a D for his handling of the housing bubble and the expansion of 2005-2007 but at least a B for his handling of the financial crisis and macroeconomic fallout.   (It would be an A if not for the mixed signals in bailing out “little” Bear Stearns and not “big” Lehman Brothers.)  It seems like he’s learned that bubbles are not a benign phenomenon and that the Fed can act to stop them.

Last Sunday’s NYT had an excellent point-counterpoint on the question of Bernanke’s reappointment, a true heavyweight matchup between Nouriel (“Dr. Doom”) Roubini, arguing for, and Monetary History of the United States co-author (with Milton Friedman) Anna Jacobson Schwartz arguing against.  Both columns are well worth reading and re-reading over the next few months.

(This time you’ll have to find the Clash video yourself.  Sorry.)

“The food is terrible. And in such small portions.”

9 July 2009

“How dead is Keynes?” asked economist James Tobin in 1977, when Keynesian economics was starting to lose ground in economics departments to more theoretically elegant alternatives like new classical economics, and when the stagflation of the mid-1970s sapped many people’s confidence in Keynesian policy prescriptions. Tobin said Keynesian economics was still the best macroeconomic theory out there, and that standard Keynesian pump-priming remedies for recessions like deficit spending and monetary expansion still worked. True as those words might have been, however, Keynesian economics was not faring well in the court of public opinion, neither among academic economists nor among policymakers. Paul Volcker’s Federal Reserve invoked monetarism, not Keynesianism, in its draconian anti-inflationary policies of the early ’80s, and President Reagan, of course, sold his tax cuts as “supply side” economic policies designed to restore incentives to work and save.

It’s fair to say that nothing really did come along to supplant Keynesian economics on the policy front.  Even Reagan’s “supply side” tax cuts had most of their impact through traditional Keynesian channels — putting more money in people’s pockets for them to spend — than by influencing people to supply more labor or save more. The estimated impact on labor supply was meager. The personal saving rate actually fell (graph from Calculated Risk). And President Bush 43’s early 2001 tax rebates worked much the same way — though they weren’t enough to prevent the recession of that year, they did mitigate it. But it’s hard to imagine any Republican politician of the last 30 years announcing, as President Nixon once did, “I am now a Keynesian.” Even Democratic politicians seem less than eager to embrace Keynes.

Fast forward to President Obama’s and Congress’s $787 billion, two-year stimulus package. Republicans have been calling it a failure practically ever since the time the ink on the bill was dry, and the American public seems to be getting increasingly impatient with, if not skeptical of, the stimulus. Unemployment keeps creeping up, after all, most recently to 9.5%. Warnings about the country’s long-term debt problems, to which the stimulus makes some contribution (however overblown in some quarters), have become ever more dire. Andrew Leonard of Salon has a nice little update on the politics and economics of the stimulus, titled “Is the Obama economic rescue plan a failure?”

annie_hallLeonard, citing Barry Ritholtz of The Big Picture, says the real problem, contrary to Republican critics who say the stimulus is just worthless “spending” as if government purchases weren’t part of GDP (and as if tax cuts weren’t part of the stimulus, too), is not that the food is so bad but that the portions are too small:



5 July 2009

(Title semi-stolen from the Option ARMageddon site, whose views I disclaim.)

Although precise causes of the current crisis are still a matter of some debate, it’s generally agreed that adjustable-rate mortgages (ARMs) played no small part in the housing bubble and its subsequent bursting. ARMs, once very rare, because very common during the bubble, especially for subprime borrowers.  Dean Baker notes that in 2004-2006 ARMs made up 35% of all new mortgages, up from single digit levels previously.   And quite a few (though not necessarily most) mortgage defaults occurred after the “teaser rate” period of these mortgages ended and the “resets,” or higher, market-based interest rates became effective.  Some of the mortgage holders could not make the higher monthly payments and thus defaulted.  (Others could afford the higher monthly payments but didn’t deem them worth paying, especially if they were “underwater” in the sense of their mortgage debt being larger than the resale value of their house.)

Today’s NYT column by University of Chicago behavioral economist Richard Thaler, titled “Mortgages Made Simpler,” got me thinking about this. Thaler laments the often bewildering complexity of many mortgages today, but casually dismisses the notion of requiring all mortgages to be simple fixed-rate mortgages.  A little too casually, I’d say.  He just says that complexity is necessary for “innovation,” without providing evidence that mortgage innovation has been helpful. Fellow Chicago economist Austan Goolsbee (drawing on an NBER working paper by Kristopher Gerardi, Paul Willen & Harvey Rosen), provided a fair bit in a March 2007 NYT op-ed, arguing that mortgage innovation has made many more mortgages possible, especially for younger, poorer, and minority applicants. The argument now looks rather dated in view of the tidal wave of subprime foreclosures, as well as the increasing realization that tying oneself down with a mortgage is not a great idea for everyone (e.g., people with low and variable income, people who might want to relocate soon, people who live in cities where rent is cheap relative to house prices — which was a lot of cities during the housing bubble). It also raises the question, Why can’t banks just issue fixed-rate mortgages with higher interest rates to their riskier customers?

Thaler says they shouldn’t have to, but that they should be required to offer every customer a fixed-rate mortgages as an option, alongside whatever complex mortgages they want to offer them.*  I call it the Baskin-Robbins approach:  31 flavors, many of them quite unusual, but always including vanilla, chocolate, and strawberry for those folks who don’t get out much. The plain-vanilla-mortgage option is a good idea, but it raises another question:  Why weren’t banks doing that all along?

One big reason is surely that interest rates, including regular mortgage rates, were at historic lows in the first half of this decade, when the bubble began.  Banks and other lenders did not want to be locked into receiving such low interest rates for the next 15 or 30 years, so they pushed ARMs.  Fed Chairman Greenspan’s crazy-ass claim that ARMs made sense for American consumers likely fueled this fire.  Even so, ever since ARMs began in the 1970s and 1980s as a response to volatile interest rates, it’s been well known that ARMs transfer risk from the bank to the borrower.  Which makes them a dicey deal for all but the richest borrowers (who don’t actually need the loan but might want it to get the mortgage interest deduction on their taxes and can afford the risk of higher interest payments) and clairvoyants who know what interest rates are going to do in the next 15 or 30 years.  So why why why did so many people enter into ARMs?

My hunch is that ARMs were a form of predatory lending in many, perhaps most cases.  Banks seem to have actively pushed ARMs on many borrowers.  (A former student of mine told me that a bank actually pulled a bait and switch on her and her husband, substituting an ARM for a fixed-rate loan at the last minute. I suspect there are many other such cases.)  Others who would steer clear of the mortgage market because they know they can’t afford a particular fixed monthly payment might be suckered in with a low enough teaser rate and unctuous assurances that interest rates will still be low at the end of the teaser period or that they’ll have no trouble refinancing at a lower rate. This seems to me an area that needs more investigation.


Where credit ain’t due: The rating agencies

22 June 2009

For once, I agree wholeheartedly with a Wall Street Journal editorial.  (OK, I could do without the mixed sports metaphor in the title (“A Triple-A Punt.” How bush league).  The piece raps the Obama Administration’s new financial reform plan for giving the credit rating agencies a free pass.  Some key excerpts:

‘The government-anointed judges of risk at Standard & Poor’s, Moody’s and Fitch inflicted upon investors the AAA-rated subprime mortgage-backed security. They also inflicted upon the world’s nest eggs the even more opaque AAA-rated collateralized debt obligation (CDO). Without the ratings agency seal of approval — required by SEC, Federal Reserve and state regulation for many institutional investors — it would have been nearly impossible to market the structured financial products at the heart of the crisis. Yet Team Obama suggests only that regulators reduce the agencies’ favored role “wherever possible.”. . .


A fate worse than debt

21 June 2009

To paraphrase Benjamin Franklin, a nation that chooses deficit reduction over its economic health will soon have neither.

A story that I’d missed a couple days ago was the results of new polls from the NYT and the WSJ, allegedly finding Americans to be apoplectic about the federal budget deficit and down, down, down on the $787 spending stimulus.  The poll results are described by Catherine Rampell of Economix, Paul Krugman on his blog, and Andrew Leonard on Salon.  Considering the disastrous effects of budget cutting during the Great Depression (first in 1932 under Hoover, then in 1937 under FDR), the results does not seem to bode well for future recovery efforts.  “A nation of Herbert Hoovers” was Salon‘s headline.

It’s easy to read these poll results and conclude that Americans want the economy placed on a starvation diet.  But is that the correct conclusion?  Rampell takes a closer look at the NYT poll and isn’t so sure.  She points out another question, which asks what America’s biggest problem is, and notes that only 2% say the budget deficit.  That puts it well behind the economy (38%), jobs (19%), and “health care” (7%).   An accompanying chart of Gallup poll results since the 1930s show that not since the mid-1990s has the budget deficit been seen as the nation’s top problem by more than 5% of the public.