Bad Arguments Against Tax “Increases”

By James Kwak

Last week, a professor making more than $250,000 per year (with his wife’s income) put up a blog post (since taken down) criticizing President Obama for wanting to “raise” his taxes.* The post basically said, after all of their basic expenses, “we are just getting by despite seeming to be rich.” If his taxes go up, he says he will have to cut back on spending, which will depress the economy, or perhaps even sell his house or cars, which will depress those asset markets. The problem, he argues, is that the tax “increases” won’t affect the true super-rich, because they use tax dodges to avoid paying taxes; instead, they will just hurt the economy.

This post has been the target of some howitzers on the Internet, mainly focused on the professor’s income and expenses, but I wanted to raise a few more general policy points.

First, it’s just not true that the rich will reduce their spending dollar-for-dollar as their taxes go up. The reason that tax cuts are a lousy form of stimulus applies in reverse: just as extra cash leads to more saving, less cash leads to less saving. And this is especially true for the rich, who have more slack in their budgets. There might be individual rich households that will reduce their spending dollar-for-dollar, but in aggregate it just won’t happen.

Continue reading “Bad Arguments Against Tax “Increases”” →

Can Someone Explain Facebook Credits to Me?

By James Kwak

The recent New York Times story on Facebook Credits was just one of a slew of articles that have been coming out recently on this topic. (Hint: When that happens, it’s usually because the company in question is putting on a PR campaign, which means they are pushing stories to the media in an attempt to build buzz.) According to the generally positive reporting, Credits are “a virtual currency system that some day could turn into a multibillion-dollar business.”

As far as I can make out,* Credits are points that you can buy with real money and that are stored with your Facebook account data on the mother ship in Palo Alto (just like your bank keeps track of the Dollars you have on account there). You can use Credits to pay for a variety of stuff in Facebook apps, and Facebook takes a cut (currently thirty percent) of the value of any transaction using Credits. The story is that in the long run, you may be able to use Credits to buy anything, not just stuff on Facebook, positioning Facebook as a potential leader in electronic payments.

Continue reading “Can Someone Explain Facebook Credits to Me?” →

Foreclosure Wave Hits Cash Buyers, Too

By James Kwak

Since most of you probably read Calculated Risk, you’ve probably seen the Sun Sentinel story of the man in Florida who paid cash for a house–and still lost it in a foreclosure. Not only that, but he bought the house in a short sale in December 2009, the foreclosure sale happened in July 2010, and only then did he learn about the foreclosure proceeding.

Even after that,

“Grodensky said he spent months trying to figure out what happened, but said his questions to Bank of America and to the law firm Florida Default Law Group that handled the foreclosure have not been answered. Florida Default Law Group could not be reached for comment, despite several attempts by phone and e-mail. . . .

“It wasn’t until last week, when Grodensky brought his problem to the attention of the Sun Sentinel, that it began to be resolved.”

Bank of America now says it will correct the error “at its own expense.” How gracious of them.

If the legal system simply allows Bank of America to correct errors, at cost and with ordinary damages, after they happen, this type of abuse will only get worse. There’s obviously no incentive for banks not to make mistakes, and as a result they will behave as aggressively as possible at every opportunity possible. Yes, this was probably incompetence, not malice, on the part of the bank. But if you don’t force companies to pay for the consequences of their incompetence, they will remain willfully incompetent, and the end result will be the same.

After The Recession: What Next For the Fed?

By Simon Johnson

The Federal Reserve was created in 1913 to help limit the impact of financial panics. It took a while for the Fed to achieve that goal, but after World War II – with a great deal of help from other parts of the federal government – the Fed hit its stride. Today the Fed has not only lost that touch but, given the way our political and financial system currently operates, its own policies exacerbate the cycle of overexuberance and incautious lending that will bring on the next major crisis (and presumably another severe recession).

Sudden loss of confidence in the financial system was not uncommon toward the end of the 19th century, and while the private sector was able to stave off complete disaster largely by itself, the tide turned in 1907. In that instance J.P. Morgan could stand firm only because, behind the scenes, his team received a large loan from the United States Treasury (on this formative episode, see The Panic of 1907: Lessons Learned From the Market’s Perfect Storm by Robert F. Bruner and Sean D. Carr). Leaders of the banking system realized they needed help moving forward, and there was general agreement that the widespread collapse of financial intermediaries was not in the broader social interest. The question of the day naturally became: How much government oversight would bankers have to accept in return for the creation of a modern central bank? Continue reading “After The Recession: What Next For the Fed?” →

Elizabeth Warren: The Right Appointment At The Right Time

By Simon Johnson

The case for appointing Elizabeth Warren to set up the new Consumer Financial Protection Bureau (CFPB) was, at the end of the day, overwhelming.  She had the original idea, she helped build political support, and her own credentials have been only strengthened by her work as head of the Congressional Oversight Panel for TARP.  On Friday, the president will reportedly appoint Professor Warren as an assistant to the president and special adviser to the Treasury Secretary, with the task of setting up and initially running the CFPB.

Some of Ms. Warren’s supporters think this move is something of a half-measure – they would have preferred a conventional nomination, with all the fanfare of a classic confirmation battle in the Senate.  There is something to be said for that, but the interim appointment route is by far the best way forward for three reasons. Continue reading “Elizabeth Warren: The Right Appointment At The Right Time” →

Basel III: The Fatal Flaw

By Simon Johnson

The international discussion among government officials regarding bank reform is, at an informal level, going better than you might think.  Top people in the “official sector” are increasingly willing to confront the banking lobby and even refute its more egregious claims, particularly the completely erroneous notion that making banks safer – by requiring them to hold more capital – would actually hurt the broader economy and undermine growth.

Unfortunately, the structured intergovernmental process that actually changes the rules around banks – known as Basel III (or “Basel 3”) – was rushed to an unsatisfactory conclusion last weekend.  The US and other countries with major financial centers will need to add substantial additional capital requirements at national levels if these new rules are to be at all effective. Continue reading “Basel III: The Fatal Flaw” →

Brady Bonds For The Eurozone, Starting With Ireland

By Peter Boone and Simon Johnson. This post comprises the opening paragraphs of a longer article available for free and without advertizing at Project Syndicate.

Today’s conventional view of the eurozone is that the crisis is over – the intense, often existential concern earlier this year about the common currency’s future has been assuaged, and everything now is back under control.

This is completely at odds with the facts. European bond markets are again delivering a chilling message to global policymakers. With bonds of “peripheral” eurozone nations continuing to fall in value, the risk of Irish, Greek, and Portuguese sovereign defaults is higher than ever.

This comes despite the combined bailout package that the European Union, International Monetary Fund, and European Central Bank created for Greece in May, and despite the ECB’s continuing program of buying peripheral EU countries’ bonds. Heading into its annual meetings in a few weeks (followed by the G-20 summit in Seoul in November), the IMF is bowing to pressure to drop ever-larger sums into the EU with ever-fewer conditions.

Indeed, official rhetoric has turned once again to trying to persuade markets to ignore reality. Patrick Honohan, the governor of Ireland’s central bank, has labeled the interest rates on Irish government bonds “ridiculous” (meaning ridiculously high), and IMF researchers argue that default in Ireland and Greece is “unnecessary, undesirable, and unlikely.”

…..

Read the rest of this article, with links to sources, at Project Syndicate: click here (or just use this address: http://www.project-syndicate.org/commentary/johnson12/English).  It’s free and no advertizing is involved; more about Project Syndicate here.

The Importance of the 1970s

By James Kwak

It isn’t often that I read two books in a row that both cite Alexis de Tocqueville, probably my favorite Social Studies 10 author (although he was far from my favorite at the time). In Third World America, Arianna Huffington cited Tocqueville’s observation that democracy should promote the interests of “the greatest possible number”; as I pointed out, this is clearly no longer true in America (if it ever was). In Winner-Take-All Politics,* Jacob Hacker and Paul Pierson explain why.

In 13 Bankers, Simon and I argue that the key forces behind the transformation of the financial sector and the resulting financial crisis were political, not simply economic. To this argument, at least two good questions spring to mind: Why finance? And why then? Hacker and Pierson have good answers to both of these questions. Their answer to the latter question is better than (though not inconsistent with) the answer we gave in our book.

Continue reading “The Importance of the 1970s” →

Republican Nightmare: Putting Elizabeth Warren to Work Now

By Simon Johnson

President Obama is finally looking for bold, creative, and clever ways to change the way the US economy operates – preferably with measures that will take effect by the November midterms and change the tone of the broader political debate.  His tax proposals this week have some symbolic value, but in the broader sense all of these fiscal suggestions are tinkering at the margins.

What could he possibly do that would grab people’s attention, mobilize his political base, and put his opponents on the defensive?  There is an easy answer: Appoint Elizabeth Warren to start running the Consumer Financial Protection Bureau (CFPB) immediately.

And the brilliant part of this idea – as explained by Shahien Nasiripour at the Huffington Post (see also David Dayen’s Thursday coverage)– is that the Dodd-Frank financial reform legislation allows the person charged with setting up this new agency to be an outright appointment, rather than a nomination subject to Senate confirmation. Continue reading “Republican Nightmare: Putting Elizabeth Warren to Work Now” →

What Is President Obama’s Fiscal Message?

By Simon Johnson

President Obama is finally attempting to cut through some of the disinformation and confusion that surrounds US fiscal policy in general and taxes in particular.  His suggestion this week is: let’s (effectively) raise taxes on relatively high income people – by letting the Bush tax cuts expire for those people – while introducing temporary tax breaks that will more directly stimulate business investment and presumably hiring. 

Any way you cut it, the numbers involved are not big enough to impact unemployment significantly by November, but these ideas – and the Republican rival suggestions currently on the table – are more about symbols, messages, and midterm votes than about accelerating the economic recovery.  Seen in those terms, the president is still missing a key argument in both economic and political terms. Continue reading “What Is President Obama’s Fiscal Message?” →

What a Little Bit of Economics Does to You

By James Kwak

For a class, I read an old (1986) paper by Kahneman, Knetsch, and Thaler on fairness. It’s based on surveys posing various hypothetical situations where businesses can take some action. For example, most people thought that it was OK for a grocer to pass on a wholesale price increase to consumers (Question 7) but not to raise prices because there is a general shortage and the grocer has the only shipment of a certain item (Question 12). In short, people have an intrinsic sense of fairness the authors summarize this way: “The cardinal rule of fairness is surely that one person should not achieve a gain by simply imposing an equivalent loss on another.”

Today in class, the professor posed the first question from the paper:

“A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20.”

In 1986, 82 percent of respondents thought this was unfair. In class, it was about 50-50.

Continue reading “What a Little Bit of Economics Does to You” →

Upcoming Appearances

By James Kwak

I know you can see Simon somewhere virtually every week (OK, that’s a big exaggeration, but you know what I mean), but I wanted to let you know about a couple of talks I’ll be giving. I’ll be the featured speaker at the NS Capital Fall Financial Symposium in Stamford, Connecticut, on October 7 (free, but pre-registration required).

On September 15, I’ll be the keynote speaker at the Washington Credit Union League Convention in Seattle, but for that one I believe you need to register for the conference.

See you.

Update: I forgot to add that I’m also talking on a financial reform panel at Yale Law School on September 28 at 6 pm.

Good Economics

By James Kwak

On my way to and from New Haven, I listen to podcasts, including a lot of TED Talks. Today I listened to a talk by Esther Duflo, the recent winner of the Clark Medal (top economist under forty), from earlier this year. The topic was using randomized experiments to test alternative social policies and determine what measures of fighting poverty are more effective than others. It was probably the best and most inspiring economics talk I’ve heard in a long time.

Yet More Unending Telecom Hell

By James Kwak

When last we left our hero, he had just (with some difficulty) placed an order with Comcast because of Verizon’s many system and customer service failures. A friend of mine said that he couldn’t want to see the post I would write about Comcast, which he had found to be terrible as well. This post is probably coming sooner than even he expected.

So . . . a week after placing that order, I showed up at the installation time, and no one came. I asked my wife to call Comcast, and they told her that our order had almost vanished; after much digging they found some record of it (this is a new service order, so if they had our name and address at all, it could only have come from my order), but no further information. Again, just like with Verizon, the phone people said they have no visibility into the online system (is it really possible that the phone and online front ends go into two completely separate back-end systems? yes), and also said cheerfully that many online orders go into unfulfilled limbo.

Continue reading “Yet More Unending Telecom Hell” →

Why the Education Gap?

By James Kwak

Probably the most important and intractable economic problem we face is not restarting the economy after the financial crisis, but the decades-old problem of stagnant wages for the lower and middle classes and the consequent massive increase in income inequality. This is something that Raghuram Rajan brings up in the first chapter of Fault Lines, and, like many people, he points the finger at education. Citing (like everyone else) Claudia Goldin and Lawrence Katz, he writes (pp. 22-23),

“As agriculture gave way to manufacturing in the mid-1800s, the elementary school movement in the United States created the most highly educated population in the world. . . . The high school movement took off in the early part of the twentieth century and provided the flexible, trained workers who would staff America’s factories and offices. . . .

“Recent technological advances now require many workers to have a college degree to carry out their tasks. But the supply of college-educated workers has not kept pace with demand–indeed, the fraction of high school graduates in every age cohort has stopped rising, having fallen slightly since the 1970s.”

Continue reading “Why the Education Gap?” →