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.

Legal Immigration

Some opponents of immigration attempt to hide behind an opposition to solely illegal immigration (the "wait your turn" argument). It makes them look civic, rather than xenophobic. 

To supplement my previous post about the benefits of immigration, a nice flow chart of just how cumbersome and lengthy the legal immigration process is can be found here. Many people without direct family in the U.S.A. who would like to immigrate have no legal avenue, especially the poor and unskilled. See also, Franz Kafka's Before the Law.

Migration and its Benefits

Lower barriers to migration is by far the best policy option to increase economic growth, and reduce poverty. Yet there’s still debate and hypocrisy. How can a country, or person, who espouses the benefits of free markets be against the free flow of labor? It’s half the basic production function[1]. Anyway, if you click “read more” I intend to show that the evidence is overwhelmingly in support of freer migration. And opposition is only possible through ignorance, hypocrisy, or malice for the poor. Here are the basic conclusions showing freer migration, of both skilled and unskilled workers, is the single best policy option for the world economy.

1. Complete reduction of barriers would increase world GDP by between 67-147%. Even a small reduction in barriers would lead to welfare gains larger than the complete elimination of remaining barriers to goods and capital flows.

2. Migrants from the developing world themselves are the largest beneficiaries of migration. At the median, a migrant to the U.S. will experience a wage increase of around 4.11 times their pre-migration wage.

3. Immigration increases productivity and employment levels for all workers, including native workers.

4. No study has found large negative effects on GDP, wages, or government finances/service provision due to immigration.

5. Emigration from developing countries puts upward pressure on domestic wages, increases incentives for education, and leads to remittances. All of which make emigration a net benefit for poor countries.

Gender Differences in Developing Countries

Well this is pretty shameful:

Yet...

Innovation and Patent Laws

Believe

September Jobs Report

There's some unusual news in the area of unemployment statistics. First, in late September, the BLS issued a preliminary revision to their March 2011 – March 2012 numbers; they underestimated job growth by about 20%. In a way this is news only a statistician could love, the effect of these job gains won't change because the measurement is more accurate. And it does make the apparent slowing down of the economy look more pronounced. But it's still good news that we weren't doing as poorly as thought. The figure below shows the gains since March starting from where the revision put the total increase in jobs ending March 2012. 

The news for September in particular is complicated. The increase in total non-farm jobs was reported at 114,000. A lame number, not terrible but not any good either. The numbers would be terrible if the government was still shedding jobs, instead government employment is creeping up. On the good side the numbers for July and August were revised upwards by a total of 86,000 jobs. 

Further complicating things is the fact that the unemployment rate dropped, from 8.1% to 7.8%, and not from people leaving the labor force. It is the first time the unemployment was below 8% since January 2009. The unemployment rate is calculated using a different survey, of households rather than businesses. The household survey shows an astonishing 873,000 more jobs than in August. The household survey numbers are volatile, and the two numbers often diverge, but over time are similar in aggregate. As Floyd Norris (Chief Financial Correspondent for the New York Times) points out,
“A year ago, the the establishment numbers were looking better than the household numbers. Now the reverse is true...Over the last 24 months, however, the two reports are virtually identical, showing an additional 3.6 million jobs and workers." 

I really don't have the expertise to shed any more light on the confusing batch of statistics today. But the take away message seems to be that the economy is and was doing better than we thought, but it's still slowing down.

Rating Politicians

I was drunk during the debate, just like in '08. It helps you pay much less attention to what's being said, but notice how it's being said. Mitt Romney said everything better; Obama seemed like he forgot he had the debate that night. Also the format was terrible.

Anyway, to help judge the candidates by what they actually say and do, The Economist has (un-scientifically but whatever) polled hundreds of professional economists in the United States.

Overall Obama seems to have a lead over Romney when it comes to economic policy. Though Romney is slightly favored by business economists. The results are typically much closer on the specifics, though Obama opens up wide leads on certain issues.

The best part of these polls however, is how the economists identify themselves politically. The largest group, at 50%, is independents, followed by Democrats, with 43%, and only 7% of economists polled are Republicans. This result is nearly identical to when the same polling was done four years ago. It warms my heart to know that half of economists are independents and only 7% Republicans.

Art for Tired Eyes

Economists

"I don't know what to do
But I know what not to do"

- Volcano!

QE3: The Fed Steps In

The Federal Reserve has decided to further stimulate the economy in a bold and unprecedented manner. The Fed announced, in a 12-1 decision, that it would “[purchase] agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate…in a context of price stability.” These purchases will continue so long as “the outlook for the labor market does not improve substantially.” And even if it does “[A] highly accommodative stance of monetary policy will remain appropriate for a considerable time.”

This action is very different from past Fed actions in that it’s theoretically unlimited in its commitment. In previous quantitative easing the Fed committed to specific dollar amounts. The new policy is limited only to $40 billion per month, for a length of time yet to be determined. The Fed buys bonds from banks with newly created money[1], this reduces the cost of lending, and thus of borrowing, which lowers the cost of consumption and investment. The focus on mortgage-backed securities will reduce the cost of mortgages in particular, stimulating housing demand. There are other channels through which QE stimulates the economy; however, if the banks aren’t willing to lend or individuals/businesses willing to borrow the stimulative effects will be lessened.

On the positive side, this action comes just days after the European Central Bank (ECB) made an unlimited commitment to buy bonds of European countries that are in a debt agreement with the EU/IMF. That the Europeans have made a similar commitment increases the simulative effects of Fed action. Economic policy works best when pursued in unison.

Some people are concerned about the inflationary effects of such policies. There are two basic possible outcomes: either it won’t work, in which case inflation won’t be an issue, or it will, in which case the Fed can withdraw the stimulus and reduce inflationary pressure (more details here and here). Inflation has been historically low and stable since before and especially after the recession. And the Fed doesn’t seem too concerned for now, stating, “If inflation goes above target, we take a balanced approach: bring inflation back to target over time but in a way that takes into account deviations of both [unemployment and inflation] from our target.” The Fed has a duel mandate to keep inflation and unemployment low. Currently inflation is below target and unemployment above target, so this policy is very consistent with the Fed’s mandate.

Now it’s up to the politicians, which isn’t as confidence inspiring. The Europeans need a political solution to escape their debt crisis; the ECB can only buy them time. The United States needs a political solution to the “fiscal cliff”, a detrimental combination of tax increases and spending cuts that will take effect in January. The Fed can only soften the blow slightly. Yet whatever happens, it is good to know that, like a good friend, “the Fed will be there to do what it can.”