Some Survey Results

By James Kwak

Here are the results of the latest New York Times/CBS News poll. (Here’s the Times article.)  A few observations:

1. When asked what the most important problem facing the country is (question 4), here are the winners:

  • Jobs: 27%
  • Economy: 25%
  • Other: 16%
  • Health Care: 13%
  • Budget Deficit: 4%
  • DK/NA: 4%

This shows the divide between the country, which cares about jobs, and the Washington punditocracy, which cares (or professes to care) about the deficit. Now, I’m not saying that something’s actual importance is a function of its perceived importance. Governing requires doing what’s best for the country, whether or not people realize it. But neither is it true to say that Americans are overwhelmingly concerned about the deficit. They’re not. And looking at the numbers, you would think most would favor increased spending or lower taxes to create jobs. Later on, though, when given that explicit question, we find a much smaller margin (47-45) in favor of jobs. This, of course, is largely an artifact of question design, so you can argue about which design is more relevant depending on what question you’re trying to answer.

2. On questions 6-10, Obama gets positive marks for foreign policy and terrorism, but negative marks for the economy, health care, and the deficit. This is what you would expect for a Republican president, not a Democratic one (with the possible exception of the deficit question, since Democrats are still seen as big spenders, the past two administrations notwithstanding). Probably the most likely explanation is that the last three are simply things that people are unhappy about in general; also, the economy and health care are issues where Obama faces disapproval both from the right and the left, for opposite reasons. Basically, we have a centrist president.

3. Only 8% of Americans think that “most members of Congress” deserve re-election. This, it seems to me, is one of those survey results that is inherently self-defeating. All of the Republican base should be happy with Republican Congressmen for successfully fighting off the Obama agenda. Many though not all Democrats no doubt blame the last year on the Republicans and should be reasonably happy with their Congressmen. And we know the vast majority of members of the House will be returned to office. So all this means is that people have an unfocused antipathy toward Congress as an institution.

4. When you ask if “homosexuals” should be allowed to serve in the military (page 24), people are in favor 59-29. When you ask about “gay men and lesbians,” you get 70-19. (If you follow up by asking about serving “openly,” the margin falls to 44-41 and 58-28, respectively.) Words matter.

Waiting For The G7 On The Euro

By Simon Johnson

Yesterday’s announcement of European “support” for Greece was badly bungled. 

The Global Crisis Fighter’s Guide to the Galaxy clearly states that when “markets overreact… policy needs to overreact as well” (see Larry Summers’s 2000 Ely Lecture to the American Economic Assocation, American Economic Review, vol. 90, no. 2, p.11; no free link available – and yes, I know that the White House doesn’t always follow its own playbook). 

This definitely does not mean: Vague promises to provide some support in an unspecified fashion in return for some policy actions to be specified later.

Irrespective of your view on how much fiscal adjustment Greece needs vs. how much German taxpayer money it deserves (or can realistically expect), you need a different approach – much more concrete and detailed.  The only good news yesterday was that the IMF will play a slightly greater role than previously expected, but even this change was a nuance missed by everyone – and who knows where it will lead.

If the euro continues to depreciate as it has so far today, the G7 will need to weigh in. Continue reading “Waiting For The G7 On The Euro” →

The Myth of Efficiency

By James Kwak

Planet Money’s latest podcast features an interview with Matt LeBlanc, an efficiency expert. LeBlanc’s job is to observe various processes and figure out ways to make them more efficient. The idea, is that by increasing efficiency companies can save money, which ends up helping everyone through higher productivity and lower prices, even if some people get laid off along the way.

I am as much of a compulsive efficiency nerd as anyone (well, almost anyone). LeBlanc lays out his toiletries in the morning in a specific order in order to minimize transition time. When I lived in Berkeley, I figured out the fastest way to drive to school. The various possible routes were different paths through a grid that included some stop signs and some street lights; the best  route involved slowing down at one intersection, looking to see if what color the light at an intersection was, and making a decision based on that. On one of my previous blogs I wrote a post about the quickest way to get through a security line at an airport. (Tip #1: Don’t unload your bags into the plastic trays until shortly before you reach the X-ray scanner. Your bags were designed to help you carry a lot of stuff with two hands; if you unpack them early, you have to move your unpacked stuff with the same two hands. Tip #2: Put your bags through the scanner before your computer and toiletries bag; that way you can have your bags ready and waiting on the other end so you can pick up the computer and slide it into your bag in one motion.) One of my pet peeves is businesspeople who fly frequently, make faces when standing behind families in the security line, and then slow down the line themselves because they haven’t figured out how to get their stuff onto the conveyor belt immediately after the person in front of them.

Continue reading “The Myth of Efficiency” →

Is Larry Summers Getting Tougher?

Financial regulation is currently in no-man’s land, having emerged more or less intact from the House frying pan before facing the gauntlet of the Senate.

To its credit, the Obama administration has in recent weeks taken a firmer position: The excesses of the past decade have to come to an end. This was evident three weeks ago in the new proposals announced by the president to constrain the activities of large banks, which went beyond anything the Treasury Department had proposed last summer.

It was also evident in an interview that Lawrence H. Summers, the president’s chief economic counselor, gave to CNBC on Tuesday. (Ryan Grim has transcribed additional quotations.) Continue reading “Is Larry Summers Getting Tougher?” →

Robert Samuelson Again

Remind me never to open Newsweek again when I have real work to do. Robert Samuelson tries to play the tough guy yet again in his column, saying that we face either major entitlement cuts or major tax increases and we have to buck up and take it like real men. I agree that we need to do something about the long-term debt problem, and the sooner we come up with a solution the better. But this was what set me off: “There is no way to close the massive deficits without big cuts in existing government programs or stupendous tax increases.”

This leaves out the obvious and best solution: reduce the growth rate of health care costs. Democrats and Republicans differ on how to do it–the former put a large package of cost-cutting measures in the Senate version of the health care reform bill, the latter want to kill the tax exclusion for employer-sponsored health care (and some Democrats would be fine with that as well). But everyone knows that the long-term debt problem is a health care problem, we spend far more on health care than we get back in outcomes, and cutting health care cost growth is the key. If we don’t, then we’re completely screwed no matter how much we cut Medicare–someone has to pay those health care costs, and if we cut entitlements we’re just shifting the problem onto individuals. (Put another way, Medicare is largely a redistribution system–as Samuelson recognizes–and if you kill it, you haven’t done anything about the fundamental mismatch between aggregate income and aggregate health care costs.) You may prefer that politically, but it’s still not a solution.

Samuelson says, “Even with these cuts [proposed by him], future taxes would need to rise. Unless you’re confronting these issues–and Obama isn’t–you’re evading the central budget problems.” Does he not realize that health care reform was the centerpiece (now perhaps failed, but at least he tried) of Obama’s first year in office, and that Obama himself insisted that cost reduction was more important than universal coverage, to the chagrin of his own political base? Oh, wait. Samuelson doesn’t realize that health care is the central budget problem.

I’m sorry to belabor the point. You all know it. But apparently Robert Samuelson doesn’t.

By James Kwak

Bankers and Athletes, Part 2

In a recent interview with Bloomberg (Simon’s commentary here), President Obama compared bank CEOs to athletes–a analogy favored by Goldman director Bill George, among others. However, Obama got the analogy right:

“The president, speaking in an interview, said in response to a question that while $17 million is ‘an extraordinary amount of money’ for Main Street, ‘there are some baseball players who are making more than that and don’t get to the World Series either, so I’m shocked by that as well.'”

That is, Obama is saying that some bankers are overpaid, just like some athletes are overpaid. Maybe he read my earlier post?

Continue reading “Bankers and Athletes, Part 2” →

Radio Stories

I spend a lot of time in the car driving to and from school, so I end up listening to a lot of podcasts (mainly This American Life, Radio Lab, Fresh Air, and Planet Money). I was catching up recently and wanted to point out a few highlights.

Last week on Fresh Air, Terry Gross interviewed Scott Patterson, author of The Quants, and Ed Thorp, mathematician,  inventor of blackjack card counting (or, at least, the first person to publish his methods), and, according to the book, also the inventor of the market-neutral hedge fund. These are some of Thorp’s comments (around 24:20):

“As far as you can tell now, how are quants being used on Wall Street? Are these mathematical models being relied on as heavily now after the stock market crash as they were before?”

Continue reading “Radio Stories” →

President Obama On CEO Compensation At Too Big To Fail Banks

Bloomberg today reports President Obama as commenting on the $17 million bonus for Jamie Dimon of JP Morgan Chase and the $9 million bonus for Lloyd Blankfein of Goldman Sachs,

“I know both those guys; they are very savvy businessmen,”

and

““I, like most of the American people, don’t begrudge people success or wealth. That is part of the free- market system.”

Taken separately, these statements are undeniably true.  But put them together in the context of the Bloomberg story – we have to wait until Friday for the full text of the interview – and the White House has a major public relations disaster on its hands. Continue reading “President Obama On CEO Compensation At Too Big To Fail Banks” →

Revised Baseline Scenario: February 9, 2010

Caution: this is a long post (about 3,000 words).  The main points are in the first few hundred words and the remainder is supportive detail.  This material was the basis of testimony to the Senate Budget Committee today by Simon Johnson.

A.    Main Points

1)      In recent months, the US economy entered a recovery phase following the severe credit crisis-induced recession of 2008-09.  While slower than it should have been based on previous experience, growth has surprised on the upside in the past quarter.  This will boost headline year-on-year growth above the current consensus for 2010.  We estimate the global economy will grow over 4 percent, as measured by the IMF’s year-on-year headline number (their latest published forecast is for 3.9 percent), with US growth in the 3-4 percent range – calculated on the same basis.

2)      But thinking in terms of these headline numbers masks a much more worrying dynamic.  A major sovereign debt crisis is gathering steam in Europe, focused for now on the weaker countries in the eurozone, but with the potential to spillover also to the United Kingdom.  These further financial market disruptions will not only slow the European economies – we estimate growth in the euro area will fall to around 0.5 percent Q4 on Q4 (the IMF puts this at 1.1 percent, but the January World Economic Outlook update was prepared before the Greek crisis broke in earnest) – it will also cause the euro to weaken and lower growth around the world.

3)      There are some European efforts underway to limit debt crisis to Greece and to prevent the further spread of damage.  But these efforts are too little and too late.  The IMF also cannot be expected to play any meaningful role in the near term.  Portugal, Ireland, Italy, Greece, and Spain – a group known to the markets as PIIGS, will all come under severe pressure from speculative attacks on their credit.  These attacks are motivated by fiscal weakness and made possible by the reluctance of relatively strong European countries to help out the PIIGS.  (Section B below has more detail.) Continue reading “Revised Baseline Scenario: February 9, 2010” →

Elizabeth Warren Calls Out Wall Street

Although the Consumer Financial Protection Agency made it through the House more or less intact, the banking lobby is taking another, better shot at killing it in the Senate, and is planning to use the magic words: “big government” and “bureaucracy.” Elizabeth Warren wrote an op-ed for Tuesday’s Wall Street Journal that lays out the confrontation. For most of the past two decades, many Americans trusted the banking industry–not necessarily to be moral exemplars, but they trusted that the banks were basically doing what was right for customers and for the economy. Then in 2007-2008 that mood abruptly reversed, as it became apparent that unscrupulous mortgage lenders, the Wall Street banks that backed them, and the credit rating agencies had been ripping off mortgage borrowers on the one hand and investors on the other.

The big banks face a choice. They can agree to sensible reforms that protect consumers and rein in the excesses of the past decades. Or they can simply decide to screw customers, but do it openly this time, since they have so much market share it almost doesn’t matter what customers think. How else do you explain, say, Citigroup’s concocting a new credit card “feature” explicitly to get around a new requirement of the Credit CARD Act? Or Jamie Dimon saying that financial crises are something to be expected every five to seven years, so we should just get over it?

Continue reading “Elizabeth Warren Calls Out Wall Street” →

Whose Fault?

To believe politicians in Washington and pundits in the media, the national debt has become the most important political issue of the day. (Whether it should be–as opposed to, say, jobs–is another question.) The Republican argument is, basically: “Big deficits! Democratic president! His fault!” The Obama administration argument, by contrast, is “No way! George W. Bush’s fault!”

I generally side with Obama on this one, mainly because of the two Bush tax cuts and the unfunded Medicare prescription drug benefit. Keith Hennessey, Bush’s last director of the National Economic Council, has a counterargument. Some of his points are good. OK, well, one point–the fourth one down. Hennessey is right that what initially transformed the Clinton surplus into the Bush deficit was the 2001 recession, which was beyond Bush’s control–just like what transformed the large Bush deficits of 2007-2008 into the enormous Obama deficits of today was the 2007-2009 recession.

The other points are good debating, but I don’t buy them. This could take a while.

Continue reading “Whose Fault?” →

Fed Chair as Confidence Man

I’m not the one saying it–that would be Robert Samuelson, columnist for Newsweek and the Washington Post. The sole point of Samuelson’s recent opinion piece is that Ben Bernanke’s job is to increase confidence.

Like much but not all error, there is a grain of truth to this point. Thanks to John Maynard Keynes (whom Samuelson cites), George Akerlof, Robert Shiller, and any number of economics experiments, we know that confidence has an effect on behavior and hence on the economy. Too much overconfidence can fuel a bubble and too much pessimism can exacerbate a slowdown.

But to leap from there to the conclusion that the job of the chair of the Federal Reserve is to increase confidence–“Ben Bernanke has, or ought to have, a very simple agenda: improve confidence”–is just silly.

Continue reading “Fed Chair as Confidence Man” →

Euro Falling, US Recovery Under Threat

Intensified fears over government debt in the eurozone are pushing the euro weaker against the dollar.  The G7 achieved nothing over the weekend, the IMF is stuck on the sidelines, and the Europeans are sitting on their hands at least until a summit on Thursday.  There is a lot of trading time between now and then – and most of it is likely to be spent weakening the euro further.

The UK also faces serious pressure, and there is no telling where this goes next around the world – or how it gets there.

There may be direct effects on the US, as our banking system remains undercapitalized.  Or the effect may be through making it harder to export – one of the few bright spots for the American economy over the past 12 months has been trade.  But this is unlikely to hold up as a driver of growth if the euro depreciation continues.

Some financial market participants cling to the hope that the stronger eurozone countries, particularly Germany, will soon help out the weaker countries in a generous manner.   But this view completely misreads the situation. Continue reading “Euro Falling, US Recovery Under Threat” →

Europe Risks Another Global Depression

The entirely pointless G7 meeting this weekend only served to underline the fact that Europe is again entering a serious economic crisis.

At the end of the meeting yesterday, Treasury Secretary Tim Geithner told reporters, “I just want to underscore they made it clear to us, they the European authorities, that they will manage this [the Greek debt crisis] with great care.”

But the Europeans are not being careful – and it’s not just about Greece any more.  Worries about government debt and associated public sector liabilities (e.g., because banking systems are in deep trouble) have spread through the eurozone to Spain and Portugal.  Ireland and Italy are next up for hostile reconsideration by the markets, and the UK may not be far behind. 

What are the stronger European countries, specifically Germany and France, doing to contain the self-fulfilling fear that weaker eurozone countries may not be able to pay their debt – this panic that pushes up interest rates and makes it harder for beleaguered governments to actually pay?

The Europeans with deep-pockets are doing nothing – except insist that all countries under pressure cut their budgets quickly and in ways that are probably politically infeasible.  This kind of precipitate fiscal austerity contributed directly to the onset of the Great Depression in the 1930s. Continue reading “Europe Risks Another Global Depression” →

Is Tim Geithner Paying Attention To the Global Economy?

In an interview that will air Sunday on ABC, Treasury Secretary Tim Geithner says, “”We have much, much lower risk of [a double-dip recession] today than at any time over the last 12 months or so … We are in an economy that was growing at the rate of almost 6 percent of GDP in the fourth quarter of last year.  The most rapid rate in six years.  So we are beginning the process of healing.”

The timing of this statement is remarkable because, while the US is finally showing some signs of recovery, the global economy is bracing for another major shock – this time coming from the European Union.

The mounting debt and deficit problems in Greece might seem relatively small and faraway to the US Treasury – concerned as it is with China’s exchange rate and the ritual of G7 meetings, and likely distracted by the major snow storm now hitting Washington DC.

But the problems now spreading from Greece to Spain, Portugal, Ireland and even Italy portend serious trouble ahead for the US in the second half of this year – particularly because our banks remain in such weak shape. Continue reading “Is Tim Geithner Paying Attention To the Global Economy?” →