Looking Back at the 70s

Karl Smith says:

I like to focus on inflation because I think just about all of us have agreed that inflation is primarily controlled by actions at the Fed.

I'm ripping this completely out of context1 because it reminds me of a question I have for any economists who care to respond. Here it is: it's now been 30 years since the stagflation of the 70s. Is it still the consensus view that the inflation of that era was caused by a union-triggered wage-price spiral? Or do we believe that Milton Friedman was right, and inflation is always and everywhere a monetary phenomenon, even in the 70s? Or something else?

Just to be clear, I should add that I'm not asking if the wage-price spiral was a factor — I'm sure it was — but whether it was the proximate cause. Or were loose fiscal and monetary policy the cause, and union demands simply a reaction? The reason I ask is simple: Paul Volcker jacked up interest rates from 1979-1981, and inflation fell. This suggests that union demands were mainly a response to perceived Fed seriousness about inflation, not a primary cause of 70s inflation. Likewise, although unions have declined in the U.S., they've remained pretty strong in much of Europe and there's been no repeat of 70s-style inflation there. This also suggests that monetary policy is considerably more important than union wage demands.

But I don't know. So I'm tossing it out. Any macro or labor economists care to venture an opinion?

1But you can, of course, click the link to see what he's talking about. Hint: inflation is going down unless the Fed decides to do something about it.

Shutting Down Over Healthcare

Apparently Rep. Steve King (R-Iowa) is demanding that the GOP leadership sign a "blood oath" to include repeal of healthcare refrom in every single appropriations bill next year, even if it leads to a government shutdown. This is nothing surprising coming from King, who's a famous loon, but Steve Benen says it's yet more evidence that the prospect of a government shutdown is real, not just a Democratic scare tactic to motivate the troops:

This really isn't manufactured drama — much of the Republican Party is intent on making this happen. It's why talk of a shutdown is already being pushed by a House Republican leader (Rep. Lynn Westmoreland of Georgia); a Republican Senate candidate (Joe Miller of Alaska); a Republican House candidate (Teresa Collett of Minnesota); and a variety of prominent Republican voices (Newt Gingrich, Dick Morris, and Erick Erickson).

It's not theater; it's not posturing; it's not an idle pre-election threat. Voters should appreciate how serious this is before heading to the polls.

I dunno. Steve may be right that the threat is real, but I think I'd still put my money on any shutdown over healthcare reform being shortlived. The problem for Republicans is that it would give President Obama a perfect soapbox for talking endlessly about all the benefits of ACA, and the drama of a shutdown means that plenty of people would actually be listening. So not only would Republicans look petulant and childish if they repeatedly passed bills that either failed in the Senate or got vetoed, but Obama would spend the entire time talking about how he'll never let the Republican Party take away your right to insurance even if you have a preexisting condition. And he'll never let them take away the small business tax credits. And he'll never let them reinstitute the doughnut hole. Rinse and repeat.

Not only would Republicans lose the showdown, but they'd quite possibly end up making ACA popular for the first time in its existence. I suspect the saner elements of the GOP leadership are pretty well aware of this. They might feel like they have to make a pro forma effort to repeal healthcare reform, but if they shut down the government I think they'll pick a different excuse.

Taxes and the Rich

Venture capitalist Garrett Gruener has some advice for his fellow capitalists:

For nearly the last decade, I've paid income taxes at the lowest rates of my professional career. Before that, I paid at higher rates. And if you want the simple, honest truth, from my perspective as an entrepreneur, the fluctuation didn't affect what I did with my money. None of my investments has ever been motivated by the rate at which I would have to pay personal income tax.

....No one particularly enjoys paying taxes, but one lesson we should have learned by now is that for the good of the country, we need to tax people like me more. At a minimum, we need to return to the tax rates of the Clinton era, when the economy performed far better. Simply taxing the wealthiest 2% of Americans at the same rates they were taxed before the Bush tax cuts could reduce the national deficit by $700 billion over the next 10 years. Remember, paying slightly more in personal income taxes won't change my investment choices at all, and I don't think a higher tax rate will change the investment decisions of most other high earners.

What will change my investment decisions is if I see an economy doing better, one in which there is demand for the goods and services my investments produce. I am far more likely to invest if I see a country laying the foundation for future growth. In order to get there, we first need to let the Bush-era tax cuts for the upper 2% lapse. It is time to tax me more.

Fine. Gruener is a lefty. But this is the simple truth: changing the top marginal rate from 35% to 39.6% will have no measurable impact at all on work or investment decisions. From a macroeconomic perspective, it will reduce the future deficit and nothing more. It's a pure win for everyone, even the rich.

How To Order Thai Food

Last night at a Thai restaurant, Mark Kleiman wanted to order Tam Kah with just mushrooms, which produced the following question from our server:

OK. Would you like the chicken and mushroom soup without the chicken, or the shrimp and mushroom soup without the shrimp?

A pretty philosophical conundrum, no?

Good News and Bad on Wall Street

The New York Times reports both good news and bad today:

The activities at the heart of what Wall Street does — selling and trading stocks and bonds, and advising on mergers — are running at levels well below where they were at this point last year, said Meredith Whitney, a bank analyst who was among the first to warn of the subprime mortgage disaster and its impact on big banks.

Worldwide, the number of stock offerings is down 15 percent from this time last year, while bond issuance is off 25 percent, according to Capital IQ, a research firm. Based on these trends, Ms. Whitney predicts that annual revenue from Wall Street’s main businesses will drop 25 percent, to around $42 billion in 2010, from $56 billion last year.

....As a result, executives, portfolio managers and analysts say that even the mighty Goldman Sachs, which posted a profit every day for the first three months of the year, is unlikely to deliver the kind of profit growth that investors have come to expect.

Keith Horowitz, a bank analyst at Citigroup, said he expected Goldman Sachs to earn $7.8 billion in 2010, a 35 percent decline from the $12.1 billion it made last year. The drop in trading translates into lower commissions for brokerage firms, as well as a weaker environment for underwriting initial public offerings and other stock issues, traditionally a highly lucrative niche.

Banks are also scaling back on making bets with their own money — known as proprietary trading — another huge profit source in recent years that will soon be forbidden under terms of the financial reform legislation passed by Congress this summer.

Wall Street should be earning less. Ideally, though, it should be earning less because margins have become thinner and the market for lucrative but idiotic rocket science finance has declined. So the good news here (maybe) is that prop trading activity is down and margins are getting squeezed. The bad news is that core businesses like issuing bonds and managing IPOs are also down. That's just a sign of a sluggish economy.

And speaking of a sluggish economy....

What Can Ben Do?

Tyler Cowen says today that the Fed has an easy way to boost the economy: just commit itself to an inflation rate of 3% over the next few years and people will open their checkbooks again. Personally, I'd prefer 4%. But either way, he's not very optimistic that this will happen:

If the Fed promises to keep increasing the money supply until prices rise by, say, 3 percent a year, people should eventually start spending. Otherwise, if they just held the money, it would be worth 3 percent less each year.

In a self-fulfilling prophecy, the Fed could stimulate spending and the economy, and at no cost to the Treasury. Of course, if no one believes the Fed’s commitment to price inflation, spending and employment will not go up. The plan will fail, and people will view their skepticism as vindicated.

In other words, one of our economic problems can be solved, but only if we are willing to believe it can.....Sadly, although [Ben] Bernanke clearly understands the problem, the Fed hasn’t been acting with much conviction. This is understandable, because if the Fed announces a commitment to a higher inflation target but fails to establish its credibility, it will have shown impotence.

....Part of the credibility problem stems from the political environment, especially in Congress. Imagine the day after the announcement of a plan for 3 percent inflation. Older people, creditors and workers on fixed incomes — all connected to powerful lobbies — would start to complain. Republicans would wonder whether they had found a new issue on which to campaign, namely, opposition to inflation. And Democrats would worry about what position to take. Presidents of some regional Fed banks would probably oppose the policy publicly.

It's not clear, of course, if (a) Bernanke agrees that we should target higher inflation but hasn't been able to persuade the rest of his colleagues, or (b) he's part of the problem. Option A is plausible, but I've read nothing suggesting that Bernanke has even mooted higher inflation targeting. How likely is it that he could do that with any vigor and not have word leak out?

Not very, I think. So I'd conclude either that Bernanke himself isn't on board with this or that the political climate is so obviously hostile that he knows it's hopeless to try. Neither one is very reassuring news.

A Simple Look At Income Inequality

Will Wilkinson is unimpressed with Tim Noah's recent series on growing income inequality. He cites several recent pieces of research to suggest that, in fact, inequality hasn't been growing as fast as we think:

Robert Gordon, an economist from Northwestern University....reports that improved use of income datasets "shows that there was no increase of inequality after 1993 in the bottom 99 percent of the population, and can be entirely explained by the behavior of income in the top 1 percent."....Christian Broda and John Romalis find that "the relative prices of low-quality products that are consumed disproportionately by low-income consumers have been falling over this period. This fact implies that measured against the prices of products that poorer consumers actually buy, their 'real' incomes have been rising steadily."....Using an updated price index, Christian Broda, Ephraim Leibtag, and David Weinstein find that the real wages at the 10th percentile increased by 30 percent from 1979 to 2005.

There's long been a cottage industry in efforts to show that income inequality isn't as bad as the raw numbers say it is. Until recently, the most popular tactic was to insist that we should look at consumption instead of income. This was mostly just an attempt at misdirection, but in any case the great credit bubble and bust has made it plain that a lot of recent middle class consumption was fueled by refi and charge card binges that ended disastrously. If anything, this strengthens the case of those who say that income matters after all, so we don't hear this argument much anymore.

But there are plenty of others. We're measuring inflation wrong. Cheap plasma TVs and Chicken McNuggets have made the life of the poor better than you'd think by just looking at their earnings. The whole thing is just a statistical artifact of the 1986 tax reform bill. The composition of households has changed, so household income goes farther than it used to. Income distribution looks better if you count government transfers. Etc. etc. etc.

There are bits and pieces of truth to some of these things, but for the most part they don't really address income inequality at all. They just move the spotlight to something else. Are households smaller than before? Yes, which is why I usually prefer to look at statistics for individuals. Have consumption patterns changed? Maybe so, and taking that into account in an effort to get a handle on the actual lived experience of the poor/working/middle classes is an interesting exercise. Is CPI the right inflation measure? I prefer it, but it's an arguable point.

But regardless of the answers to all these questions, there's still the raw fact that the flow of money in America has changed dramatically over the past few decades. That's why one of my favorite charts is the one on the right. It's updated from the older version that I posted a couple of days ago, and the data comes from an annual CBO report that shows the share of total earnings going to various income levels.

It's not perfect, but it's pretty good. Since it shows income shares, inflation measures don't matter. It doesn't try to measure consumption, it just measures who the money is going to. It includes pensions and government transfers. It accounts for reporting changes due to the 1986 tax reform bill. And it uses tax data to get a cleaner look at the top of the income distribution.

(Drawbacks: It doesn't include healthcare benefits, which would change the shape of the curves slightly. And it uses households as its unit of account. That's not the way I like to look at things, but it's pretty standard in the field.)

If you look at the raw CBO figures, they show that a full tenth of the national income has shifted since 1979 to the top 1% of the country. The bottom quintiles have each given up a bit more than two percentage points each, and that adds up to 10% of all earnings. That 10% has flowed almost entirely to the very tippy top of the income ladder.

Is the middle class worse off because of this? Of course they are. Income matters even if plasma TVs are cheaper than they used to be or if CPI mismeasures middle class consumption or if average households now contain 2.6 members instead of 2.7. If this massive income shift hadn't happened, middle class earnings would be higher, they'd be able to buy more stuff, and they probably wouldn't be in debt as much. And the top 1% wouldn't have quite so much idle cash lying around to do stupid things with.

This income shift is real. We can debate its effects all day long, but it's real. The super rich have a much bigger piece of the pie than they used to, and that means a smaller piece of the pie for all the rest of us. You can decide for yourself if you think this is something we should just shrug our shoulders about and accept.

The Circular Firing Squad

Here's Barack Obama at a fundraiser last night:

Democrats, just congenitally, tend to get — to see the glass as half empty. (Laughter.) If we get an historic health care bill passed - oh, well, the public option wasn't there. If you get the financial reform bill passed — then, well, I don't know about this particular derivatives rule, I'm not sure that I'm satisfied with that. And gosh, we haven't yet brought about world peace and — (laughter.) I thought that was going to happen quicker. (Laughter.) You know who you are. (Laughter.) We have had the most productive, progressive legislative session in at least a generation.

"In other words," says Glenn Greenwald, "you're just a petulant, unreasonable, unrealistic, fringe child who doesn't appreciate the greatness and generosity he's given you....What's most striking about Obama's comments is that there is no acceptance whatsoever of responsibility (I've failed in some critical areas; we could have/should have done better)." Jane Hamsher piles on too: "It all appears to be little more than an egotistical, thin-skinned taunt aimed at those they feel aren’t giving them the accolades the Democrats think they deserve."

I know why Jane and Glenn and plenty of others are angry at Obama. Some of their disappointments I share, some I don't. And there's some history here. But still: come on, folks. It's a campaign fundraiser. It's a place where you rouse whichever troops are in the audience and reel off a list of your accomplishments, not one where you hang your head and talk about your failures. It's a place where you tell a few jokes — like acknowledging the fact that liberals have been devotees of the circular firing squad for as long as liberals have existed. It's lighthearted after-dinner stuff, not an address to the nation.

I wish Obama and his staff would knock off these kinds of jibes, but even so it doesn't make sense to go this ballistic over a casual remark at a fundraising event. Maybe we should all ease up a bit on this stuff.

Friday Cat Blogging - 17 September 2010

This is pre-dinnertime catblogging. Every day, starting around 4:30 in the afternoon, both cats make their way into the living room and start looking ostentatiously bored (Domino, on the left) or ostentatiously cute (Inkblot, on the right). Eventually they get fed. According to me, it's because the clock strikes five and that's dinnertime. According to them, it's because the bored/cute act works. So the postmodernists are right: we all make our own realities, and who's to say which one is really true?

The Inflation Bogeyman

The Fed's preferred measure of inflation is core inflation, which excludes food and energy prices. According to the BLS, the core inflation rate in August was just slightly above zero. The core inflation rate over the past two years is 1.17% and the rate over the past year is 0.89%. Chart below. Needless to say, this is well below the Fed's target. Think they'll do anything about this at their next meeting?