December 16, 2019

Economix Blog: Bruce Bartlett: The Pros and Cons of Obama’s Reorganization Plan


Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of the forthcoming book “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

On Friday, President Obama announced plans to consolidate a number of federal agencies related to business and trade into a single agency in order to improve efficiency and the international competitiveness of American companies.

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The agencies to be combined are the Department of Commerce, the Small Business Administration, the Export-Import Bank, the Overseas Private Investment Corporation, the Trade and Development Agency, and the Office of the Trade Representative. A 2010 report from the Congressional Research Service provides a good overview of the functions of these organizations.

This is not a new idea. In 1983, President Reagan asked Congress for a similar reorganization. According to a New York Times article, the purpose of the new agency was to create an American version of Japan’s powerful Ministry of International Trade and Industry.

At the time, Japan was widely viewed the same way China is today: as our greatest economic competitor and potentially a national security threat as well. Books like “MITI and the Japanese Miracle” (1982) by Chalmers Johnson were widely read. They glorified Japan’s “industrial policy” and praised its bureaucrats for vision and skill in using a combination of trade restrictions, targeted subsidies and regulatory policy to create an economic juggernaut.

While not seeking to emulate MITI’s heavy-handed command and control of private industry, American officials did see international trade, especially export prowess, as a key to economic prosperity and national power.

If it took selective trade restrictions on strategic goods like computer chips or subsidies to domestic manufacturers, then that’s what it took to maintain American supremacy in a world in which nuclear weapons counted for less and trade deficits were a sign of weakness.

Economists were less impressed by MITI than political scientists such as Dr. Johnson. The economists thought that Japan’s economic success lay mainly in its excellent tax and budget policies – which actually had their roots in the American occupation after World War II when Gen. Douglas MacArthur had the Columbia University economist Carl Shoup study the Japanese tax system and write a report whose recommendations were largely implemented.

Japan also had a highly competitive domestic market, a high savings rate and strong productivity growth.

These macroeconomic factors were far more important to Japan’s postwar economic success than anything MITI accomplished, the economists asserted.

In the late 1980s, cracks in MITI’s facade of invincibility were evident. By the early 1990s, high-profile MITI initiatives in advanced computers and nuclear power were widely viewed as failures.

Economists began increasingly to view MITI as a hindrance to growth. Books like “Divided Sun: MITI and the Breakdown of Japanese High-Tech Industrial Policy, 1975-1993” (1995) by Scott Callon reflected the growing consensus, as did the 1996 article by the economists Richard Beason and David Weinstein in the Review of Economics and Statistics.

By 2001, the Japanese government accepted the MITI critique and effectively abolished it, folding it into the Ministry of Economy, Trade and Industry. A 2002 study published by the Ministry of Finance concluded, “The Japanese model was not the source of Japanese competiveness, but the cause of our failure.”

Economists now discourage developing nations from adopting Japanese-style industrial policies.

Nevertheless, the Obama administration appears enamored with exactly the sort of industrial policy that Japan rejected. Last year, the president promised to double exports over five years, a goal most economists considered fanciful; has promoted “Buy America” requirements that have roiled trade relations with Canada, the United States’ largest trading partner; and often extols the special virtues of manufacturing companies, proposing more special tax breaks for them just last week.

One provision of Mr. Obama’s reorganization plan that is of particular concern to free traders is folding the Office of the Trade Representative into the Commerce Department.

I know from personal experience at the Treasury Department that in internal administration discussions of trade policy the various agencies are expected to play certain roles. Commerce always defends whatever business wants because that’s its job. The Council of Economic Advisers always takes the principled free trade position, and so on.

At the end, the Office of the Trade Representative is the “honest broker,” a role that would be impossible for it to play as part of the parochial Commerce Department. The Office of the Trade Representative’s ability to fulfill this function is now assured by its position as part of the executive office of the president. This allows it to take the broad view of what is in the best interest of the country as a whole and bargain with our trading partners in good faith.

To effectively abolish the Office of the Trade Representative is a dreadful idea. It is a small agency; there are no efficiency gains to be realized by making it another bureau within Commerce. And no matter what promises are made to guarantee its independence, placing the Office of the Trade Representative within Commerce will inevitably politicize the office.

It’s easier to defend the transfer of other agencies like S.B.A. into a revamped Commerce Department. There’s no evidence that S.B.A. does much of anything to promote small businesses. Its independent status has made it easier for those that benefit from its programs to essentially capture it and use it to channel funds to favored constituencies.

Conservative groups like the Heritage Foundation have for years called for S.B.A. to be abolished.

The Obama proposal may just be an election year ploy so that he can continue to say that he will create two million jobs through exports. It may also be designed to force Congressional Republicans to choose between their professed love of small businesses and the ineffectiveness and waste of the S.B.A.

But the Obama proposal may also indicate a commitment to discredited industrial policies and a subordination of trade policy to political interests.

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Economix Blog: Laura D’Andrea Tyson: Some Good Economic News, but Will It Last?


Laura D’Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and served as chairwoman of the Council of Economic Advisers under President Clinton.

In recent weeks, a series of encouraging reports on the United States economy, culminating in the December employment report, has provided tantalizing evidence that the recovery is strengthening. But it’s too early to celebrate.

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Both 2010 and 2011 started with good economic news and forecasts of a strong growth rebound but proved to be disappointing. Despite recent signs of strength, most forecasts for 2012 predict that growth will fall short of 2.5 percent, the rate required to absorb anticipated increments to the labor force, and that’s assuming Congress extends the payroll tax cut and unemployment benefits through the year.

Right now, it looks as though the United States economy will continue to recover at a moderate pace in 2012. But there are considerable downside risks that could cause growth to falter.

The central problem remains inadequate aggregate demand – both at home and around the world. The shortfall in demand is reflected in unutilized resources, notably unemployed and underemployed workers and idle plant and machinery.

The level of output in the United States is now higher than it was in the fourth quarter of 2007 but still far below the level that could be produced if existing resources were fully utilized. A recent Treasury estimate puts the gap between actual and potential output at more than 7 percent – or more than $1 trillion of goods and services.

The output gaps are even larger in many European economies, some of which never regained their 2007 output levels and have fallen into another recession that is now spreading throughout Europe.

In the United States, high levels of unemployment, weak wage gains and a steep decline in home values continue to constrain consumption, which accounts for about 70 percent of aggregate demand. Real disposable personal income actually decreased in the second and third quarters of 2011 and was essentially unchanged for the year.

The uptick in consumer spending in the last months of 2011 was offset by a worrying drop in the household saving rate, which fell to 3.5 percent, down from an average of 5.3 percent in 2010 and less than half its long-term historical average of 8 percent.

A sustained increase in household saving is necessary to make a significant and permanent dent in household debt, which still hovers at near-record levels relative to household incomes.

But instead of saving more, households borrowed more at the end of 2011, and consumer debt registered its largest increase in percentage terms since October 2001. This trend is neither healthy nor sustainable.

The December employment report showed promising signs of growth in labor incomes fueled by an increase in hours worked and an increase in hourly wages. With hours and wages both up, average weekly earnings rose at an annual rate of 3.1 percent in the last three months of 2011.

But with an unemployment rate of 8.5 percent, a labor-force participation rate of only 64 percent and 6.6 million fewer jobs than in December 2007, aggregate labor income has fallen to a historic low of 44 percent of national income. And labor income is the most important component of household income, which, in turn, is the major driver of consumer spending.

Labor’s share of national income tends to rise in recessions as companies hold on to workers, but the 2008 recession was different; companies shed workers at a terrifying pace and labor income plummeted. At the current pace of job creation, the labor share of income is not likely to recover its pre-recession level for a long time.

According to the Hamilton Project, the United States still has a “jobs gap” of 12.1 million jobs, and even with monthly job growth at the December 2011 rate of 200,000 jobs a month, the gap will not close until 2024.

Corporate profits are at an historic high as a share of national income, and business investment in plants and equipment has been strong, fueled in large measure by robust demand in emerging economies. But growth in these economies is also poised to slow in 2012 as recession in Europe and lower commodity prices eat into their exports.

In addition, emerging economies face tighter credit conditions, as European banks scale back their cross-border loans and build their capital, and as global investors reduce their risk exposure in response to the sovereign debt crisis gripping the euro zone.

With weaker consumption growth at home, the United States must rebalance future growth toward more exports. President Obama has set an achievable goal of doubling American exports over five years.

But recession in Europe and a slowdown in emerging economies will dampen American export markets in 2012. If concerns over the European debt crisis lead to a stronger dollar, as seems likely, that too will make the rebalancing and export goals more elusive.

And with a worldwide shortage of aggregate demand, there will be a strong temptation for countries to adopt zero-sum protectionist policies in 2012 to keep demand at home and to block access to their markets.

Barriers to market access are already a source of trade friction between the United States and China, which is the second-largest American export market. President Obama just announced an interagency task force to monitor “unfair” trading and business practices by China, and the United States is already investigating or pursuing market-access complaints against China on a variety of products in the World Trade Organization.

Given the large and persistent jobs deficit and the considerable risks to a sustained recovery in 2012, additional fiscal measures to increase aggregate demand are warranted – but Tea-Party obstructionism and election-year politics make them highly unlikely.

President Obama proposed a $450 billion package of such measures in October, but the package died in Congress despite compelling evidence that it would have supported about two million jobs over two years.

At this point, it is not even certain that the payroll tax cut and unemployment benefits will be extended through the rest of this year. What is certain is that we will hear a lot about job creation from Republican Congressional and presidential candidates but will see little action by a Congress mired in gridlock.

The danger in 2012 is not too much fiscal stimulus, but too much fiscal austerity. The same danger is stalking Europe and could lead to a sovereign default by a euro-zone country and the breakup of the euro.

Such an event, considered unthinkable just a few months ago but viewed as a real risk now, would plunge Europe and the United States into recession, with negative reverberations throughout the global economy.

For all of these reasons, 2012 is likely to be another difficult and disappointing year for the United States economy. The recent news has been promising but it’s too early to bring out the Champagne.

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Economix Blog: Nancy Folbre: Welfare Reform Revisited

U.S. Census Bureau, Economic Report of the PresidentDESCRIPTION

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst.

Fifteen years have passed since changes in welfare administration imposed tighter restrictions on poor families with children that were seeking cash assistance.

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Many Republicans now advocate similar restrictions and cuts in other forms of assistance to the poor on the grounds that they discourage work. Newt Gingrich asserts that janitorial employment for poor children would improve their work ethic.

Yet as the chart above shows, the poverty rate among children now closely follows the unemployment rate, because many parents depend more heavily on paid employment but are unable to find it. (From 1997 to 2010, the correlation between the two rates was 0.78, compared with 0.42 from 1964 to 1996.)

As its name suggests, the Temporary Assistance for Needy Families program, or TANF, established in 1996, was devised on the presumption that mothers who were willing to work would not need more than temporary help. It was never intended to function effectively under conditions of high unemployment.

Indeed, caseloads and outlays in the program have increased much less than those in other forms of public assistance, like food stamps, which have less stringent work requirements. A recent Urban Institute report shows that TANF has proved largely unresponsive to the recession.

The program no longer provides much of a safety net at all. The Center on Budget and Policy Priorities notes that only 27 percent of families in poverty received any cash assistance from TANF in 2009.

Its limited coverage of the poor does not seem to trouble fans of TANF. In a video marking welfare reform’s 15th anniversary, Ron Haskins of the Brookings Institution fails to mention that the child poverty rate now exceeds that of 1996. His only comment on the slow growth of assistance in a period of intense need is, “It makes you wonder.”

Indeed, it makes one wonder whether the real purpose of reform was, as claimed, to help poor families, or simply to minimize spending on them. TANF benefits, adjusted for inflation, are now worth much less than they were in 1996 in most states. They are not sufficient in any state to raise a family’s income above 50 percent of the poverty line.

The much-acclaimed commitment to help poor mothers make a transition to paid employment has also weakened. Arizona and South Carolina have made particularly sharp cuts in child-care subsidies.

Census reports based on the Survey of Income and Program Participation indicate that poor families that pay for child care spent about 40 percent of their income for that purpose in 2010, up from 29 percent in 2005. Expenditures for other families purchasing child care in 2010 was 7 percent.

The combination of child care and other work-related costs, including transportation, further reduce the net benefits of public assistance. Many families may conclude that these benefits are not worth the time, effort and humiliation required to get them. This harsh treatment doesn’t help them find a job.

Welfare reform is in dire need of … reform. A bill recently introduced by Representative Gwen Moore, Democrat of Wisconsin, the Rewriting to Improve and Secure an Exit Out of Poverty Act, would provide permanent funding, modify work requirements so that education and training would qualify, and guarantee child care for TANF work-eligible recipients.

A more likely scenario for the near future is further cuts in TANF spending, driven by fiscal austerity measures that will contribute to persistent unemployment. Pressure to allow extended unemployment benefits to expire puts many children at immediate risk.

A work ethic doesn’t help much when there is no work to be had.

This post has been revised to reflect the following correction:

Correction: December 12, 2011

An earlier version of this post misstated the affiliation of Ron Haskins. He is with the Brookings Institution, not the Urban Institute.

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Economix Blog: What’s Behind Labor Force Dropouts

On Tuesday I wrote about how the entirety of the net decline in the labor force last month could be explained by women dropping out. I also puzzled over why a majority of women who left the labor force happened to have been employed before they opted out, because the stereotypical labor force dropout is usually an unemployed worker who got discouraged and gave up looking for a new job.

Since then I’ve dug into the history of labor force dropouts and what workers usually do right before they leave the labor force. As it turns out, November’s breakdown was not terribly unusual; a majority of women who leave the labor force each month are usually coming directly from a job (perhaps because they’re retiring, going on maternity leave or are laid off and not seeking re-employment):

DESCRIPTIONSource: Bureau of Labor Statistics, job flows data Note: Numbers in chart refer to gross number of job-leavers, and so do not subtract out the number of workers joining the labor force. Data are seasonally adjusted.

Note, however, that the number of women who leave the labor force directly from a job has actually fallen in the last few years, while the number of women leaving the labor force after having been recently unemployed has risen. This supports the discouraged-worker explanation of recent trends.

The same is true for men. As with female dropouts, typically most of the men who leave the labor force each month have been leaving directly after holding a job:

DESCRIPTIONSource: Bureau of Labor Statistics, job flows data Numbers in chart refer to gross number of job-leavers, and so do not subtract out the number of workers joining the labor force. Data are seasonally adjusted.

But while the number of men dropping out directly after holding a job (e.g., retirees) has stayed relatively flat in recent years, the number of men dropping out of the labor force after a spell of unemployment has risen.

Part of last month’s bizarre dropout pattern has been solved, then: In any given month of the last decade most of the people dropping out of the labor force have been leaving jobs, but the reason the total number of dropouts has risen more recently is that more unemployed workers have given up applying for jobs. Again, it’s the discouraged-worker narrative.

That still leaves some gender dynamics to be explained, though.

During the recession, which technically lasted from December 2007 to June 2009, some men dropped out of the labor force, and many times more women joined it. Many of these new female workers were probably stepping up as breadwinners when their husbands were laid off.

During the recovery, which extends from June 2009 to the present, both men and women have dropped out of the labor force, but many more women have dropped out than men.

Probably female dropouts have exceeded male dropouts lately because state and local government layoffs have disproportionately hit women. And as those women are laid off, they may become too discouraged by the sorry job market to even apply for new positions.

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Economix Blog: Bruce Bartlett: Raising Taxes on the Rich: Not Whether, but How


Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of the forthcoming book “The Benefit and the Burden.”

Last week, the Senate rejected proposals by both Democrats and Republicans to pay for an extension of the 2 percent temporary payroll tax cut enacted a year ago. The Democratic plan to finance it with a 3.25 percent surtax on millionaires garnered significantly more votes than the Republican plan to cut the number of federal jobs and freeze the pay of federal workers.

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This time last year Republicans were insisting that the Bush tax cuts be made permanent without paying for a penny of the cost, even though there is no evidence that they stimulated the economy.

Saying that they are now concerned about the impact of the payroll tax cut on the deficit and its lack of stimulative effect makes Republicans sound a lot like Captain Renault in “Casablanca,” when he said he was shocked to discover gambling going on as he was handed his winnings.

Republicans like to pretend that cutting spending is economically costless, even stimulative, whereas raising taxes in any way whatsoever is so economically debilitating that it dare not be contemplated. This view is complete nonsense.

Careful studies by the Congressional Budget Office and others show that certain spending programs are highly stimulative, whereas tax cuts provide very little bang for the buck.

Congressional Budget Office

Keep in mind that these results are symmetrical. A policy with a high multiplier, such as government purchases, will reduce the gross domestic product by exactly the same amount if it involves spending cuts. A tax cut with a low multiplier will have an equally small negative economic effect if it is instead done as a tax increase.

This would suggest that one of the worst ways to cut spending, from a macroeconomic point of view, would be to do it the way Republicans proposed last week: by cutting government employment. Judging by the table above, cutting taxes for lower- and middle-income people and paying for it with higher taxes for higher-income people, as Democrats have proposed, is unambiguously stimulative.

In any case, the Republican position is politically weak. Polls consistently show that a large majority of Americans favor higher taxes on the rich. For example, the New York Times/CBS News polls in September and October found that about two-thirds of Americans would raise taxes on households earning $1 million or more to reduce the deficit; only 30 percent were opposed.

Growing numbers of millionaires and billionaires have gone on record as favoring higher taxes on the rich, because they can afford them and think they’re necessary to deal with our nation’s fiscal problem, which is largely due to historically low revenues.

These include Warren Buffett, Carlos Slim, Mark Cuban and Nick Hanauer, among others. The group Patriotic Millionaires for Fiscal Strength has been lobbying Congress to raise taxes on people like themselves. A similar movement is under way in Europe as well.

It is no longer possible to deny that there has been a sharp rise in the income and wealth of the ultra-rich while everyone else’s income has stagnated. Authoritative recent studies by the Congressional Budget Office and by Anthony Atkinson, Thomas Piketty and Emmanuel Saez prove that fact beyond question.

The point is not to punish the rich for being rich — Republicans routinely scream “class warfare” whenever anyone suggests higher taxes on the rich — but to raise revenue. If the rich don’t pay more, everyone else will have to.

Recognizing the intellectual and political weakness of their position, Republicans have responded that there is nothing to stop rich people from sending checks to the Treasury Department to reduce the debt. About $3 million is annually donated to the government for this purpose. On Oct. 12, Senator John Thune, Republican of South Dakota, introduced legislation that would add a line on tax returns to make voluntary contributions to the Treasury. It was enthusiastically endorsed by the anti-tax activist Grover Norquist.

Reducing the deficit through voluntary contributions is not a serious idea. It would be a drop in the bucket, such contributions are not sustainable, and it would be unwise to have the government dependent on them because inevitably they would come with strings attached.

Republicans often say that tax evasion and avoidance by the wealthy would cause revenues to fall, rather than rise, if their taxes are raised. But according to the Tax Policy Center, rates higher than the current top rate of 35 percent accounted for 29 percent of individual income tax revenue as recently as 1986, during the Reagan administration.

Recent studies by Peter Diamond and Emmanuel Saez and by A.B. Atkinson and Andrew Leigh find that increasing the top income tax rate would raise net additional revenue at least until it reached 63 percent and probably much higher.

Nor is it correct that low taxes on the rich are essential for economic growth. Recent studies by Dan Andrews, Christopher Jencks and Andrew Leigh and by Thomas Piketty, Emmanuel Saez and Stefanie Stantcheva show that while tax cuts for the rich have raised their share of aggregate income, they have not raised the rate of economic growth.

There are legitimate questions about whether the temporary payroll tax cut stimulated employment or if its expiration will reduce growth, about whether a surtax on millionaires is the best way to pay for it and how much additional revenue can reasonably be expected.

But the idea that the rich cannot or should not pay more should be dismissed out of hand. They can and must pay more; the only question is how best to do it.

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Economix Blog: Bruce Bartlett: Gingrich and the Destruction of Congressional Expertise


Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of the coming book “The Benefit and the Burden.”

On Nov. 21, Newt Gingrich, who is leading the race for the Republican presidential nomination in some polls, attacked the Congressional Budget Office. In a speech in New Hampshire, Mr. Gingrich said the C.B.O. “is a reactionary socialist institution which does not believe in economic growth, does not believe in innovation and does not believe in data that it has not internally generated.”

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Mr. Gingrich’s charge is complete nonsense. The former C.B.O. director Douglas Holtz-Eakin, now a Republican policy adviser, labeled the description “ludicrous.” Most policy analysts from both sides of the aisle would say the C.B.O. is one of the very few analytical institutions left in government that one can trust implicitly.

It’s precisely its deep reservoir of respect that makes Mr. Gingrich hate the C.B.O., because it has long stood in the way of allowing Republicans to make up numbers to justify whatever they feel like doing.

For example, Republicans frequently assert that tax cuts, especially for the rich, generate so much economic growth that they lose no revenue. This theory has been thoroughly debunked, most recently by the tax cuts of the George W. Bush administration, which, according to C.B.O., reduced revenues by $3 trillion. Nevertheless, conservative groups like the Heritage Foundation (where I worked in the 1980s) still peddle the snake oil that the Bush tax cuts paid for themselves.

Mr. Gingrich has long had special ire for the C.B.O. because it has consistently thrown cold water on his pet health schemes, from which he enriched himself after being forced out as speaker of the House in 1998. In 2005, he wrote an op-ed article in The Washington Times berating the C.B.O., then under the direction of Mr. Holtz-Eakin, saying it had improperly scored some Gingrich-backed proposals. At a debate on Nov. 5, Mr. Gingrich said, “If you are serious about real health reform, you must abolish the Congressional Budget Office because it lies.”

This is typical of Mr. Gingrich’s modus operandi. He has always considered himself to be the smartest guy in the room and long chaffed at being corrected by experts when he cooked up some new plan, over which he may have expended 30 seconds of thought, to completely upend and remake the health, tax or education systems.

Because Mr. Gingrich does know more than most politicians, the main obstacles to his grandiose schemes have always been Congress’s professional staff members, many among the leading authorities anywhere in their areas of expertise.

To remove this obstacle, Mr. Gingrich did everything in his power to dismantle Congressional institutions that employed people with the knowledge, training and experience to know a harebrained idea when they saw it. When he became speaker in 1995, Mr. Gingrich moved quickly to slash the budgets and staff of the House committees, which employed thousands of professionals with long and deep institutional memories.

Of course, when party control in Congress changes, many of those employed by the previous majority party expect to lose their jobs. But the Democratic committee staff members that Mr. Gingrich fired in 1995 weren’t replaced by Republicans. In essence, the positions were simply abolished, permanently crippling the committee system and depriving members of Congress of competent and informed advice on issues that they are responsible for overseeing.

Mr. Gingrich sold his committee-neutering as a money-saving measure. How could Congress cut the budgets of federal agencies if it wasn’t willing to cut its own budget, he asked. In the heady days of the first Republican House since 1954, Mr. Gingrich pretty much got whatever he asked for.

In addition to decimating committee budgets, he also abolished two really useful Congressional agencies, the Office of Technology Assessment and the Advisory Commission on Intergovernmental Relations. The former brought high-level scientific expertise to bear on legislative issues and the latter gave state and local governments an important voice in Congressional deliberations.

The amount of money involved was trivial even in terms of Congress’s budget. Mr. Gingrich’s real purpose was to centralize power in the speaker’s office, which was staffed with young right-wing zealots who followed his orders without question. Lacking the staff resources to challenge Mr. Gingrich, the committees could offer no resistance and his agenda was simply rubber-stamped.

Unfortunately, Gingrichism lives on. Republican Congressional leaders continually criticize every Congressional agency that stands in their way. In addition to the C.B.O., one often hears attacks on the Congressional Research Service, the Joint Committee on Taxation and the Government Accountability Office.

Lately, the G.A.O. has been the prime target. Appropriators are cutting its budget by $42 million, forcing furloughs and cutbacks in investigations that identify billions of dollars in savings yearly. So misguided is this effort that Senator Tom Coburn, Republican of Oklahoma and one of the most conservative members of Congress, came to the agency’s defense.

In a report issued by his office on Nov. 16, Senator Coburn pointed out that the G.A.O.’s budget has been cut by 13 percent in real terms since 1992 and its work force reduced by 40 percent — more than 2,000 people. By contrast, Congress’s budget has risen at twice the rate of inflation and nearly doubled to $2.3 billion from $1.2 billion over the last decade.

Mr. Coburn’s report is replete with examples of budget savings recommended by G.A.O. He estimated that cutting its budget would add $3.3 billion a year to government waste, fraud, abuse and inefficiency that will go unidentified.

For good measure, Mr. Coburn included a chapter in his report on how Congressional committees have fallen down in their responsibility to exercise oversight. The number of hearings has fallen sharply in both the House and Senate. Since the beginning of the Gingrich era, they have fallen almost in half, with the biggest decline coming in the 104th Congress (1995-96), his first as speaker.

Brookings InstitutionAfter Newt Gingrich became speaker of the House in the 104th Congress, the number of hearings held there fell far more sharply than in the Senate.

In short, Mr. Gingrich’s unprovoked attack on the C.B.O. is part of a pattern. He disdains the expertise of anyone other than himself and is willing to undercut any institution that stands in his way. Unfortunately, we are still living with the consequences of his foolish actions as speaker.

We could really use the Office of Technology Assessment at a time when Congress desperately needs scientific expertise on a variety of issues in involving health, energy, climate change, homeland security and many others. And given the enormous stress suffered by state and local governments as they are forced by Washington to do more with less, an organization like the Advisory Commission on Intergovernmental Relations would be invaluable.

It is essential that Congress not cripple what is left of its in-house expertise. Gutting the G.A.O. and abolishing the C.B.O. would be acts of nihilism. Any politician recommending such things is unfit for office.

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Economix Blog: Nancy Folbre: Occupy Economics


Nancy Folbre is an economics professor at the University of Massachusetts, Amherst.

The Occupy Wall Street movement, displaced from some key geographic locations, now enjoys a small but significant encampment among economists.

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Concerns about the impact of growing economic inequality fit neatly into a larger critique of mainstream economic theory and its deep faith in the efficiency of markets.

Many unbelievers (including me) insist that we inhabit a global capitalist system rather than an efficient market. Willingness to use the C-word (capitalism) often signals concerns about a concentration of economic power that unfairly limits individual choices, undermines political democracy, generates financial and ecological crises and limits access to alternative economic ideas.

We can’t address these concerns effectively without a wider discussion of them.

Seventy Harvard students dramatized dissatisfaction with the economics profession when they walked out of Prof. Gregory Mankiw’s introductory economics class on Nov. 2, protesting, in an open letter to their instructor, that the course “espouses a specific — and limited — view of economics that we believe perpetuates problematic and inefficient systems of economic inequality in our society today.” (Professor Mankiw, a periodic contributor to the Economic View column in the Sunday Business section of The New York Times, discussed the protest in an interview with National Public Radio.)

The event prompted online discussion of conservative bias in introductory economics textbooks, including an anti-Mankiw blog set up by Daniel MacDonald, a graduate student in my own department. Prof. John Davis of the University of Amsterdam and Marquette University posted a video arguing that economic researchers, like fish, engage in herd behavior in order to minimize individual risk.

Similar themes were explored at the recent meetings of the International Confederation of Associations for Pluralism in Economics, a forum for a remarkable variety of dissenting views deploying the C-word. I participated in a session discussing blogs maintained by David Ruccio of Notre Dame, Perry Mehrling of Barnard College, Tiago Mata of Duke University and Tim Wise of Tufts University, as well as an independent blogger, Peter Radford.

At the final plenary session of the conference, titled “Ethics and Economics,” participants discussed an “Economists’ Statement” in support of Occupy Wall Street that has been posted online at Econ4, a new site aimed at popular economics education. As of Nov. 27, the statement had gotten more than 220 signatures.

Populist anger — whether from the left or from the right — typically challenges conventional wisdom. In a startling opinion piece recently published in The Wall Street Journal, Sarah Palin urges the Occupy protesters to realize that Washington politicians have been “Occupying Wall Street” long before anyone pitched a tent in Zuccotti Park.

Emphasizing government corruption, she declared that the Tea Party had always been opposed to “crony capitalism.” But is there a better kind of capitalism? If so, how can we move toward it? If not, what can we build in its place?

These are questions that both the Tea Party and Occupy Wall Street need to answer.

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Economix Blog: Simon Johnson: Measuring Financial Contagion


Simon Johnson, former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

In an interview with The New York Times in July, Sheila Bair, the departing chairwoman of the Federal Deposit Insurance Corporation, said of her experience over the last few years: “They would say, ‘You have to do this, or the system will go down.’ If I heard that once, I heard it a thousand times.”

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No responsible official wants the entire financial system to crash; this would be incredibly disruptive to all Americans and potentially lead to a worldwide depression. Knowing this, many people who want bailouts on generous terms use “contagion fear” as part of their sales pitch.

How are we to know if a particular event, like deciding not to bail out a big bank, will lead to contagion that spreads to other financial markets? Contagion is the key issue.

In Europe, the failure of just one large bank can do macroeconomic damage; governments there have let individual banks build balance sheets that are bigger than the country’s gross domestic product. In the United States, we too should fear megabanks; the big six bank-holding companies have become much bigger in recent years and now have combined assets worth more than 65 percent of G.D.P.

But even the biggest (currently JPMorgan Chase) has a balance sheet of just under $2.3 trillion, while our G.D.P. is around $14 trillion. (Each of the top 10 global banks is around the $2 trillion mark, according to the latest available data from The Banker, but they are based in countries of very different sizes. Be careful in using these numbers as accounting conventions for banks may vary – in particular, derivative exposures are arguably understated in United States banks’ published accounts relative to European banks.)

If JPMorgan Chase were in trouble – a completely hypothetical scenario – and its creditors faced, for example, 40 percent losses, this would be very bad news (40 percent is an arbitrary number often used as a baseline by creditors thinking about potentially distressed situations; it looks as though creditors to Lehman Brothers will, on average, end up losing a good deal more of their exposure).

JPMorgan Chase is mostly financed with debt because, alone among modern executives, bankers do not believe in much equity financing for their businesses. So the financial losses to debt holders could be on the order of $1 trillion.

That would be enough to bring on a serious recession. But it might not, by itself, bring the world economy to its knees.

The case for arguing that JPMorgan Chase is too big to fail rests on the notion that its failure or the prospect of serious losses at that one bank would create fear across a broad range of other assets. Asset price declines could then push other banks into insolvency; we saw some of this in the fall of 2008. There is a potential downward spiral.

One response to this is: Let ’em fail. That’s tempting, particularly if you think that one set of traumatic failures would teach everyone that, next time, there will be no bailouts.

Experience from the 19th century in America is not particularly encouraging in this regard. There were no bailout mechanisms – the Federal Reserve was not invented until 1913 and the federal government did not have the resources to save the financial system, even if it wanted to.

Nevertheless, the United States experienced serious banking panics at regular intervals throughout the century, sometimes due to disruptions beyond the control of bankers but often due to the overextension of credit. Banks in those days had to hold “specie” (gold and silver coin), which was generally payable on demand when people wanted to redeem their bank notes (which were issued by private banks, not the government, before the Civil War).

“Suspensions” of the convertibility for bank notes into specie were disappointingly frequent. During the period 1815-30, according to Davis Rich Dewey’s “Financial History of the United States” (see page 155), “Failures of banks were common and bill holders and depositors suffered much.” There was a major panic in 1819, and another in 1837, perhaps brought on by the policies of President Andrew Jackson. There was a panic in 1857 in the run-up to the Civil War, and also in 1860 and 1861.

By some definitions, there were also crises in 1847 and 1866. After the Civil War, “banking disturbances occurred in 1873, 1884, 1890, 1893, and 1907,” according to Elmus Wicker in “Banking Panics of the Gilded Age” (see page xiii).

Much of Charles Kindleberger’s classic financial history, “Manias, Panics and Crashes” – the title tells you everything – covers the period before central banks operated in their modern form. Various schemes at the state level – and later at the federal level – attempted to control or constrain risk-taking by individual banks, but the unfortunate reality is that the financial lifeblood of American commerce has always been prone to lending too much and incurring heavy losses.

People see one bank failure and fear the consequences – hence, panics and runs on the bank. Anyone who thinks that we solved this problem with forward-thinking central banks or fiscal interventions has not been paying close attention – either to the United States or to Europe – over the last three years.

We really need transparency on the exact exposures of banks. To whom have they lent and on what basis? Just telling supervisors does not help us at all, because sharing information only behind closed doors is just another potential mechanism for regulatory capture.

For large financial institutions – those with more than $100 billion in total assets – everything should be out in the open. If you want to operate in relative secrecy, stay small. The costs of today’s opaqueness are huge, creating the basis for the plea, “Save us or you’ll lose the world.”

And if the published information is too complex for outsiders to understand, big banks must be forced to simplify their operations until they become sufficiently transparent. Potential contagion risks must be measurable and apparent to the marketplace, including to independent analysts who have access only to public information.

Needless to say, if any institution poses major contagion risks, as measured on this basis, it should be forced to become safer.

Richard W. Fisher, president of the Federal Reserve Bank of Dallas, spoke recently about what he called the “pernicious problem” of too-big-to-fail financial institutions, “in a culture held hostage by concerns for ‘contagion,’ ‘systemic risk’ and ‘unique solutions’”:

“Invariably, these behemoth institutions use their size, scale and complexity to cow politicians and regulators into believing the world will be placed in peril should they attempt to discipline them. They argue that disciplining them will be a trip wire for financial contagion, market disruption and economic disorder. Yet failing to discipline them only delays the inevitable – a bursting of a bubble and a financial panic that places the economy in peril.”

You can only discipline a big troubled bank if you understand and can measure the consequences of its failure.

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Economix Blog: Bruce Bartlett: Balancing the Budget, for Real


Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of the coming book “The Benefit and the Burden.”

Representative David Dreier, chairman of the House Rules Committee, was one of four Republicans to defy the House leadership and vote against a balanced budget amendment.Kevin Wolf/Associated PressRepresentative David Dreier, chairman of the House Rules Committee, was one of four Republicans to defy the House leadership and vote against a balanced budget amendment.

On Friday, the House of Representatives voted on a balanced budget amendment to the Constitution. At the last minute, the leadership substituted a straightforward version, H.J. Res. 2, in lieu of the spending limitation amendment reported by the House Judiciary Committee that I criticized last week.

Today’s Economist

Perspectives from expert contributors.

While I’d like to think that Republican leaders realized the folly of writing an inexact concept like gross domestic product into the Constitution, more likely the reason was that they hoped to attract the votes of “blue dog” Democrats by offering a less radical proposal.

In the end, the Republican ploy didn’t work, and the balanced budget amendment was unable to attract the necessary two-thirds vote. Only 25 Democrats joined almost every Republican in supporting the amendment.

Interestingly, four Republicans opposed the amendment, and one of them was Representative David Dreier of California, chairman of the powerful House Rules Committee. In this position, his job is to follow the dictates of the House leadership and ensure that the rules for debate are as favorable as possible to its wishes. In other words, Mr. Dreier is not a Republican dissident, but someone whose position requires that he be among the most loyal and dependable supporters of whatever his party favors.

For decades, virtually all Republicans have supported a balanced budget amendment. Indeed, Mr. Dreier himself long took that position and previously voted for a balanced budget amendment to the Constitution. So, it is remarkable that Mr. Dreier was among the “no” votes on the measure.

But on Thursday, Mr. Dreier told the House that he had changed his mind. Back in 1995, Mr. Dreier said he thought the budget would never be balanced without a constitutional requirement. But two years later, the budget was, in fact, balanced. As he explained:

I said at the outset that I believed when I cast that vote in January of 1995 in favor of a balanced budget amendment to the Constitution that it was the only way that we would be able to achieve a balanced budget. I was wrong. Two short years later, we balanced the federal budget, and that went on for several years. It went on until 2001.

Republicans seldom talk about the balanced budgets of fiscal years 1998 through 2001, because they happened on Bill Clinton’s watch. They either pretend they didn’t happen, imply they occurred through some sort of “immaculate conception” unconnected to Clinton’s policies or try to claim that the 1997 cut in the capital gains tax led to an outpouring of revenue that balanced the budget.

The truth is that the federal surpluses resulted from specific legislation enacted in 1990 and 1993 that virtually every Republican opposed. In particular, taxes were increased and tight budget controls were put in place that prevented taxes from being cut or spending increased unless offset by tax increases or spending cuts. These budget controls are commonly referred to as “paygo,” for pay-as-you-go.

What happened can be seen in Congressional Budget Office data. When the 1990 budget deal took effect in fiscal year 1991, federal spending was 22.3 percent of G.D.P. and revenue was 17.8 percent. The deficit was 4.5 percent of G.D.P. Revenue rose steadily to 19.9 percent of G.D.P. by fiscal year 1998 and spending fell to 19.1 percent, yielding a budget surplus of almost 1 percent of G.D.P.

Revenue continued to rise to 20.6 percent of G.D.P. in fiscal year 2000, and spending fell to 18.2 percent. The surplus reached 2.4 percent of G.D.P.

These results run 100 percent contrary to Republican dogma, which is that tax increases, especially on the rich, do not yield additional revenue because people will cease working and investing, and the economy will stagnate. Yet the hallmarks of the 1990 and 1993 budget deals were an increase in the top income tax rate; first to 31 percent from 28 percent, and then to 39.6 percent. Revenue clearly rose, as did the economy.

The hallmarks of the George W. Bush administration were large tax cuts almost annually. These were supposed to stimulate growth and lead to lower spending by “starving the beast.” Revenue fell more than 2 percent of G.D.P. by fiscal year 2007, which ended just before the recession began in December 2007. Spending rose to 19.6 percent of G.D.P. because of two unfunded wars, unchecked spending on earmarks by Republicans in Congress and creation of a new entitlement program, Medicare Part D. We went from a surplus of 2.4 percent of G.D.P. to a deficit of 1.2 percent.

In 2002, Republicans got rid of paygo so that they could cut taxes and increase spending without constraint.

Thus we have a perfect test of two economic theories: one that says raising taxes and imposing binding constraints on spending will balance the budget, which was successful, and another that says cutting taxes will starve the beast, which failed spectacularly.

And just for good measure, the former set of policies were far more stimulative to economic growth than the latter, as shown in the following table from the Congressional Research Service.

Congressional Research Service

In short, Representative Dreier was quite right to say that amending the Constitution was unnecessary to balance the budget; it required only the will to embrace tax increases. But this is anathema to Republicans, who preferred to allow the Joint Select Committee on Deficit Reduction to fail than to accede to any net increase in taxes.

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Economix Blog: Rick Perry’s Intrade Flash Crash



Dollars to doughnuts.

During last night’s Republican presidential debate, Gov. Rick Perry of Texas made an “oops” when he forgot the third of three federal departments he wanted to eliminate. As Nate Silver’s blog post noted, Mr. Perry’s odds of winning the Republican nomination halved within seconds on Intrade, an online market where people bet on the odds of various events.

The red points in the Intrade chart below show that bettors believed his chance of winning the Republican nomination fell from nearly 9 percent to a low of 3 percent:


It’s amazing how quickly that happened; clearly markets process information efficiently when they have it.

It also reminded me (and others on the Twitterverse last night) of another market event from last year…

DESCRIPTIONReport of the Staffs of the CFTC and SEC to the Joint Advisory Committee on Emerging Regulatory Issues.

…except without the quick snap back up.

For a more in-depth take on what Wednesday night’s gaffe could mean for Mr. Perry’s presidential chances, check out Nate Silver’s blog post.

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