Kevin Drum - October 2011

Small Businesses Still Mostly Concerned About the Economy

| Tue Oct. 25, 2011 9:01 AM PDT

In a Gallup poll released yesterday, 22% of small business owners said their most important problem was "complying with government regulations." That's not really surprising. What's surprising, frankly, is that it's taken so long for the number to rise even that high. Given the 24/7 blitzkrieg about "job killing regulations" from Fox News, the Wall Street Journal, and Republican politicians of all stripes, I'm surprised the number didn't pass 50% months ago. If you hear something often enough, it takes on a life of its own.

The truth, of course, is that business regulation hasn't changed all that much in the Obama era, and that's especially true for small businesses. There are some regulations in the pipeline for the future, but even there, most of the big ones — Obamacare, Dodd-Frank, new EPA regs — hardly affect small businesses at all. And most of the ones that would — dust rules, new licensing rules for farm vehicles — are myths.

You can see this for yourself if you read further in the Gallup poll. When they're asked about "problems," many small business owners immediately make an association with "government regulations." But when Gallup asks "what would you need to see in order to feel that your business will thrive in 2012?" that association goes away and you get a truer picture of what's really bothering them. This time, only 12% mention government regulations and a full 42% respond with some version of an improved economy. And it's really more like 59% if you include fundamentally economic complaints like "cash flow" and "availability of credit."

Everybody hates regulations, and small businesses have some legitimate gripes about overregulation. Right now, though, their real problem is crystal clear: the economy sucks and they need more customers. That's just a big fat reality, and there's nothing much that Fox News can do to change that no matter how much they try.

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Quote of the Day: "I Don't Care About That"

| Tue Oct. 25, 2011 7:59 AM PDT

From Rick Perry, after John Harwood of the New York Times notes that his tax plan will mean huge tax cuts for the rich in an era of already skyrocketing income inequality:

But I don’t care about that.

I suppose there's something oddly refreshing about that response. There's also this:

Q. Why did you choose to keep the birther issue alive?

A. It’s a good issue to keep alive. You know, Donald [Trump] has got to have some fun. It’s fun to poke him a little bit and say “Hey, let’s see your grades and your birth certificate.” I don’t have a clue about where the president — and what this birth certificate says. But it’s also a great distraction. I’m not distracted by it.

I wonder what he thinks those last two sentences mean? Or is it just word salad, like much of the rest of the (short) interview, which is mostly just a core dump of the conservative id? It's hard to tell.

Herman Cain Officially Declares Himself a Joke

| Mon Oct. 24, 2011 8:31 PM PDT

I dunno. Maybe your sense of humor isn't quite the same as mine. So no guarantees. But I swear I almost had a heart attack laughing at this ad from Herman Cain. I just couldn't stop. But you have to watch to the end. It's the cigarette and the smile that really make it. (Via Weigel.)

Brendan Nyhan offers this declaration: "I'm officially declaring the debate about whether Cain is a serious candidate over." Yes, please.

Rick Perry's Miraculous Tax Plan

| Mon Oct. 24, 2011 8:14 PM PDT

Huzzah! Rick Perry's new tax plan is out:

The plan starts with giving Americans a choice between a new, flat tax rate of 20% or their current income tax rate. The new flat tax preserves mortgage interest, charitable and state and local tax exemptions for families earning less than $500,000 annually, and it increases the standard deduction to $12,500 for individuals and dependents....My plan also abolishes the death tax once and for all, providing needed certainty to American family farms and small businesses....To help older Americans, we will eliminate the tax on Social Security benefits....We will eliminate the tax on qualified dividends and long-term capital gains to free up the billions of dollars Americans are sitting on to avoid taxes on the gain.

In addition, Perry is going to lower the corporate tax rate, move to a territorial tax system, pass a Balanced Budget Amendment, ban earmarks, freeze federal hiring and salaries through 2020, halt all pending federal regulations, repeal Obamacare and Dodd-Frank, repeal section 404 of Sarbanes-Oxley, and add private accounts to Social Security (presumably without paying for them, per normal Republican doctrine)

I'm disappointed. Perry only wants to repeal section 404 of Sarbanes-Oxley? Why not the whole enchilada? What a sellout.

What can you even say about this? It sounds less like a tax plan than a big ol' stew pot of right-wing applause lines, all the way up to the inane insistence that eliminating the estate tax has nothing to do with rich people and is only designed to provide "needed certainty to American family farms and small businesses." Should we laugh or cry? Perry has actually managed to combine two separate conservative memes (the estate tax is all about family farms, uncertainty is hobbling the economy) into one single sentence that makes even less sense than either of them separately. It's hard not to be impressed.

But can we please spare a moment for the people who are really going to suffer because of this? Yes, I'm talking about whichever poor schlubs at the Tax Policy Center draw the short straw and have to go through the dreary motions of scoring this. We all know the basic answer, of course: Perry's plan represents a massive tax cut for the rich and a huge loss of revenue for the federal government. But we want numbers, dammit! Not that they really matter, since once they're produced we'll merely be told that they represent old-fashioned static thinking. What we need is a shiny new dynamic scoring of Perry's plan that takes into account the fact that it would, as James Pethokoukis puts it, "supercharge growth." I assume he tweeted that with a straight face, but on the internet you never know, do you?

And one last thing: you sort of have to admire Perry's gimmick of allowing everyone to choose between his plan and the existing income tax. You can almost imagine the conversation: one of his advisors points out that no matter how careful you are, someone will pay more under the new plan. Probably people with low incomes, and you just know the librul media will have a field day with that. "It's regressive! Rick Perry hates the poor!" It'll be a nightmare.

But Perry has a brainstorm! Give everyone a choice! This means that not one single person will pay more under his plan, because they can always choose the old system if they want. This means keeping all 60,000 pages (or whatever) of the old tax code, of course, so nothing really gets simplified. Still, no one pays more, and that's a guarantee. Beat that, Herman Cain.

The Race Against Artificial Intelligence

| Mon Oct. 24, 2011 1:30 PM PDT

A pair of MIT economists, Erik Brynjolfsson and Andrew McAfee, have written a new book suggesting that computers are finally getting smart enough to do jobs that only people could do in the past. Nothing new there. But they've joined a (still small) but growing number of observers who are afraid that the jobs being displaced are being displaced for good:

Faster, cheaper computers and increasingly clever software, the authors say, are giving machines capabilities that were once thought to be distinctively human, like understanding speech, translating from one language to another and recognizing patterns. So automation is rapidly moving beyond factories to jobs in call centers, marketing and sales—parts of the services sector, which provides most jobs in the economy.

During the last recession, the authors write, one in 12 people in sales lost their jobs, for example. And the downturn prompted many businesses to look harder at substituting technology for people, if possible. Since the end of the recession in June 2009, they note, corporate spending on equipment and software has increased by 26 percent, while payrolls have been flat.

…Productivity growth in the last decade, at more than 2.5 percent, they observe, is higher than the 1970s, 1980s and even edges out the 1990s. Still the economy, they write, did not add to its total job count, the first time that has happened over a decade since the Depression.

In the same way that investors get giddy when economic booms have lasted a long time (this time is different!), there's always a danger of getting too pessimistic when an economic downturn lasts a long time. Just because this recession is a deep one doesn't necessarily mean that it has brand new causes or that it's never going to end.

That said, take a look at the chart on the right. You've probably seen it dozens of times: It shows the percentage of people in the United States who are employed. Here's the important thing about it: It didn't peak in 2007 and then plummet during the Great Recession. It peaked in 2000, and it's been dropping ever since. Even the huge housing/credit bubble of the aughts was only able to hold it at bay slightly.

In other words, something happened around 2000 that pushed people out of the labor force. There are lots of possible culprits, so it's wise not to get too invested in a single explanation. Still, I'd say that 2000 is also about the time that computers seriously started to do human jobs. Just a little bit at first, and then more and more. This trend was masked a bit by the high fever we ran in 2003-07, but when the fever broke we compressed seven or eight years of decline into two.

My back-of-the-envelope guess has always been that job losses during the Great Recession have been about one-third structural and two-thirds cyclical. The cyclical part we could address with fiscal and monetary policy if our political leaders had the guts to do it. But I suspect that at least some of the explanation for the structural part is the growing sophistication of computers, and it's not clear what we can (or want to) do about that. Computers can't drive cars or trucks yet, but that day isn't far away. And when it comes, I still wonder what all those drivers are going to do.

Who Should Pay the Price for Financial Failure?

| Mon Oct. 24, 2011 10:39 AM PDT

If you read my epic post on NGDP targeting this morning, you'll recall that one of its virtues is that it automatically encourages higher inflation when the economy turns down and automatically encourages lower inflation when the economy is heating up. This is good for purely economic reasons, since low real interest rates help spur growth during recessions, but Steve Randy Waldman writes today that it has moral benefits too, including this one:

A second moral benefit is that under (successful) NGDP targeting, any depressions that occur will be inflationary depressions....If depressions occur even while the NGDP path is stabilized, then they will reflect some failure of supply or technology. Our aggregate investment choices will have proved misguided, or we will have encountered insuperable obstacles to carrying wealth forward in time. It is creditors, not debtors, whom we must hold accountable for patterns of aggregate investment. There always have been and always will be foolish or predatory borrowers willing to accept a loan that they will not repay. We rely upon discriminating creditors to ensure that funds and resources will be placed in hands that will use them well.

....I do not relish inflation for its own sake, or advocate punishing creditors because they are rich and the tall poppies must be cut. But if, despite NGDP stabilization, real GDP cannot be sustained, someone has to bear real losses. There are only two choices: current producers can be taxed in order to make creditors whole in real terms, or past claims can be devalued so that losses are borne at least in part by creditors. In my view, the latter is the only moral choice, and the only choice that creates incentives for investors to maximize real-economic return....

In theory — the theory being that the Fed is really, truly, rock-solid committed to NGDP level targeting and everyone knows it — creditors understand that they're going to pay the price for foolish loans. They might become insolvent, obviously. But even if they don't, they understand up front that if the economy tanks they're going to see the value of their loans erode because the Fed will temporarily engineer higher inflation. One way or another, they're going to pay the piper, and this will make them more careful in their lending practices.

Now, I'll confess that I have my doubts about that last sentence. Thinking Minskyishly, I suspect that creditors are just bound to act stupidly at the height of economic booms. If the fear of bankruptcy doesn't give them pause, a little bit of inflation won't either. As Steve says, they might deserve to take a hit more than, say, taxpayers or borrowers, but I doubt that the prospect of future inflation will change their behavior much.

No, the real virtue of NGDP targeting, if it works, is that it provides a good set of rules for countercyclical monetary policy, which should prevent economic booms from getting too far out of hand in the first place. But I think a bit of caution is still in order here. The Fed, along with other central banks, has been searching for a good monetary policy rule ever since the ancien régime collapsed in the post-Bretton Woods era, and so far the search for something truly automatic has been fruitless. NGDP targeting is the latest flavor of the day, and who knows? Maybe it really is the magic bullet. But while it might be a pretty good rule, something tells me that, like any rule, it will somehow be deemed inadequate during some future crisis. There is, after all, always the legitimate question of what the proper level target should be (it depends on population growth, technological growth, productivity growth, etc.) and there are measurement problems too, even for something as simple as NGDP. Finding some kind of mechanical monetary rule that automatically produces stable growth is sort of a Holy Grail among a certain set of economists, but we're probably not going to find one anytime soon.

In the meantime, though, it's possible that NGDP targeting is the best bet we have. It's certainly worth all the attention it's getting.

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Quote of the Day: Newt Laments His Party's Ignorance

| Mon Oct. 24, 2011 10:01 AM PDT

From Newt Gingrich, free associating on Herman Cain's road to the presidency:

I think one of the Republican weaknesses has been that we rely too much on consultants and too much on talking points. And we don’t rely enough on actually knowing things.

Seriously? Newt "Language: A Key Mechanism of Control" Gingrich is concerned that Republicans are relying a bit too much on mindless talking points these days? When did he have this Road to Damascus moment?

Mitt Romney Hearts Illegal Immigrants

| Mon Oct. 24, 2011 9:38 AM PDT

Somebody's oppo machine was busy over the weekend. Noam Levey reports in the LA Times today that although Mitt Romney's Massachussetts healthcare reform bars illegal immigrants from receiving insurance subsidies, and bars illegal immigrants from receiving Medicaid, it doesn't explicitly bar them from the absolute bottom rung of medical care:

The Massachusetts healthcare law that then-Gov. Mitt Romney signed in 2006 includes a program known as the Health Safety Net, which allows undocumented immigrants to get needed medical care along with others who lack insurance.

Uninsured, poor immigrants can walk into a health clinic or hospital in the state and get publicly subsidized care at virtually no cost to them, regardless of their immigration status.

Somebody in a rival campaign presumably thinks this is a useful campaign issue because the slavering masses of the tea party base won't be appeased until illegal immigrants are literally writhing in the streets while doctors walk by and pointedly ignore them. Allowing them access to even last-ditch health services is unacceptable, even if the pointy-heads insist that we're saving money in the long run because it keeps them out of emergency rooms.

That's my guess, anyway. In any case, this being the super slick Romney campaign, not the shambolic chaos that passes for one in Rick Perry's camp, a super slick answer was probably prepared months ago and deposited into Romney's real-time enterprise response database, where it could be plucked out at a moment's notice. Surprisingly, though, not really:

The Romney campaign referred questions to Tim Murphy, who served as Romney's state health and human services secretary. Murphy said the governor never intended the Health Safety Net to serve undocumented immigrants.

"Our view when we signed the law was that all benefits would be for people in the commonwealth who were here legally," Murphy said, noting that the regulations implementing the program were written after Romney left office in 2007.

That's it? That's their best shot? I predict that this will persuade exactly no one. The real answer, of course, is that back in 2006 Romney still had a small core of human decency left in his soul, and naturally didn't want even illegal immigrants dying on the streets of Boston for lack of an antibiotic. But he's not allowed to admit that anymore, so instead we get some nonsense about Romney being shocked, shocked at how the regs turned out. That's life in the modern Republican Party for you.

It's funny. Every once in a while I actually feel a little sorry for Romney for being forced to compete in this environment. What's a moderate technocrat to do, after all? But then I remember how enthusiastically he used this exact same xenophobic dynamic to bash Perry repeatedly over the in-state tuition issue, and suddenly I don't feel sorry for him even a little bit anymore. Lie down with dogs and you pick up some fleas.

Chart of the Day: It's a Small, Small World

| Mon Oct. 24, 2011 8:22 AM PDT

Politico reports that the Obama administration, in the person of Jan Eberly, Treasury’s new assistant secretary for economic policy, is pushing back on the Republican notion that "regulatory uncertainty" is damaging the economy. It's sort of sad that she has to waste valuable neurons on this, when she could instead be doing actual useful work, but I guess that's politics for you.

Anyway, her case is here. And part of her case is that the American economy isn't actually suffering from any more uncertainty than the rest of the world, which suggests that American regulations can't really be having much of an impact. The chart below shows two measures of stock market volatility, one for the U.S. and one for Europe, and as you can see, they've moved pretty much in lockstep during the Obama era.

Which, to make a separate point, is an impressive demonstration of the fact that we live in a global economy, not just an American one. When stuff happens, it affects us all. Keep that in mind when American bankers and Treasury officials keep telling us that "we aren't very exposed" to a possible eurozone disaster. My guess is that we're pretty exposed after all, which is a good reason for all of us to hope that Europe gets its act together soon.

The Great and Mysterious NGDP Targeting Debate

| Mon Oct. 24, 2011 5:22 AM PDT

How should the Fed manage monetary policy? The hot topic these days is NGDP level targeting, an old idea that's become newly popular as the economy continues to splutter and current Fed policy seems less and less effective. So let's take a look at NGDP targeting and try to answer two questions:

  • Question #1: Why target NGDP levels? Why not something else?
  • Question #2: How do we target NGDP? Can the Fed really control it?

First, though, a technical definition. NGDP is nominal GDP. That is, it's the total output of goods and services without any correction for inflation. So if the Fed's target is, say, 5% growth per year, that could come from any combination of real GDP growth plus inflation. From a monetary perspective, you don't care. If real GDP doesn't grow at all, you want 5% inflation. If real GDP is on fire and growing 5%, you want no inflation. One way or another, though, you want spending — the number of dollars spent on goods and services — to grow on a stable, predictable path. With that, onward.

Warning! The following is both long and tentative, because I don't really know what I'm talking about. So I'm putting the rest below the fold. If you click "More," do it with the understanding that (a) some of it might be wrong and/or misguided due to a lack of understanding on my part of key concepts, and (b) you're just following along for the ride as I try to puzzle through some stuff in public. OK?