Politics

Guess which continent wasn't politically important enough for UN Secretary Dag Hammarskjöld's head to not block in this posed picture.

That's a bit unfair. He died in a plane crash in Africa on his was to the Democratic Republic of the Congo to negotiate a cease fire between factions that were tearing the country apart in the "Congo Crisis". Granted, UN members such as the United States, Belgium and the Soviet Union were using it as a playground for the Cold War, and completely undermined anything a neutral member of the UN could do. Also Dag was an economist so he couldn't have been that bad. Then again:

Fiscal Cliff Update

Because of the timing, I’d like to expand on a previous post about the fiscal cliff, seen here.

The CBO has released a new report about how terrible the fiscal cliff will be unless congress acts to prevent it. The basic story is the same, but there are a few key details worth dwelling on. The figure below provides a nice summation of them. The column on the left is dollars of GDP lost per dollar cut; the column on the right is essentially how many full time “equivalent” jobs will be lost per million dollars of cuts. 

The first thing noticeable is that the spending cuts that were part of the deficit ceiling deal will be the most damaging to the economy and employment. This is because discretionary spending (spending subject to the annual appropriations process in congress) is below its 40 year average, each additional cut will damage the economy more. The mirror of this is that tax increases will have less damaging effects per dollar of the deficit reduced. This is because taxes are below their 40 year average.

Furthermore, when “Extend Most Expiring Tax Provisions and Index the AMT to Inflation” is compared to the same policy “Except for the Lower Tax Rates on Income Above Certain Thresholds” (or, let the Bush Tax Cuts expire for the rich) there is little effect. In terms of GDP, the average difference in growth will be $0.10 per tax dollar forgone – notice though that the estimated range for increasing or not increasing taxes on the rich is the same. In terms of employment, increasing taxes on the rich is estimated to have no effect. It’s almost as if “the Job Creators” will keep working even if they keep a few percent less of their incomes each year. 

Poverty

Here's a simple post. There's a lot that's wrong in the world; but we should keep things in context. Poverty world wide is decreasing at the most rapid pace ever observed. It shows what good can be done when markets work, as opposed to corporatism masquerading as capitalism. No system has a better track record.

At the same time, this raises the question of what is happening in the United States. Whereas global inequality is decreasing, in the United States it is increasing. Whereas global poverty is decreasing, in the United States it is increasing (mostly due to the Great Recession but considering that it is at least not decreasing). As the graph below shows, while the United States has a lower poverty rate than many countries, it has a higher rate than pretty much every other developed country. And in a country of 310 million-ish people that results in a very large population in poverty.

So, the election, requisite post:

Obama wins, about 52% in the popular vote but barely a dent in his Electoral College count from last time, etc.

Conservatives: will blame Romney for not being conservative enough. One of the few relative "moderates" left has some insight on that:

“If I hear anybody say it was because Romney wasn’t conservative enough I’m going to go nuts. We’re not losing 95% of African-Americans and two-thirds of Hispanics and voters under 30 because we’re not being hard-ass enough.” – Lindsey Graham

But they’ll probably say that anyway despite two senate elections lost due to very conservative candidates' offensive ignorance about women and rape. Also worth mentioning: the states of Washington and Colorado decided to pursue sensible public policy by legalizing and regulating the sale and possession of marijuana.

Anyway, what about Maryland? In Maryland voters upheld a law giving illegal immigrants a pathway to receive in-state tuition rates at public colleges and universities. I’ve recently posted on the benefits of immigration and the difficulties of legal immigration. And education is the ultimate public good, higher levels of education make everyone better off. Additionally, Marylanders voted to uphold the state law allowing same sex marriages, or rather, upheld a law allowing equal access to the legal status given to people who receive marriage licenses. Maryland is indeed a great state, where a majority of people came out to vote for better public policy and the furthering of equality before the law. 

In fact election night was a big night for gay rights and equality. After losing every previous referendum on gay marriage, referendums supported it in Maryland, Maine, and Washington; and a referendum to establish a constitutional ban on gay marriage in Minnesota failed – a veritable sweep. Furthermore, voters in Wisconsin elected Tammy Baldwin to the senate. Unless a current senator comes out in the next couple months she will be the first openly gay U.S. senator. All in all, a good night for progress.

The Fiscal Cliff

The Fiscal Cliff is the popular term given to the scheduled expiration of mostly tax increases and spending cuts that will take effect as certain laws expire this coming January. Expiring tax provisions include the Bush tax cuts, tax cuts enacted as stimulus measures such as the payroll tax holiday and a provision limiting the expansion of the Alternative Minimum Tax[1]. Spending provisions from the Budget Control Act (the debt ceiling deal) will reduce discretionary spending and extended emergency unemployment benefits will expire starting in 2013.

In the coming decade, the expiration of these policies will reduce budget deficits to around 1.4% of GDP per year and debt from 73% to 61% of GDP. Failure to let these provisions expire will result in debt increasing to 93% of GDP by 2022. In the long run growth will be lower if these provisions never expire.

However, in the short run, given the weak state of our economy[2], allowing every provision to expire at once will cause the economy to contract and unemployment to rise. The Congressional Budget Office (CBO) forecasts the fiscal cliff will knock growth down to 0.5% over the next year and increase unemployment to 9.1%. The annual growth of 0.5% breaks down to negative growth of 1.3% on an annualized basis[3] in the first half of the year before recovering to grow by 2.3% annualized by the second half. Put simply, with the fiscal cliff, the worst year of the recovery has yet to happen. I personally find the CBOs non-cliff growth forecast to be too optimistic. But the size of the hit is the same; the CBO provides what is most likely a very best case scenario.

Those who think congress could never be as reckless to let this come to past should think back to the deficit ceiling drama. But even if it’s avoided, we are already suffering due to the uncertainty. The CBO estimates that the uncertainty alone will reduce growth in the second half of the year by 0.5% annualized. J.P. Morgan reports that 61% of its clients say the fiscal cliff is affecting their hiring plans. Economists Sylvain Leduc and Zheng Liu of the Federal Reserve Bank of San Francisco estimate that uncertainty has already added 1% to the unemployment rate.

Given the reality of the situation, simply delaying all elements of the fiscal cliff would be better than letting it happen. But the tax policies should expire first, and for the wealthy first. Even if none of the spending cuts take place, discretionary spending (the spending that is appropriated annually as part of the budget process) will still finish the decade below its 40 year average. And our tax system needs simplifying reforms to raise revenues. But the undeniable truth is that our debt problem cannot be solved by tax increases and discretionary spending cuts alone. Mandatory spending, especially on health programs, such as Medicare, Medicaid, and Social Security, will sink us eventually. If we can’t reform those programs, the only outcomes of the fiscal cliff debate are to ruin our economy now, or delay the inevitable by a matter of years later.

October Jobs Report

It's the last jobs report before the election, 171,000 jobs were added in October. A number that is only good relative previous jobs reports and the pessimistic expectations of market watchers. If this stayed the level of job growth we would return to pre-crisis unemployment by 2018ish. But the figure is an improvement, and furthermore, the numbers for the previous two months have been adjusted upwards by a combined 84,000 jobs. The unemployment rate increased to 7.9% due to an increase in people actively looking for jobs, a good sign.

As an example of how large future revisions can be, when the August jobs report came out the BLS reported a paltry increase of 96,000 jobs. By this report that number had be revised to 192,000 jobs added.