Posts tagged with ‘economics’
Benjamin Harrison, 1872
Great explanation of why economists seem to be wrong so often about economic policies.
Is the Fed tieing it shoe laces together by predicting high growth and then revising downward?
Binyamin Appelbaum, Fed Expected to Reduce Growth Forecast but Cut Stimulus
The pattern is striking. In every year since 2008, Fed officials have steadily reduced their initial expectations for economic growth. In each year except 2012, they had still overestimated the strength of the economy in June of the forecast year.
The consequences at times have been painful. Fed officials have said they did not act more strongly to stimulate the economy in the immediate aftermath of the recession because they expected the economy to rebound more quickly.
Fed officials argue that unanticipated economic setbacks have contributed to their failures of foresight, including spending cuts by federal, state and local governments, the European economic crisis and, most recently, an unusually cold winter.
But officials have also acknowledged that the impact of those setbacks appears to reflect an underlying weakness in the economy that they did not anticipate.
Josh Bivens, director of research and policy at the left-leaning Economic Policy Institute, said economic conditions in recent years had few precedents, making it hard to predict the pace of the recovery. Traditional models assume the Fed can restore growth by cutting interest rates, but the Fed has held interest rates near zero since late 2008, and that has proved insufficient. That has left forecasters guessing, he said.
“You can definitely be sympathetic with them,” he said. “We’re just in uncharted territory.”
Fed officials have adjusted by gradually backing away from their assumption that the economy will rebound strongly. Officials make an initial forecast two years before the beginning of a given year. Those long-range forecasts reflect their views of the economy’s potential more than the conditions that are likely to prevail at that time. And for the last five years, Fed officials have steadily reduced their expectations. In 2009, they estimated that growth in 2012 would run as high as 4.8 percent. Last year, they estimated that growth in 2016 would run no higher than 3.3 percent.
Such slow adjustments are typical, researchers have found. William D. Nordhaus, a professor of economics at Yale, found in a benchmark 1985 paper that forecasters are anchored to their opinions. “We break the good or bad news to ourselves slowly, taking too long to allow surprises to be incorporated into our forecasts,” Mr. Nordhaus wrote.
The Fed is no better than other market watchers: they are all caught in the postnormal fog, unable to peer into the uncertain future. But the consequences of the irrational exuberance of the Fed’s projections are much more significant than an investment fund guessing wrong on Apple. It seems that the optimism may be another tool in the Fed’s bag to influence behavior of other parties, but this rapidly turns into the boy who cried wolf.
A protegé of the French economist Thomas Piketty, Gabriel Zucman has researched the mystery of international balance sheets showing increasing liabilities: Where’s the money?
Rich people and cash-rich companies are hiding it in tax havens:
Jacques Leslie, The True Cost of Hidden Money
GABRIEL ZUCMAN is a 27-year-old French economist who decided to solve a puzzle: Why do international balance sheets each year show more liabilities than assets, as if the world is in debt to itself?
Over the last couple of decades, the few international economists who have addressed this question have offered a simple explanation: tax evasion. Money that, say, leaves the United States for an offshore tax shelter is recorded as a liability here, but it is listed nowhere as an asset — its mission, after all, is disappearance. But until now the economists lacked hard numbers to confirm their suspicions. By analyzing data released in recent years by central banks in Switzerland and Luxembourg on foreigners’ bank holdings, then extrapolating to other tax havens, Mr. Zucman has put creditable numbers on tax evasion, showing that it’s rampant — and a major driver of wealth inequality.
Mr. Zucman estimates — conservatively, in his view — that $7.6 trillion — 8 percent of the world’s personal financial wealth — is stashed in tax havens. If all of this illegally hidden money were properly recorded and taxed, global tax revenues would grow by more than $200 billion a year, he believes. And these numbers do not include much larger corporate tax avoidance, which usually follows the letter but hardly the spirit of the law. According to Mr. Zucman’s calculations, 20 percent of all corporate profits in the United States are shifted offshore, and tax avoidance deprives the government of a third of corporate tax revenues. Corporate tax avoidance has become so widespread that from the late 1980s until now, the effective corporate tax rate in the United States has dropped from 30 percent to 15 percent, Mr. Zucman found, even though the tax rate hasn’t changed.
Mr. Zucman’s tax evasion numbers are big enough to upend common assumptions, like the notion that China has become the world’s “owner” while Europe and America have become large debtors. The idea of the rich world’s indebtedness is “an illusion caused by tax havens,” Mr. Zucman wrote in a paper published last year. In fact, if offshore assets were properly measured, Europe would be a net creditor, and American indebtedness would fall from 18 percent of gross domestic product to 9 percent.
So, another wrinkle in the new abnormal economics: the wealthy can skew the system to pile their shekels higher and higher, meanwhile manipulating the system so that national policies reinforce the massive inequality of our economy.
Welcome to the postnormal.
The way the world’s financial markets ‘work’ has ceased to follow classical models, and now the experts cannot track risk. Welcome to the postnormal.
Susanne Walker and Liz Capo McCormick, Unstoppable $100 Trillion Bond Market Renders Models Useless - Bloomberg
If the insatiable demand for bonds has upended the models you use to value them, you’re not alone.
Just last month, researchers at the Federal Reserve Bank of New York retooled a gauge of relative yields on Treasuries, casting aside three decades of data that incorporated estimates for market rates from professional forecasters. Priya Misra, the head of U.S. rates strategy at Bank of America Corp., says a risk metric she’s relied on hasn’t worked since March.
After unprecedented stimulus by the Fed and other central banks made many traditional models useless, investors and analysts alike are having to reshape their understanding of cheap and expensive as the global market for bonds balloons to $100 trillion. With the world’s biggest economies struggling to grow and inflation nowhere in sight, catchphrases such as “new neutral” and “no normal” are gaining currency to describe a reality where bonds are rallying the most in a decade.
“The world’s gotten more complicated and it’s a little different,” James Evans, a New York-based money manager at Brown Brothers Harriman & Co., which oversees $30 billion, said in a telephone interview on May 30. “As far as predicting direction up and down, I don’t think they have much value,” referring to bond-market models used by forecasters.
In an economy where secular stagnation has taken hold, and the world’s currencies are spiraling in a liquidity trap, it appears we are still in a crisis; but people are spending a great deal of time talking about heading off the next one.
A hundred trillion being invested in bonds because investors can’t accurately gauge risk, and the degree of complexity and uncertainty continue to rise, and — despite the hype about big data — no one seems to know where things are headed.
Josh Freedman and Michael Lind look back to the New Deal and forward to a new social contract. Will we have a continuation of the ruinous “low-wage” social contract that is now in effect, a shift to the Nordic social state, or a third alternative?
What, then, would a better social contract look like?
First, we could accept the basic shape of the low-wage economy while softening its edges by asking government to do even more. With higher taxes on the wealthy, Washington could use the tax code to provide poor and middle-class families more generous means-tested subsidies to pay for childcare, education, and healthcare. Since the Clinton era, much of the Democratic Party has embraced this version of the social contract. It is essentially the model behind Obamacare.
The downside, besides the challenge of raising taxes, is that subsidies don’t guarantee affordability. They can even encourage industries to raise their prices; see, for example, the proliferation of cheap student loans, which have not made college much more affordable. What’s more, means-tested programs for the poor often lack the political support needed to keep them strong.
Another possibility, which would please many progressives, would be to nudge the economy toward a social democratic model such as that of Scandinavia. This social contract would entail high wages, a high cost of living, and a universal welfare state paid for with high, relatively flat taxes.
But transplanting the Nordic model as a whole to the U.S. would be difficult in the face of fierce resistance to higher levels of spending. It would also be hard to import a system of benefits paid for by broad and flat taxes, like payroll taxes and consumption taxes, on a country like the U.S. with much greater inequality.
In our own work at the New America Foundation, we have outlined a third idea we call the “middle-income social contract.” It assumes that many service industries won’t be able to offer their workers middle-income salaries, which means that, in addition to raising wages somewhat, the government will have to take a more active role in making essential services like education, child care and health care more affordable. The best way to do this is to provide these programs directly, such as through universal Pre-K, single-payer health insurance, or subsidies to the states for taking care of the elderly. Policymakers can begin to build a middle-income social contract by raising the federal minimum wage closer to a true living wage and expanding public early education, both of which are widely popular proposals.
The current low-wage social contract between American workers, employers, and the government has been a raw deal for most Americans. Just as the New Deal contract shifted to the low wage model, we need to shift once again to a system more suited to the current economy and needs of workers and citizens. The options for the next social contract are many—we just have to choose the right one.
I believe that we are on the path toward government provided education (pre-K through college), health and elderly care, and greatly strengthened social security, all paid for through higher taxes on the wealthy and business. We will simply have to wait for the GOP to be made insignificant through changing demographics.
Of course, many libertarians — including the tech sector — will be opposed, but there is a split there for social liberalism, like education.
But this will be the front and center political battlefield for the next presidential elections. The core question: How much does the State have to do to ensure equality, both in opportunity and in services?
A great snapshot.
Klein makes the case that corporations should be in favor of a single payer system, financed by individual and business taxes, to diminish the risks and costs of administering their own health care policies:
It’s never made a bit of sense for health-care benefits to be routed through employers. The system emerged in the U.S. by accident. Wage controls during World War II made it impossible for companies to attract workers by offering higher salaries. Because health benefits were exempt from high wartime taxes, companies began using them to attract talent. After the war, unions joined employers in pressuring Congress to ensure employer-based health benefits were never taxed. So the U.S. emerged with an odd system in which a dollar of untaxed employer-based health benefits was worth much more to a worker than a dollar of taxed salary. Employers became the main vehicles for insurance not because anyone thought it was a good idea, but because the tax code made it a bargain.
The great mystery of U.S. health care is why the country’s CEOs didn’t demand a single-payer system a long time ago.
The result has been a disaster for employers and workers alike. In Canada, the risk pool is effectively the entire country. Two costly pregnancies have barely any effect on aggregate costs. In Medicare, the risk pool is 49 million beneficiaries. A few patients with catastrophic health problems won’t budge those numbers much. But in our employer-based health-care system, the risk pool is often a few hundred, a few thousand or a few tens of thousands of employees. A bit of bad luck can be catastrophic.
The great mystery of U.S. health care is why the country’s CEOs didn’t demand a single-payer system a long time ago. It’s an unending distraction — and cost drag — for companies to employ expensive human-resources divisions to negotiate with insurers and hospitals, manage health-care costs, and field questions and concerns from employees. Companies that are great at making cars or buildings or accounting software can’t survive if they’re not also successful at managing health insurance.
The system persists for reasons that will be familiar to anyone watching the rollout of the Patient Protection and Affordable Care Act: Change is scary. No CEO wants to deal with the outcry from employees who are terrified that their benefits are being outsourced to the government. And few CEOs trust the federal government to manage benefits with any skill — they worry they’ll just end up paying more in taxes than they do in premiums. That worry is often particularly acute for CEOs themselves, who would pay disproportionately in any system that relied on progressive taxation. Finally, their suspicions are typically reinforced by dire predictions from their HR managers, whose jobs depend on the survival of employer-based health benefits.
The result is that CEOs hate the current system but are too fearful to move to a different one. Consequently, they’ve made themselves — and their companies — vulnerable to “distressed babies.”
The last comment a reference to AOL’s Tim Armstrong, who stepped into a sinkhole by talking about ‘distressed babies’ that caused him to propose cutting back on AOL benefits, and then to rapidly apologize and back off those cuts.
Corporations’ opposition to a single payer nationalized health care system is crazy, like poor white people being opposed to food stamps.