Year: 2010

The More Things Change …

By James Kwak

As a holiday gift to myself, I’ve actually been reading a real book, on paper — The Worldly Philosophers, by Robert Heilbroner. The book itself was not a gift to myself; I have my sister’s old copy, which is the 1980 edition. The book is a traditional intellectual history of some of the main figures in economics. As the original was written in 1953, it focuses less on the mathematical line of economics, from Walras and Marshall through Arrow-Debreu to the present, and more on what used to be called political economy: Smith, Ricardo, Mill, Marx, Keynes, etc. It’s not a way to learn economics, but a way to learn something about the historical conditions that helped give rise to some important economic ideas.

But some passages seem oddly relevant today. Discussing the conventional economic wisdom of the early nineteenth century (pp. 121-22):

“They lived in a world that was not only harsh and cruel but that rationalized its cruelty under the guise of economic law. . . . It was the world that was cruel, not the people in it. For the world was run by economic laws, and economic laws were nothing with which one could or should trifle; they were simply there, and to rail about whatever injustices might be tossed up as an unfortunate consequence of their working was as foolish as to lament the ebb and flow of the tides.”

Continue reading “The More Things Change …” →

Why Can’t Europe Avoid Another Crisis? Why Can’t the U.S.?

By Simon Johnson

Most experienced watchers of the eurozone are expecting another serious crisis to break out in early 2011. This projected crisis is tied to the rollover funding needs of weaker eurozone governments, i.e., debts falling due in March through May, and therefore seems much more predictable than what happened to Greece or Ireland in 2010. The investment bankers who fell over themselves to lend to these countries on the way up, now lead the way in talking up the prospects for a serious crisis.

This crisis is not more preventable for being predictable because its resolution will involve politically costly steps – which, given how Europe works, can only be taken under duress. And don’t smile as you read this, because this same logic points directly to a deep and morally disturbing crisis heading directly at the United States.

The eurozone needs to – and will eventually – take three steps: Continue reading “Why Can’t Europe Avoid Another Crisis? Why Can’t the U.S.?” →

Tax Cutters Set Up Tomorrow’s Fiscal Crisis

By Simon Johnson. This post slightly updates the first few paragraphs of my most recent column on Bloomberg, which ran last week. For the rest of that column, use this link.

President Barack Obama is receiving congratulations for moving to the center on the tax agreement with Republicans.

Both sides think they got something: Democrats feel this will nudge unemployment below 8.5 percent in 2012, helping the president get reelected; Republicans achieved longstanding goals on measures such as the estate tax and think they will get most of the credit for an economic recovery that’s already under way.

The truth is, the deal moved us closer to a fiscal crisis, just as the euro zone now is experiencing.

Who will emerge on top in the U.S. version is harder to predict; at the moment, Republicans have the edge. But it’s not clear even they will be happy with what they wished for — an opportunity to enact massive federal government spending cuts.

To read the rest of this column, please click here. Alternatively, you can use the full address: http://www.bloomberg.com/news/2010-12-23/tax-cutters-set-up-tomorrow-s-fiscal-crisis-commentary-by-simon-johnson.html

Bankers’ Pay On The Line Again

By Simon Johnson

The people who run big banks in the US have had a good year. They pushed back hard on financial reform legislation during the spring and were able to defeat the most serious efforts to constrain their power. They and their non-US colleagues scored an even bigger win at Basel this fall, where the international committee that sets financial safety standards decided to keep the required levels of equity in banks at dangerously low levels. And the counter narrative for the 2008 financial crisis, “Fannie Mae made me do it,” gained some high profile Republican adherents closely aligned with the men who will control the House Financial Services Committee in 2011-12.

But there is also a potential lump of coal in Santa’s sack for the biggest banks, in the form of restrictions of pay – both its structure and perhaps even the amounts (although officially the latter is not currently on the table). Continue reading “Bankers’ Pay On The Line Again” →

Symbols and Substance

By James Kwak

Arnold Kling wins the prize for the most erudite post of the past week, a review of The Symbolic Uses of Politics, by Murray Edelman. Kling cites not only Sigmund Freud and J.D. Salinger, but Theodor Adorno and Seymour Lipset (with specific books, not just names), among others.

In Kling’s summary, Edelman divided the political sphere into insiders and outsiders (Kling’s terms). Insiders are basically special interests: small in number but well organized and with specific goals. Outsiders, or the “unorganized masses,” are the rest of us: we have some interests, but we are poorly organized to pursue them and therefore are generally unsuccessful. In particular, Outsiders suffer from poor and limited information, and therefore are especially susceptible to political symbols. In Kling’s words:

“Given these differences, the Insiders use overt political dramas as symbols that placate the masses while using covert political activity to plunder them. What we would now call rent-seeking succeeds because Outsiders are dazzled by the symbols while Insiders grab the substance.”

Continue reading “Symbols and Substance” →

Why Citigroup?

By James Kwak

I think Ezra Klein is probably right about Peter Orszag:

“Citigroup is a really big, really powerful institution. Orszag’s position in it is the sort of position that could one day lead to being president of Citigroup. If you’re him, and you’re trying to figure out an interesting and high-impact way to spend the next 40 years, I can see why it’s appealing. But it’s the power and the job and the opportunity, more than the money, that make it appealing.”

Klein says the problem is that this kind of job transition makes people lose faith in government, and I agree with that. But I think there’s a deeper problem as well.

This is the mindset of the ambitious educational elite: You go to Harvard (or Stanford), maybe to Oxford (or Cambridge) for a Rhodes (or Marshall), then to Goldman (or McKinsey, or TFA), then to Harvard Business School (or Yale Law School), then back to Goldman (or Google), and on and on. You keep doing the thing that is more prestigious, opens more doors, has more (supposed) impact on the world, and eventually will make you more and more famous and powerful. Money is something that happens along the way, but it’s not your primary motivation. Then you get to Peter Orszag’s position, where you can do anything, and you want to go work for Citigroup? Why do our society and culture shape high-achieving people so they want to be executives at big, big companies that are decades past their prime? Why is that the thing people aspire to? Orszag wanting to work at a megabank — instead of starting a new company, or joining a foundation, or joining an NGO, or becoming an executive at a struggling manufacturing company that makes things, or even being a consultant to countries with sovereign debt problems — is the same as an engineer from a top school going to Goldman instead of a real company. It’s not his fault, but it’s a symptom of something that’s bad for our country.

The Obama Renaissance

By James Kwak

President Obama is enjoying something of a political resurgence, at least among the commentariat. Ezra Klein points out that his approval ratings remain higher than those of his Congressional opposition, as opposed to Clinton in 1994 and Bush in 2006. In The New York Times, Michael Shear says the lame-duck session of Congress could be a “big win” for Obama, and Matt Bai hails the tax cut compromise as “responsible governance” and says it could lead to a successful presidency.

Obama is certainly in a decent position politically, and I would bet on him to be reelected comfortably in 2012. First off, his opponents in Congress are deeply irresponsible (admittedly: “The single most important thing we want to achieve is for President Obama to be a one-term president.”) and face a huge political problem within their own party: a significant portion of the conservative base really does want lower deficits, yet the only thing the Republican caucus knows how to do is cut taxes. Klein points out that the Republicans will eliminate House rules that spending increases or tax cuts have to be offset elsewhere, and will instead say that “tax cuts don’t have to be paid for, and spending increases can’t be offset by tax increases.” Second, the Tea Party and Sarah Palin mean that Obama is likely to face an opponent who has been pulled dangerously close to the lunatic fringe during the primary (or, even better yet, Palin herself). And third, there’s triangulation.

Continue reading “The Obama Renaissance” →

“Washington and the Regulators Are There To Serve the Banks”

By James Kwak

It is too obvious to bear saying, but I’ll say it anyway.

At the urging of the administration, Congress passed a financial reform bill this past summer that expanded the theoretical powers of regulators, but also gave those regulators the power to write the rules implementing the bill and then to enforce the rules. The bill’s sponsors fended off efforts to write specific constraints, whether size limits or leverage limits, into the statute. Yet the bill did nothing that I am aware of to ensure that regulators do a better job than they did last time around, unless you count the creation of a standalone consumer protection agency. (Yes, this is a hard problem with no easy solutions, but ignoring it doesn’t make it go away.)

Now we will see the results. Via Mark Thoma, Andrew Leonard provides the money quote, from incoming House Financial Services Committee chair Spencer Bachus: “in Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks.”

Of course, having written a book that argued that politics is more important than economics, this doesn’t surprise me. Nor does the decision by the Financial Crisis Inquiry Commission’s Republican appointees to deny that the shadow banking system even exists, or to write a dissenting “primer” whose only possible motivation can be captured in Barry Ritholtz’s post, “Repeat a Lie Enough Times . . .” But what frustrated me about the administration’s position over the spring and summer was the idea that, despite this basic fact, they marched forward as if government regulation is a purely technocratic problem that can be solved by simply finding smart men and women of integrity and conscientiousness.

Delusions Of Fiscal Grandeur

By Simon Johnson

If you honestly believe that investors will happily buy up any amount of US government debt (at low interest rates) for the indefinite future, then relax. The tax deal passed yesterday should make you happy.

But if you fear that the US will soon be tested by financial markets – just as the eurozone is being tested today – then please read my column,”Voodoo Economics Revisited“, which is now on the Project Syndicate website. There is a well-established tradition in the Republican Party of thinking that tax cuts cure all ills; many in the Democratic leadership have apparently now fallen into line. We need to think hard about what our fiscal crisis will look like – and who will end up being hurt the most.

Another link to the column: http://www.project-syndicate.org/commentary/johnson15/English

Republican Splits, Fiscal Opportunity

By Simon Johnson

An informative and potentially productive political debate has broken out over fiscal policy. Ironically, this is not between Democrats and Republicans – the leadership on both sides of the aisle is trying hard to agree that a moderate stimulus is worth increasing the national debt by nearly $900 billion. And the new debate is not particularly due to the Bowles-Simpson bipartisan commission or other serious efforts to put the real math on the table; those technical discussions have so far been brushed aside.

Rather the intensifying and illuminating debate is within the Republican Party – particularly between people who are reasonably presumed interested in running for the presidency in 2012. Continue reading “Republican Splits, Fiscal Opportunity” →

13 Bankers in Paperback

By James Kwak

Yes, that’s a new book photo in the sidebar to the right. The paperback edition will be available on January 11, 2011. It has a new epilogue taking the story from January 2010 (when we finished the hardcover) to September 2010, covering the financial reform debate in the Senate and the final Dodd-Frank Act.

Enjoy.

The Moderate Republican Stimulus

By James Kwak

One of the great things about the Internet, as opposed to, say, law school, is that other smart people will do my homework for me. Last week I said that Obama’s position on the tax cuts was a “moderate-Republican line in the sand” and that the tax deal was closer to the Republicans’ ideal outcome than the Democrats’, but the latter argument was based on some guesses about Republican preferences. Now Mike Konczal has done some of the harder argument, uncovering hard evidence that the Republicans would have agreed to the extended child tax credit sweetener anyway and presenting five points for the argument that the Republicans wanted payroll tax cuts – in particular, they wanted them more than Making Work Pay tax credit that they replaced.

Here’s Mike’s version of the administration’s chart:

He calls it the “Moderate Republican Stimulus Package 2.0.”

This American DREAM

By James Kwak

Brad DeLong reminded me that the DREAM Act is being considered by Congress right now and has an outside chance of passage. If you are a Senator on the fence about this issue, or you work for one, you should listen to the last segment of this This American Life episode, starting about forty-six minutes in. It will break your heart.

Oh, and given that opposition has been basically along party lines: aren’t the people who would qualify for citizenship under the act natural Republican voters, anyway? Basically the act would reward people who pull themselves up by their bootstraps, without the benefit of federal aid. Or is that no longer what the Republican Party is about?

Who Wanted What?

By James Kwak

Look, I’m familiar with the argument for the tax cut deal. It’s not a terrible argument. In simple form, it goes, the top priorities are to stimulate the economy and to cushion the impact of unemployment, and a two-year tax cut extension was worth it to get that, especially since we can kill the Bush tax cuts in 2012. Now, no one who wasn’t born yesterday buys that bit about killing the Bush tax cuts in 2012, but you could still make the argument that two years of stimulus is worth making the tax cuts effectively permanent. (I don’t agree, but it’s not a crazy argument.)

But that’s not Austan Goolsbee’s argument on YouTube.

Here’s his slide:

Continue reading “Who Wanted What?” →

What Is Wrong With Cutting Taxes?

By Simon Johnson

The president and congressional Republicans have reached a deal that would cut taxes “for all Americans.” Their argument is that this package will stimulate the economy, create jobs and help lead to economic recovery and sustained growth.

This proposal, which seems likely to pass Congress, is not a good idea. Why? (To see me explain these points in a five-minute video, click here.) Vice President Dick Cheney said, loud and clear, in 2002: “Reagan proved deficits don’t matter.”

He was right that Ronald Reagan showed the Republican Party that you can get away with running significant deficits as a result of tax cuts – exactly the strategy of President George W. Bush.

But Mr. Cheney was completely wrong with regard to the implication that there are no economic consequences of sustained fiscal deficits. Continue reading “What Is Wrong With Cutting Taxes?” →