November 21, 2017

Economix Blog: Inflationphobia, Part II

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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.”

Last week, I discussed the phenomenon of inflationphobia – an irrational fear of inflation that is constraining the Federal Reserve and holding back the economy. The roots of inflationphobia go back at least to the Great Depression, when inflationphobes made the same arguments year after year despite continuing deflation – a falling price level.

Today’s Economist

Perspectives from expert contributors.

The defining characteristic of the Great Depression was deflation, which began in 1927, two years before the stock market crash. The following data from the Bureau of Labor Statistics show the average change in the Consumer Price Index.

Bureau of Labor Statistics

Between 1926 and 1933, the price level fell about 25 percent. This meant that any obligation fixed in dollars increased 25 percent in real terms. This was particularly important in two areas – wages and debts. If a worker managed to keep the same monetary wage between 1926 and 1933, she actually got an increase in pay of 25 percent in terms of what she could buy because the prices of things she consumed fell 25 percent.

Similarly, if one had a debt in 1926, the real burden of that debt and the debt service increased 25 percent between 1926 and 1933. This was especially important for farmers because the prices of agricultural produce fell very rapidly and the burden of their debts increased just as rapidly.

The great economist Irving Fisher thought that the increasing real burden of debt resulting from deflation was the core cause of the Great Depression.

Despite the falling price level year after year, there were inflationphobes even then, who saw signs of inflation, inevitably leading to German-style hyperinflation, everywhere. The leading inflationphobe was a writer named Henry Hazlitt. Although not trained as an economist, he had a strong interest in the subject and the rare skill to write about it clearly.

H.L. Mencken once said of Mr. Hazlitt that he was “one of the few economists in human history who could really write.” From 1934 to 1946, he was an editorial writer for The New York Times, writing a vast number of editorials and signed articles, mainly on economic issues.

In 1932, Mr. Hazlitt was still writing for The Nation magazine, where he was a strenuous supporter of the gold standard and a fierce critic of John Maynard Keynes, whom he viewed as nothing but a crude inflationist. Mr. Hazlitt thought the cure for deflation was for all workers to slash their wages, which would lower business costs and restore growth. Debtors would simply repudiate their debts and renegotiate them.

No doubt if workers had been willing to slash their wages 25 percent, and banks and bondholders had been willing to slash their interest and principal 25 percent, this would have gone a long way toward alleviating the negative economic effects of deflation. But absent a law requiring it – which the libertarian Mr. Hazlitt would have opposed – this process could only take place slowly, painfully and unevenly.

By contrast, simply reflating the price level back to its 1926 level was relatively easy. The Federal Reserve just had to increase the money supply sufficiently. By the 1960s, even the arch-conservative Milton Friedman said this was what the Fed should have done.

But in the early 1930s, the idea of reflation was controversial, mainly because bondholders enjoyed getting back 25 percent more than they had lent in real terms. Why should they give that up? That is why one of the strongest supporters of the gold standard and opponents of reflation was Benjamin M. Anderson Jr., chief economist of the Chase National Bank.

Irving Fisher and other economists argued in favor of reflation, even being joined by Winston Churchill, who had lately been chancellor of the Exchequer in England. But the most outspoken advocate of reflation was Mr. Keynes, who was quoted in The Wall Street Journal on March 2, 1932, as saying, “It is unthinkable that we can step straight from the financial crisis to relief of the industrial crisis without the cheap money phase intervening.”

In 1933, Franklin D. Roosevelt became president and tried to stanch the deflation by suspending the gold standard and proposing legislation that would fix prices and prevent them from falling further. But these policies were ineffective because they did not get at the root of the problem, which was a fall in the money supply.

This resulted because there was no deposit insurance, so bank deposits literally disappeared when banks failed, and because the Fed refused to offset the resulting fall in the money supply through open-market monetary operations.

Mr. Fisher and some members of Congress kept pointing to the Fed, but to no avail. Responding to Republican attacks on reflation, Mr. Fisher said, there is “absolutely no escape from our present imminent danger except through reflation.”

They were opposed by Mr. Anderson and the New York banker James P. Warburg, who demanded restoration of the gold standard. In 1934, Mr. Warburg published a book detailing his criticism of reflation that was favorably reviewed in The Times by Mr. Hazlitt.

In a June 10, 1934, article for The Times, Keynes explained that monetary stimulus by itself was insufficient to stop deflation and that the
price-fixing instituted by the National Industrial Recovery Act was counterproductive, if well intentioned. He said government spending was essential to get money moving throughout the economy and recommended an increase of $400 million per month – close to $100 billion per month in today’s economy.

In an editorial probably written by Mr. Hazlitt, The Times rejected any resort to inflation no matter how much prices fell. “The one thing your inflationist cannot have too much of is inflation,” the editorial said. “Give him one dose and he becomes much more emphatic in his demands for another.”

In other words, it’s always a slippery slope – a little inflation today invariably leads to hyperinflation tomorrow. If economic stagnation and high unemployment result, it’s a small price to pay to avoid something worse, the inflationphobes always assert.

Next week I will have more to say about inflationphobia.

Article source: http://economix.blogs.nytimes.com/2013/07/16/inflationphobia-part-ii/?partner=rss&emc=rss

Today’s Economist: Inflationphobia, Part II

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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.”

Last week, I discussed the phenomenon of inflationphobia – an irrational fear of inflation that is constraining the Federal Reserve and holding back the economy. The roots of inflationphobia go back at least to the Great Depression, when inflationphobes made the same arguments year after year despite continuing deflation – a falling price level.

Today’s Economist

Perspectives from expert contributors.

The defining characteristic of the Great Depression was deflation, which began in 1927, two years before the stock market crash. The following data from the Bureau of Labor Statistics show the average change in the Consumer Price Index.

Bureau of Labor Statistics

Between 1926 and 1933, the price level fell about 25 percent. This meant that any obligation fixed in dollars increased 25 percent in real terms. This was particularly important in two areas – wages and debts. If a worker managed to keep the same monetary wage between 1926 and 1933, she actually got an increase in pay of 25 percent in terms of what she could buy because the prices of things she consumed fell 25 percent.

Similarly, if one had a debt in 1926, the real burden of that debt and the debt service increased 25 percent between 1926 and 1933. This was especially important for farmers because the prices of agricultural produce fell very rapidly and the burden of their debts increased just as rapidly.

The great economist Irving Fisher thought that the increasing real burden of debt resulting from deflation was the core cause of the Great Depression.

Despite the falling price level year after year, there were inflationphobes even then, who saw signs of inflation, inevitably leading to German-style hyperinflation, everywhere. The leading inflationphobe was a writer named Henry Hazlitt. Although not trained as an economist, he had a strong interest in the subject and the rare skill to write about it clearly.

H.L. Mencken once said of Mr. Hazlitt that he was “one of the few economists in human history who could really write.” From 1934 to 1946, he was an editorial writer for The New York Times, writing a vast number of editorials and signed articles, mainly on economic issues.

In 1932, Mr. Hazlitt was still writing for The Nation magazine, where he was a strenuous supporter of the gold standard and a fierce critic of John Maynard Keynes, whom he viewed as nothing but a crude inflationist. Mr. Hazlitt thought the cure for deflation was for all workers to slash their wages, which would lower business costs and restore growth. Debtors would simply repudiate their debts and renegotiate them.

No doubt if workers had been willing to slash their wages 25 percent, and banks and bondholders had been willing to slash their interest and principal 25 percent, this would have gone a long way toward alleviating the negative economic effects of deflation. But absent a law requiring it – which the libertarian Mr. Hazlitt would have opposed – this process could only take place slowly, painfully and unevenly.

By contrast, simply reflating the price level back to its 1926 level was relatively easy. The Federal Reserve just had to increase the money supply sufficiently. By the 1960s, even the arch-conservative Milton Friedman said this was what the Fed should have done.

But in the early 1930s, the idea of reflation was controversial, mainly because bondholders enjoyed getting back 25 percent more than they had lent in real terms. Why should they give that up? That is why one of the strongest supporters of the gold standard and opponents of reflation was Benjamin M. Anderson Jr., chief economist of the Chase National Bank.

Irving Fisher and other economists argued in favor of reflation, even being joined by Winston Churchill, who had lately been chancellor of the Exchequer in England. But the most outspoken advocate of reflation was Mr. Keynes, who was quoted in The Wall Street Journal on March 2, 1932, as saying, “It is unthinkable that we can step straight from the financial crisis to relief of the industrial crisis without the cheap money phase intervening.”

In 1933, Franklin D. Roosevelt became president and tried to stanch the deflation by suspending the gold standard and proposing legislation that would fix prices and prevent them from falling further. But these policies were ineffective because they did not get at the root of the problem, which was a fall in the money supply.

This resulted because there was no deposit insurance, so bank deposits literally disappeared when banks failed, and because the Fed refused to offset the resulting fall in the money supply through open-market monetary operations.

Mr. Fisher and some members of Congress kept pointing to the Fed, but to no avail. Responding to Republican attacks on reflation, Mr. Fisher said, there is “absolutely no escape from our present imminent danger except through reflation.”

They were opposed by Mr. Anderson and the New York banker James P. Warburg, who demanded restoration of the gold standard. In 1934, Mr. Warburg published a book detailing his criticism of reflation that was favorably reviewed in The Times by Mr. Hazlitt.

In a June 10, 1934, article for The Times, Keynes explained that monetary stimulus by itself was insufficient to stop deflation and that the
price-fixing instituted by the National Industrial Recovery Act was counterproductive, if well intentioned. He said government spending was essential to get money moving throughout the economy and recommended an increase of $400 million per month – close to $100 billion per month in today’s economy.

In an editorial probably written by Mr. Hazlitt, The Times rejected any resort to inflation no matter how much prices fell. “The one thing your inflationist cannot have too much of is inflation,” the editorial said. “Give him one dose and he becomes much more emphatic in his demands for another.”

In other words, it’s always a slippery slope – a little inflation today invariably leads to hyperinflation tomorrow. If economic stagnation and high unemployment result, it’s a small price to pay to avoid something worse, the inflationphobes always assert.

Next week I will have more to say about inflationphobia.

Article source: http://economix.blogs.nytimes.com/2013/07/16/inflationphobia-part-ii/?partner=rss&emc=rss

Today’s Economist: Bruce Bartlett: Keynes and Keynesianism

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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 Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Before the recent brouhaha about John Maynard Keynes fades from memory, I’d like to make a few final comments about Keynesian economics.

Today’s Economist

Perspectives from expert contributors.

When I began studying economics in the early 1970s, the term “Keynesian” was already losing its luster. In fact, one can date the precise moment when it became passé: Jan. 4, 1971. On that day, President Richard Nixon gave a joint interview to several television journalists. After the cameras were off, he made an offhand comment to Howard K. Smith of ABC News that he was “now a Keynesian in economics.” The New York Times reported this statement in a brief article on Jan. 7, 1971.

The article says Mr. Smith was taken aback by Nixon’s statement, because Keynes was viewed as being well to the left, politically and economically, and Nixon was viewed as an arch-conservative. Mr. Smith said it was as if a Christian had said, “All things considered, I think Mohammad was right,” referring to the prophet who founded Islam.

The Times’s economics columnist Leonard Silk quickly noted the significance of Nixon’s remark and said the president was actually carrying out Keynesian policies at that moment. His budget for the next fiscal year, which would be released in a few weeks, would be “expansionary,” Nixon had said in his television interview. Instead of aiming for budgetary balance in nominal dollar terms, Nixon said he would aim to balance the budget on a “full employment” basis.

This statement was really no less controversial than the one Nixon made about Keynesian economics. Conservatives viewed it as a license to run budget deficits forever. The idea, now called the “cyclically adjusted deficit,” is to separate the share of the budget deficit resulting from a downturn in the economy, which automatically raises spending and reduces revenue, from its “structural” component, which is a function of the basic nature of the budget itself.

The point of looking at the deficit on a cyclically adjusted basis, which the Congressional Budget Office calculates regularly, is to avoid cutting spending that is only temporarily high and will fall automatically as the economy expands, or raising taxes that will automatically rise. Such actions would exacerbate the economic downturn.

According to the C.B.O., the economic downturn has increased the budget deficit by about 2.5 percent of the gross domestic product annually since 2009. It also calculates that if the economy were operating at its potential based on its productive capacity – what used to be called “full employment,” a term now in disuse among economists – G.D.P. would be $1 trillion larger this year.

Conservatives still don’t like calculating the deficit any way except literally. All adjustments are assumed to be tricks to make it look smaller, they believe. But back in 1971, having a Republican president talk about an expansionary budget policy and balancing the budget on a full employment basis was radical stuff indeed.

The irony, of course, is that Keynesian economics, which had dominated macroeconomic thinking since the war, was already dying. For decades it had been under intellectual assault by economists associated with the University of Chicago known as “monetarists.” Their most well-known spokesman was Milton Friedman, who argued against the Keynesians’ focus on fiscal policy – federal spending and taxing policy – and their inattention to monetary policy, which is conducted by the Federal Reserve.

As it happens, Friedman had said in 1965 that “we’re all Keynesians now” in the Dec. 31 issue of Time magazine. He later complained that his quote had been taken out of context. His full statement was, “In one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian.” Friedman said the second half of his quote was as important as the first half.

But it wasn’t only those on the right, such as Friedman, who were abandoning Keynes; so were those on the left such as the Harvard economist John Kenneth Galbraith, an early and energetic supporter of Keynesian economics. In July 1971, he said that Keynes was obsolete because big business and big labor so controlled the economy that Keynesian economics didn’t work.

Galbraith said that it was “sad that Mr. Nixon has proclaimed himself a Keynesian at the very moment in history when Keynes has become obsolete.”

By 1976, it was common to hear world leaders denigrate Keynesian economics as primarily responsible for the problem of inflation. That year, Prime Minister James Callaghan of Britain, leader of the left-wing Labor Party, gave a speech to a party conference that repudiated the core Keynesian idea of a countercyclical fiscal policy. It only worked, he said, by injecting higher doses of inflation that eventually led to higher unemployment.

The following year, Chancellor Helmut Schmidt, of West Germany’s left-wing Social Democratic Party, likewise repudiated Keynesian economics. The German economy, he said, had avoided inflation by resisting the temptation to implement countercyclical fiscal policies during economic downturns. “The time for Keynesian economics is past,” Mr. Schmidt explained, “because the problem of the world today is inflation.”

On his blog last week, Paul Krugman took me to task for misconstruing the generality of Keynesian theory. My point was that policy makers in the early postwar era routinely accepted the idea that Keynesian stimulus was justified whenever the economy wasn’t doing as well as they wanted.

I acknowledge that this view derived mainly from economists who called themselves Keynesians rather than Keynes himself. He was, in fact, a strong opponent of inflation who would have opposed many “Keynesian policies” of the 1950s and 1960s, which contributed to the problem of stagflation in the 1970s that ultimately discredited those policies.

Economists and policy makers mostly forgot that Keynes prescribed budget surpluses during economic upswings to offset the deficits that he correctly advocated during downturns. In his 1940 book, “How to Pay for the War,” he advocated balancing the budget over the business cycle.

I think Milton Friedman was right that in a sense we are all Keynesians and not Keynesians at the same time. What I think he meant is that no one advocates Keynesian stimulus at all times, but that there are times, like now, when it is desperately needed. At other times we may need to be monetarists, institutionalists or whatever. We should avoid dogmatic attachment to any particular school of economic thought and use proper analysis to figure out the nature of our economic problem at that particular moment and the proper policy to deal with it.

Article source: http://economix.blogs.nytimes.com/2013/05/14/keynes-and-keynesianism/?partner=rss&emc=rss

Economix Blog: Bruce Bartlett: Keynes’s Biggest Mistake

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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 Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Over the weekend, there was a kerfuffle about whether Keynesian economics ignores the long-run implications of its policies. The Harvard historian Niall Ferguson asserted that this was the case and said that it resulted from the British economist John Maynard Keynes’s homosexuality. Professor Ferguson said that those without children, as is the case with most gay men and women, necessarily had less of a long-term view of the world than those with children who will live on after their death.

Today’s Economist

Perspectives from expert contributors.

Professor Ferguson has apologized for his off-the-cuff comment, which was widely interpreted as being homophobic. But before this incident fades from memory, I’d like to take the opportunity to discuss the questions raised by it: Is Keynes’s sexual orientation at all relevant to the interpretation of his economic theories? Does Keynesian economics completely ignore the long run?

First of all, Keynes’s sexual orientation has been known for some time, at least since publication of Michael Holroyd’s biography of Lytton Strachey in 1968. Strachey was a noted biographer, an active member of the literary Bloomsbury Group and one of Keynes’s lovers.

The revelation of Keynes’s homosexuality greatly excited his right-wing enemies, who have long used it to defame him and discredit his theories. A 1969 book, “Keynes at Harvard: Economic Deception as a Political Credo,” contains a long chapter on the subject, which describes Keynes as “a lifelong sexual deviant.” Like Professor Ferguson argued, it says that Keynes’s “aversion to human conception” was a key to his economic theories, which the book likened to Bolshevism.

The author of “Keynes at Harvard” is Zygmund Dobbs, but the driving force behind it was Archibald B. Roosevelt, who founded the Veritas Foundation, which published the Dobbs book. The youngest son of Theodore Roosevelt, Archibald Roosevelt was very active in right-wing politics throughout his life, attacking both Presidents Franklin D. Roosevelt and Harry S. Truman for coddling communists. In 1954, Archibald Roosevelt demanded that an organization named for his father rescind an award to the United Nations under secretary Ralph Bunche because of his “close affiliation with communism.”

Brad DeLong, an economist at the University of California, Berkeley, has posted a long list of conservative attacks on Keynes that have used his homosexuality as a reason to reject his economic theories. But even economists who had no interest in this aspect of Keynes’s life, like the economist James Buchanan, have criticized Keynesian economics for its excessively short-term focus and negative long-run consequences.

Unfortunately, Keynes himself was to a large extent responsible for giving this criticism of his work currency. That is because he titled his most important work “The General Theory of Employment, Interest and Money.” The term “general theory” obviously implies that it is applicable at all times, in all economic situations.

This was an unfortunate error, because the core insight of Keynesian economics is that there are very special economic circumstances in which the general rules of economics don’t apply and are, in fact, counterproductive.

This happens when interest rates and inflation are so low that there is no essential difference between money and bonds; money, after all, is simply a bond that pays no interest. When this happens, monetary policy becomes impotent; an increase in the money supply has no stimulative effect because it does not lead to additional spending by consumers or businesses.

Keynes called this situation a “liquidity trap.” Under such circumstances, government spending can be highly stimulative because it causes money that is sitting idle in bank reserves or savings accounts to circulate and become mobilized through consumption or investment. Thus monetary policy becomes effective once again.

This is an extremely important insight that policy makers have yet to grasp, even though interest rates on Treasury bills are just a couple of basis points above zero and inflation is virtually nonexistent. Although the Federal Reserve has increased the monetary base to almost $3 trillion today from $825 billion in 2007, it has had little apparent stimulative effect.

In normal times, one would expect such an increase in the money supply to be highly inflationary and sharply raise market interest rates. That this has not happened is proof that we have been in a liquidity trap for several years. We needed a lot more government spending than we got to get the economy out of its doldrums.

Although Keynes’s theory was most appropriate to the Great Depression, his followers did indeed believe in its general applicability and the Keynesian medicine was overapplied and misapplied during much of the postwar era, leading to stagflation in the 1970s. Conservatives like Professor Buchanan were right about that.

But in their rejection of Keynesian economics at a time when it needed to be rejected, conservatives threw the baby out with the bathwater and are now preventing its adoption when it is badly needed.

The criticism that Professor Ferguson implicitly leveled at Keynes of being excessively short-term oriented, therefore, has a grain of truth in it. But the much greater truth is that we are now holding the economy hostage to policies that are proper for the long-term – like stabilizing the debt-to-gross-domestic-product ratio – at a time when we face special circumstances that make such policies perverse.

In short, we are suffering from an excessive long-term focus that is crippling the economy in the short run, and the short run threatens never to end.
A friendly 1984 biography of Keynes by the economist Charles H. Hession acknowledged that his sexual orientation shaped his political philosophy. His homosexuality was “an independent element in his reformist tendency; as such, he was an outsider in a heterosexual world,” Professor Hession wrote.

I think this made Keynes more willing to think “outside the box,” as we say today, and consider ideas that ran counter to the conventional wisdom. But there is no reason to think he had any less concern for the long-run health of the economy or society than heterosexuals. Keynes understood that the long run is simply an infinite parade of short runs.

But Keynes erred in implying a more general applicability of his theories than he should have. We suffered for this in the past when they were misapplied in inappropriate circumstances, unfortunately discrediting them and preventing their adoption now, in highly appropriate circumstances.

Article source: http://economix.blogs.nytimes.com/2013/05/07/keyness-biggest-mistake/?partner=rss&emc=rss

Economix Blog: Bruce Bartlett: America’s Most Profitable Export Is Cash

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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 Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Two things I’ve heard my whole life that always seem within reach but have never occurred are that we will move to paperless offices and a cashless society. In theory, it seems simple enough; computers and the Internet should obviate the need for paper, and credit and debit cards and electronic bill pay should make cash superfluous.

Today’s Economist

Perspectives from expert contributors.

However, as we all know, we are no closer to a paperless office than we were at the dawn of the computer era. Same goes for the cashless society. As a new report from the Federal Reserve Bank of San Francisco explains, cash has not only held its own against competitors but continues to grow in popularity. Measured in dollar terms, there is 42 percent more cash in circulation today than five years ago.

Among the reasons for the rise in cash holdings are convenience, dependability and anonymity. Another key factor is the decline in interest rates, which has reduced the opportunity cost of holding cash relative to such interest-earning assets as bank deposits, money market funds and Treasury bills.

Many economists believe that the rise in cash is strongly related to growth in the so-called underground economy – criminal activity such as drug dealing, as well as tax evasion by people working off the books for cash. Strong evidence for this proposition comes from examining the distribution of cash holdings by denomination.

Federal Reserve Board

As one can see, 84 percent of the increase in cash since 1990 has been in the form of $100 bills, which have risen to 77 percent of the value of cash outstanding in 2012 from 52 percent in 1990.

I seldom use $100 bills for anything except Christmas gifts to nieces and nephews, nor do I ever see people use them in stores. I suspect that most people have the same experience. For large purchases, most law-abiding people use checks or credit cards.

Studies and common sense suggest that those people most likely to use large bills are doing so for nefarious purposes, especially drug dealing. One can easily fit $1 million in $100 bills into a briefcase.

Another key factor has been the rising amount of United States currency being exported. The Federal Reserve estimates the annual flow of United States currency abroad as well as the total level of such currency, which is counted in the aggregate currency figures in the table above. (These data appear on Line 25 in Tables F.204 and L.204 in the Fed’s Z.1 flow of funds release.)

Federal Reserve

One consequence of the rising share of United States currency held abroad is that it may distort analyses of the relationship between the money supply and economic activity. Many economists believe that inflation results largely, if not exclusively, from an increase in the money supply, much of which consists of currency, the rest being bank deposits, travelers checks and other forms of money.

But if much of the money supply circulates abroad, then any analysis correlating the money supply to domestic economic activity may be distorted and provide false conclusions.

Incidentally, exports of cash appear in the Commerce Department’s data on international transactions (Line 67). It is recorded as an increase in foreign-owned assets in the United States, but is better thought of as an almost costless way of financing a good chunk of our current account deficit. It’s like borrowing money from foreigners that most likely will never have to be paid back, at zero interest.

Foreigners hold United States currency for the same reasons Americans do and may have better motives for doing so, especially in countries suffering severe financial problems such as Cyprus and Greece. Moreover, the continuing economic crisis in Europe has diminished the popularity of the euro even though it has the advantage of coming in 500-euro denominations, about $645 at current exchange rates, making it more compact and convenient for large cash transactions.

However, some countries have withdrawn those notes as a crime-fighting measure, which has probably raised the popularity of the good old $100 bill. (United States $500 and larger bills are no longer produced and are withdrawn when found.)

According to a Federal Reserve study, the vast bulk of United States currency held abroad is $100 bills. Indeed, 65 percent of all $100 bills in existence circulate outside the United States.

Article source: http://economix.blogs.nytimes.com/2013/04/09/americas-most-profitable-export-is-cash/?partner=rss&emc=rss

Today’s Economist: Bruce Bartlett: Declining Wealth, Rising Retirement Risk

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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 Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

In a recent post, I examined aggregate national wealth from the Federal Reserve Board’s flow of funds statistics. They show that while national wealth is now approximately back to its precrisis level, the composition of it has changed. Much more is now held in the form of such financial assets as stocks and much less in nonfinancial forms such as housing. This is important, economically and distributionally, because the wealthy are much more likely to be invested in stocks and bonds, while the middle class has more of its wealth in home equity.

Today’s Economist

Perspectives from expert contributors.

Several new studies cast further light on the composition and distribution of wealth, with implications for the ability of millions of Americans to retire and have an adequate retirement income.

On March 21, the Census Bureau published data on median household wealth – the median is the exact middle of the distribution of wealth. It shows that between 2000 and 2005, median wealth increased significantly, to $106,585 from $81,821. It then fell to $68,828 in 2011. Thus, although the stock market is close to its prerecession peak and aggregate national wealth has largely been restored, the median family’s wealth is still considerably below its peak and needs to rise considerably just to get back to where it was in 2000.

The reason, of course, is that the housing market continues to lag. As Figure 1 illustrates, virtually all of the change in wealth since 2000 has been accounted for by the rise and fall of home equity, which closely tracks the price of homes.

Median net worth of households, in 2011 dollars. Median net worth is the sum of the market value of assets owned by every member of the household minus liabilities owed by household members; the Case-Shiller Home Price Index is a measure of home values that tracks home prices in 20 metropolitan regions.United States Census Bureau, Survey of Income and Program Participation, 1996, 2001, 2004 and 2008 Panels Median net worth of households, in 2011 dollars. Median net worth is the sum of the market value of assets owned by every member of the household minus liabilities owed by household members; the Case-Shiller Home Price Index is a measure of home values that tracks home prices in 20 metropolitan regions.

On the other hand, households have grown less dependent on housing wealth over time. In 1984, 41 percent of wealth was held in the form of home equity. By 2000, that percentage had fallen to 30 percent; in 2011 it was 25 percent.

A key reason for this change has been the switch from defined-benefit to defined-contribution pension plans. In the former, workers are promised a specific income at retirement, which the employer provides. The employer bears all the risk of market fluctuations.

Under a defined contribution scheme, such as a 401(k) plan, the worker and the employer jointly contribute to a tax-deductible and tax-deferred account from which the worker will finance retirement. Thus, to a certain extent, the growth of pension wealth is more apparent than real.

The worker always, in effect, owned the assets from which his pension was paid; he just never saw them or benefited when the stock market increased, nor did he suffer when the market fell. With a 401(k) account, the worker knows the present value of his retirement saving at the close of the market every day.

There are several big problems in this shift to defined-contribution pension plans. One is that workers don’t take advantage of them or fail to contribute the maximum contribution they are permitted to make. Another is that they fail to invest in stocks and instead put their money into certificates of deposit or other investments that tend to underperform stocks in the long run. Workers may also be unwise in choosing investment advisers and end up paying a lot in unnecessary fees that can be very costly to returns.

These mistakes are hardly surprising. Under defined-benefit plans, companies hired professional money managers to invest their pension funds. The average worker can hardly be expected to have the same level of expertise, nor do they have the time to investigate their options adequately. They also tend to be excessively risk-averse and invest too conservatively.

Now the first generation of workers who have virtually all their pension saving in defined-contribution plans is nearing retirement, and the news isn’t good. According to a March 19 report from the Employee Benefit Research Institute, only about half of workers nearing retirement have confidence that they have enough money saved for an adequate retirement.

Not surprisingly, retirement saving has taken a back seat to more pressing concerns – coping with unemployment, maintaining standards of living during an era of slow wage growth, putting children through increasingly expensive colleges and so on. People may also have simply underestimated how much money they needed to save in the first place.

This problem is much more severe for black Americans. According to a new study by the Institute on Assets and Social Policy at Brandeis University, black families have considerably less wealth than white families even when their incomes are comparable. Over a 25-year period, a $1 increase in income generated $5.19 in wealth for white families but just 69 cents for black Americans.

The study identified several possible explanations: years of homeownership, household income, spells of unemployment, education, and inheritances from parents. With regard to housing in particular, white families generally bought homes at an earlier age, thus building home equity longer; white families tended to get better mortgages, in part because they made larger down payments. Black Americans bought homes in poorer areas where there was less home price appreciation.

The wealth gap isn’t only racial, it’s generational. According to a March 15 study from the Urban Institute, young people today have considerably less wealth than their parents did at the same stage of life.

Factors include young people buying homes at a market peak and hence suffering disproportionately from the decline in home prices; they also put less money down, making it more likely that they have negative home equity. Younger workers have also tended to marry at a lower rate, have lower incomes than their parents, pay much higher costs for health insurance, and are more likely to graduate with college debts.

What’s really depressing about these studies is the lack of solutions and the likelihood that the problem will only get worse.

Republicans in Congress have pressed for years to convert Social Security, a classic defined-benefit pension, into a defined contribution plan, and also to convert Medicare into a voucher program. These changes would shift even more of the financial risk in retirement onto families that have yet to adapt to fundamental changes in employer pensions and the economy over the last 30 years. The future doesn’t look pretty.

Article source: http://economix.blogs.nytimes.com/2013/03/26/declining-wealth-rising-retirement-risk/?partner=rss&emc=rss

Today’s Economist: Bruce Bartlett: The Worst Possible Way to Cut Spending

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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 Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

One big problem in the sequestration debate is that both sides have been talking past each other, with unstated assumptions underlying their statements and positions. There is also a great deal of posturing going on that disguises more agreement than the public knows.

Today’s Economist

Perspectives from expert contributors.

The guiding Republican premise is that there is a vast amount of fat and waste in the federal government. Just as when individuals are overweight, a diet will improve their health.

Contrary to popular belief, Democrats don’t disagree that many programs could be cut substantially without harming government’s core mission. The problem is twofold. First, they disagree with Republicans on which programs are wasteful. Second, Republicans tend to believe that any program they disagree with, philosophically, is, per se, money wasted.

Democrats, I think, are more inclined to think that money spent inefficiently, that doesn’t advance a program’s basic purpose, is the primary source of wasteful spending.

In general, Republicans think of national security as the federal government’s primary function and just about everything else as optional. Democrats don’t disagree that national security is a core function of government but also believe that it has a responsibility to help those who can’t help themselves and to improve the quality of life of all Americans.

Thus in broad terms, Republicans seek to protect national security spending while Democrats are more concerned about domestic spending. From this dichotomy was born the idea of the sequester, which both Republicans and Democrats agreed to in 2011 in the deal that increased the federal debt limit.

The assumption was that both sides would fight equally to protect their sides of the budget and from this struggle something better would emerge than a sequester, which everyone viewed as a meat-ax approach. It tends to be forgotten now, but simultaneous with the budget deal Congress established a Joint Select Committee on Deficit Reduction that was expected to propose a better mix of spending cuts and revenue increases to achieve the bipartisan deficit target.

In the end, the so-called super committee failed. Republicans simply refused to consider any revenue increases, and Democrats opposed a deficit package consisting entirely of spending cuts.

I’m not sure what everyone thought would happen if the super committee failed, but my impression is that everyone supporting the initial budget deal just assumed that sequestration would never actually occur. No Plan B was put in place.

So people looked to the presidential election to somehow clarify the situation. Although Republicans were initially chastened by their failure to win back the White House, they quickly convinced themselves that because they remained in control of the House of Representatives, this meant there was broad public support for their approach to the deficit of spending cuts only and no tax increases whatsoever.

Republicans reluctantly accepted tax increases in the fiscal cliff deal on Jan. 1, feeling they had no choice, because failure to act would have involved a very large automatic tax increase, as all the tax cuts enacted over the previous decade expired under existing law.

They treated this retreat as giving in to extortion and resolved to double down on their insistence that there would not be one penny of tax increase in any new budget deal to replace the sequestration. For his part, President Obama has repeatedly said that eliminating tax loopholes must be part of any new deal.

Economists generally agree that “tax expenditures” such as loopholes and subsidies are the same thing as direct spending. But Republicans insist there is a fundamental philosophical difference between keeping your own money, even through an unjustified and egregious tax loophole, and receiving a check from the government.

The stalemate has been something akin to the situation leading up to the First World War: all parties knew a disaster loomed but were unable to find a way to stop it.

Conservatives appear to believe that the sequester is a big nothing, that cutting 9 percent out of nonmilitary spending and 13 percent from military spending can be borne easily. There is more than enough fat and waste in the budget to permit such cuts, they believe, without jeopardizing anything vital.

The problem, as Democrats say, is that many of the cuts are to muscle and bone, not fat. The sequester mechanism requires that cuts come equally from every line item in the budget except for a few areas, such as veterans’ programs, that were exempted in the original legislation.

It’s as if an overweight person adopted a diet that cut the same percentage from fat, liver, kidneys and other vital organs equally. That’s obviously nuts, but essentially what the sequester does to the budget. The cuts are indiscriminate, leaving bloated programs still bloated, while those that were underfinanced to begin with may lose their ability to function at all.

One thing that has surprised everyone in the sequestration debate has been how blasé Republicans have been about cutting military spending. The House minority leader, Steny Hoyer of Maryland, has said that Democrats miscalculated, thinking Republicans would fight hard to protect the military and thus be forced to negotiate.

My theory is that Republicans have concluded that the military would suffer worse under any budget deal that replaces the sequester. They may also believe they can replace military cuts resulting from sequestration in future appropriations bills.

It’s too soon to say whether the pain of the sequester will be enough to force Congress to end it or replace it with something more rational. According to the Bipartisan Policy Center, a Washington think tank, past sequesters have seldom been allowed to run their course.

Insiders generally believe that the impending expiration of government funding for fiscal year 2013, on March 27, will provide the vehicle for compromise. But as yet, the outlines of such a compromise are opaque.

Article source: http://economix.blogs.nytimes.com/2013/03/05/the-worst-possible-way-to-cut-spending/?partner=rss&emc=rss

Today’s Economist: Bruce Bartlett: The Growing Corporate Cash Hoard

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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 Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Last week, the investor David Einhorn sued Apple, in which his hedge fund is a large shareholder, to prevent it from taking actions that would allow it to continue holding onto its $137 billion in cash, rather than paying it out as dividends.

Today’s Economist

Perspectives from expert contributors.

Mr. Einhorn’s action highlights a growing problem: many corporations are holding vast amounts of cash and other liquid assets, using them neither for investment nor to benefit shareholders. These assets are largely earned and held overseas, and not subject to American taxes until the money is brought home.

Such tax-avoidance techniques, while legal, have come under increasing political attack. On Thursday, Senator Bernie Sanders of Vermont introduced legislation to end deferral and force multinational companies to pay taxes on their foreign-source income.

According to the Federal Reserve, as of the third quarter of 2012 nonfinancial corporations in the United States held $1.7 trillion of liquid assets – cash and securities that could easily be converted to cash.

By any measure, corporate cash holdings appear to be high and rising.

According to the Federal Reserve, nonfinancial corporations historically held liquid assets of 25 to 30 percent of their short-term liabilities. But this percentage began rising in 2001 and now tends to be in the 45 to 50 percent range. In the third quarter of 2012, it was 44.9 percent.

A recent study by Juan Sánchez and Emircan Yurdagul of the Federal Reserve Bank of St. Louis looked at the ratio of cash to assets at all publicly held nonfinancial, non-utility corporations. They found that, historically, such corporations held cash equal to about 6 percent of their assets, but that began rising in 1995 and is now more than 12 percent, as seen below.

Federal Reserve Bank of St. Louis analysis of Compustat data

One obvious explanation for higher cash holdings by corporations is the uncertainty of the economic environment in the aftermath of the financial crisis. They may also face greater difficulty in getting credit on short notice and need to hold more cash as a precaution.

Another explanation, put forward by the economists Thomas W. Bates, Kathleen M. Kahle and René M. Stulz, is that the growing research-and-development intensity of corporations forces them to hold more cash than they used to. They also note that companies hold fewer inventories and accounts receivable than they used to. And, they say, these factors make corporate cash flow less dependable than previously, thus necessitating the need for higher cash holdings.

A 2011 study by the International Monetary Fund (see Pages 44-49) suggests that higher cash holdings by corporations are simply a sign that they plan new investments in the near future. It says this is a “good omen,” which indicates that “investment could increase substantially over the next year or two.”

However, the dominant explanation for the increased liquidity of nonfinancial corporations appears to be the growing role of multinational corporations and the profits of their foreign operations.

In a 2006 speech, the Federal Reserve Board governor Kevin Warsh noted that higher corporate cash holdings were dominated by those with foreign operations. Between 2001 and 2004, the ratio of cash to assets at domestic-only corporations increased 20 percent, while it increased 50 percent among multinational corporations.

While this may indicate that multinational corporations expect better growth potential among their foreign subsidiaries and plan additional offshore investments, a more likely explanation is tax-based.

Under American tax law, corporate profits generated offshore are taxable, with a tax credit for taxes paid in foreign jurisdictions. But American taxes don’t apply unless and until such profits are repatriated to the United States. Thus, as long as profits are held abroad, United States taxes are deferred indefinitely.

A 2007 study in the Journal of Financial Economics found that among multinational corporations, those facing higher repatriation taxes tended to hold more cash abroad than those facing lower tax burdens. Moreover, cash holdings tend to be higher in countries with low taxes than those with high taxes. Tax sensitivity appears to be more pronounced among technology-based companies.

More recent research published by the National Bureau of Economic Research tested for the impact of taxes on corporate cash holdings by looking at companies that become multinational. They do not tend to increase their cash holdings afterward, thus undermining the tax-based explanation. But the study also finds that research and development intensity is a crucial factor.

The major role of R.D. in large cash holdings may reflect the greater opportunities for tax avoidance among businesses that can easily transfer intangible property abroad without having to move production operations or jobs to other countries. It is a simple matter for companies holding patents, copyrights or trademarks to transfer them to foreign subsidiaries and realize the profits accruing to them in lower-taxed jurisdictions.

I had an experience with this phenomenon just recently. I needed a copy of Microsoft Word for a new computer and went to www.microsoft.com to buy it. But when I tried to pay for it, my credit card was rejected. When I checked with my credit-card company I was told that the charge appeared suspicious because it went to a company based in Luxembourg – a well-known tax haven.

This technique is used by many technology-based companies. For example, The Wall Street Journal reported on Feb. 7 that the patent for the hepatitis C medication produced by California-based Gilead Sciences is domiciled in Ireland, another common tax haven. The home company thus pays royalties to its Irish subsidiary on sales of the drug in the United States, transferring profits from the United States to Ireland.

While the prospects for individual income tax reform appear to be fading, those for corporate tax reform are more positive. The problem of deferral
and the large amount of cash held abroad by multinational corporations based in the United States are key factors driving both parties toward action, possibly this year.

Article source: http://economix.blogs.nytimes.com/2013/02/12/the-growing-corporate-cash-hoard/?partner=rss&emc=rss

Economix Blog: Bruce Bartlett: Accounting for a $1 Trillion Platinum Coin

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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 Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Washington had been buzzing about the idea of minting a $1 trillion platinum coin in the event that Republicans block an increase in the debt limit (as they did in 2011), until the Treasury and the Federal Reserve rejected the idea.

Today’s Economist

Perspectives from expert contributors.

But whether or not creating a $1 trillion coin to avoid defaulting on the debt was reasonable, in accounting terms it would have been no big deal — simply a larger scale of what the Treasury and the Fed do every day.

The United States Mint, a division of the Treasury, would have had to create a $1 trillion coin of platinum — though it would not have had to contain $1 trillion of platinum — to meet the letter of the law, and the Fed would have taken ownership.

The Fed would then have credited the Treasury’s account with $1 trillion of cash that could be used to make payments authorized by the Treasury. The Fed is, in effect, the Treasury’s bank, accepting deposits and clearing payments on a daily basis.

While some people worried aloud that the creation of $1 trillion of cash would be dangerously inflationary, this is nonsense. The coin would not affect monetary policy. The Treasury and Fed constantly coordinate their actions so that tax receipts don’t reduce the money supply and Treasury payments don’t lead to an increase.

If Treasury payments threatened to raise the money supply more than the Fed would like, it would simply sell bonds from its portfolio to absorb the excess liquidity. Possessing close to $3 trillion of Treasury securities, the Fed could easily offset all the cash created by the platinum coin.

In effect, rather than the Treasury selling securities to the public to pay for spending in excess of revenues, the Fed would do so. Bonds in the Fed’s portfolio already count against the debt limit, so that is not a constraint.

Nor would the creation of a $1 trillion coin have led to higher spending. The Treasury could still spend only what has been authorized by Congress.

As a matter of accounting, the Treasury would book the $1 trillion paid by the Fed as “seigniorage.” Technically, that is the difference between the cost of creating coins and their face value. When the Fed obtains coins from the mint to distribute through the banking system, it pays the face value of the coins. According to Table 6-2 in the Analytical Perspectives volume of the 2013 budget, the mint breaks even on coinage, providing no net seigniorage to the government.

In reality, the Treasury gets a lot of revenue from seigniorage, but it shows up in a different part of the budget. Although the Fed pays the face value for coins, that is not the case with bills. The Fed pays the Treasury 5.2 cents a bill for dollar bills to 12.7 cents for $100 bills because they require more security. In 2012, the Fed paid the Treasury $747 million for currency production by the Bureau of Engraving and Printing, which approximately offset its costs of operation.

The difference between the cost of bills and their face value is also seigniorage, but the profit accrues to the Fed. It also gets revenue from the Treasury on its vast holdings of Treasury securities. These securities are a byproduct of monetary policy; when the Fed buys them on the open market – it is prohibited by law from buying them directly from the Treasury – it expands the money supply, and when it sells securities the money supply shrinks.

The Fed makes an enormous profit from interest paid to it by the Treasury, from seigniorage on currency and other services for which it charges banks. By law, the Fed subtracts its costs of operation and, annually, gives the rest back to the Treasury. On Jan. 10, the Fed made its annual payment to the Treasury, of $88.9 billion.

As the chart indicates, this is two or three times the revenue historically received by the Treasury from the Fed. But the Fed’s unprecedented actions, in coping with the financial crisis that began in 2008, led to a vast expansion of its portfolio, which generates much additional interest income.

Data for 2003-11 from annual report of the Board of Governors of the Federal Reserve System

This accounting raises some interesting issues of which even economists are generally unaware. For example, although it is part of the federal government, the Fed is treated as a private bank for the purposes of calculating the gross domestic product. The data can be found in Table 6.16D of the national income and product accounts. They show that in 2011, the Fed generated a profit of $75.9 billion – 18.6 percent of all the profits generated by the financial sector of the United States economy and 5.6 percent of the total profits of all domestic industries.

Since the Fed’s profits come primarily from interest on Treasury securities, its payment to the Treasury in effect offsets much of the net interest portion of the budget. In 2013, net interest is expected to be $229 billion. But actually it is $89 billion less than that because of the Fed payment. It would make more sense, as a matter of accounting, to treat the Fed payment as an “offsetting receipt” that would lower the net interest outlay, rather than as a “miscellaneous receipt” in the budget. This has implications for calculating the burden of the national debt.

With the idea now off the table, we may never be able to assess how the coin would have played out. But most likely it would have been business as usual between the Treasury and the Fed.

Article source: http://economix.blogs.nytimes.com/2013/01/15/accounting-for-a-1-trillion-platinum-coin/?partner=rss&emc=rss

Richard Ben Cramer, Wrote of Presidential Politics, Dies at 62

His daughter, Ruby Cramer, said he died of complications from lung cancer at Johns Hopkins University Medical Center.

Mr. Cramer was born on June 12, 1950, in Rochester, N.Y. He went to Johns Hopkins University as an undergraduate and later studied at Columbia University’s Graduate of Journalism. He worked at The Baltimore Sun before joining The Philadelphia Inquirer in the 1970s, where he was a Middle East correspondent from 1977 to 1984. He won a Pulitzer Prize in 1979 for his reporting there.

He went on to write for Sports Illustrated, Rolling Stone and Esquire, where in 1986, he wrote an article, “What Do You Think of Ted Williams Now?,” about the iconic baseball player. The article, which seemed to strip Mr. Williams bare and reconstruct him anew in the eyes of his fans, became a hallmark of sports journalism.

“It was often said Ted would rather play ball in a lab, where fans couldn’t see,” Mr. Cramer wrote. “But he never blamed fans for watching him. His hate was for those who couldn’t or wouldn’t feel with him, his effort, his exultation, pride, rage, or sorrow.” But Mr. Cramer will be most remembered for “What it Takes,” a 1,000-page, vigorously researched tome that delved into the passions, idiosyncrasies and flaws of George H. W. Bush, Bob Dole, Michael Dukakis, Joseph R. Biden Jr. and other candidates as they fought for the presidency in 1988.

As he reported for the book, he spent time with the candidates’ family members, college roommates and sometimes even their elementary schoolteachers.

He became close with the candidates themselves and in some cases forged friendships that endured after the election. Mr. Biden later gave him tips on fixing up an old farmhouse that he purchased in Maryland, he said in a 2010 interview with Politico.

“He made no bones about the fact that he became friendly with the people he reported on,” said his longtime friend Stuart Seidel, an editor at National Public Radio. “He liked Joe Biden and Bob Dole and both Bushes. He did not feel compromised by allowing himself to get close to them. He did not see himself in a confrontational reportorial role — he was telling a story.”

The book begins with Mr. Bush, then the vice president, throwing out the first pitch at a Houston Astros game in 1986.

“He’ll be cheered by 44,131 fans — and it’s not even a risky crowd, the kind that might get testy because oil isn’t worth a damn, Houston’s economy is down the crapper, and no one’s buying aluminum siding,” he wrote. “This is a playoff crowd, a corporate-perks crowd, the kind of fellows who were transferred in a few years ago from Stamford, Conn. You know, for that new marketing thing (and were, frankly, delighted by the price of housing), a solid GOP crowd, tax-conscious, white and polite.”

The book is in many ways the product of a bygone era, before quote approval and a micromanaged press corps, and when minute-by-minute coverage of a presidential campaign or anything else was a technological impossibility.

In a 2011 interview with The New York Times, Mr. Cramer described political journalists in his day as wielding real power, a contrast with now, when campaigns can seem to hold reporters at their mercy.

“Even if you had the wherewithal to embarrass a reporter, there was no mechanism to do it,” Mr. Cramer said. “And in most cases, you might as well save your breath because the reporter had no shame anyway.”

“What it Takes” received poor reviews, and sales were initially poor. Fellow journalists were also slow to see its value. Disappointed, Mr. Cramer never again wrote as prodigiously about politics. Rather, he turned his attention to other interests. He wrote a biography about Joe DiMaggio and returned to the Middle East for a book about the Israeli-Palestinian conflict.

Mr. Cramer lived in Chestertown, Md., with his wife, Joan Cramer, who survives him. He was previously married to Carolyn White, with whom he had his daughter, Ruby Cramer.

Jennifer M. Preston and Katharine Q. Seelye contributed reporting.

Article source: http://www.nytimes.com/2013/01/08/us/politics/richard-ben-cramer-dies-at-62-chronicled-presidential-politics.html?partner=rss&emc=rss