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Monday, December 13, 2010

Transcript: 417 Does the ransom for the tax deal amount to a return of Bush II economics?

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Recovery in the midst of recession. Or is it recession in the midst of recovery? Plus will the Democrats shoot themselves in the political foot if they don't pay the king's ransom of tax cuts for the rich? And we look in on the continuing crisis in Europe, where defense of the banking sector is being cast as defense of the euro as a currency, and some folks don't like the euro. So will the banks fall with it?

First a short post from Calculated Risk in its entirety:

Ylan Mui at the WaPo captures the economic bifurcation of America: Economic recovery leaving some behind this Christmas

At Tiffany's, executives report that sales of their most expensive merchandise have grown by double digits. At Wal-Mart, executives point to shoppers flooding the stores at midnight every two weeks to buy baby formula the minute their unemployment checks hit their accounts. Neiman Marcus brought back $1.5 million fantasy gifts in its annual Christmas Wish Book. Family Dollar is making more room on its shelves for staples like groceries, the one category its customers reliably shop.

"When you start to line up all the pieces, you see a story that starts to emerge," said James Russo, vice president of global consumer insights for The Nielsen Co. "You kind of see this polarized Christmas."

Some people are doing fine. Others are barely getting by and still trapped in a deep recession. A 9.8% unemployment rate is unacceptable ... something to remember this time of year. Best to all.


I see somebody commented on those sound effects we use for Idiot of the Week. They make the podcast seem juvenile. Sorry, Mr. Meltzer. But if we could somehow take less seriously the promises, premises and positions of the august architects of economic calamity, we would all be better off. When you hear Ben Bernanke on 60 Minutes


When you hear Ben Bernanke tell America something like this, the appropriate response is to laugh out loud.


The recovery is in full swing in the financial sector, but it is absent from the real economy.

As late as March 2008, Bernanke was telling the nation we would escape recession. We already had one foot in it. Now he says if he hadn't acted on such a massive scale, there would have been 25 percent unemployment.

Of course, he is talking about the collapse of the banking sector under the weight of bad mortgages and securitization. His massive response essentially held the banks harmless from their profligate practices. The bailout, the guaranteeing of their loans and the making explict free coverage under too big to fail insurance, none of this has touched the real economy recession.
Credit is not flowing. Cheap money is moving overseas. Bubbles in commodities and in foreign markets are threatening new instability.

At least in hindsight, we can see a restructuring of the banks while holding depositors harmless and allowing the owners and creditors to take a hit might have made more sense. At least it would have begun to reduce the massive debt that to this day prevents any real private sector recovery.

We know that saving the banks did not revive the economy, but simply moved the debt problem onto the government's accounts. Where the taxpayer can foot the bill. The taxpayers who are still waiting for recovery.

We don't hear so much any more the assurances that saving the banks was a necessary precursor to a revived economy. That seems to have been replaced by a sober shaking of the head and a sage recognition that we are in for a long slog. Nor do we hear so much how it is that profitable corporations will revive the labor markets. Instead corporations are generating profits for Wall Street to whistle at by firing people and downsizing.

It looks very much like the lag in the effect of monetary policy has been extended, too. It used to be said that nine to eightteen months after Fed action, we would see action in the real economy. That lag is now up to who knows how long.

So, Ben,


Absent these days is the promise of pragmatism from the president. When he came into office, pragmatic was a watchword. We hoped that meant that looking at what works and what doesn't. We were imagining an economic pragmatism. Instead we got political appeasement.

We did get a stimulus that was one-third stimulus and two-thirds bribery. Perhaps that is pragmatism. And having talked to enough people, I understand that most Joes don't think the stimulus worked even one-third. Well, we are about to see what happens without it. If the compromise with the Republicans passes, we have the old Bush policies back in place. Here is a bit from one of the revolutionaries in the House Democratic caucus.


That is Jay Inslee from the great state of Washington.

The point here is well taken. We have not educated one child, built one mile of road, prevented the layoff of one police officer or fireman. Even the extension of unemployment benefits which has the highest multiplier into the real economy suffers from the fact that it is spending without producing anything. Were we to require an hour's litter patrol from unemployment recipients, the economic effect of the dole would be the same -- or actually more by the value of less litter for a day or so.

If we are going to spend federal money to fix the unemployment problem, why don't we use it to hire people? There is plenty to be done. There is plenty of spare capacity to do it. By allowing long-term unemployment, we are degrading our economy, not making it more fit.

We have, say, eight million unemployed. With $30 billion, you can employ a million people a year at low wages, but with benefits. For two hundred billion per year out of this tax cut stuff, you could completely solve the unemployment problem. No, Ben, I am not contemplating a massive gang of litter picker-uppers stretched across the horizon. I am talking about directly employing people, some at lower wages, others at higher wages, all of whom pay taxes and generate a robust multiplier for the rest of the economy. We know people with jobs are going to buy cars or bicycles and clothes and food and we know they are going to pay taxes. At all levels. They are going to buy a wide range of goods and services.

So you have the real economic stimulus plus taxes being paid plus the potentially immeasurable advantage of the work being produced, be it environmental remediation, energy retrofitting, infrastructure construction, educating our kids, protecting the streets, social work, health care. There are jobs in place awaiting funding at all levels of state and local government. It should not tire your brain to envision a substantial workforce, the substantial knock-on benefits to society, the multiples of economic activity. This is pragmatic. This is one of the pragmatic answers that the last president in a depression came to.


Now some of you, maybe Ben Bernanke, will say government is a poor allocator of resources, and we need to rely on the market or we will have a nation burdened with white elephants. I won't mention the acres of MacMansions lying vacant, nor the absence of meaningful markets to produce environmental salvation, nor at the opposite end the well-being of the financial fat cats in the midst of the current predicament for the rest of us. That I assume is background to everyone's understanding. So I won't mention it. I'll just say that the markets we have haven't worked very well for most of us.

Now to the Euro.

It was with some amusement that I saw recently reports of a revolt among the German population against the Euro currency. A return of the Deutschmark.


In Europe the bailouts of the various nations, particularly Ireland, is apparently being cast as a defense of the common currency, the Euro. As we have been saying for some time, it is in reality a bailout of the German banks. One effect of big trade surpluses is big capital flows out of the country. One is a mirror of the other. The same mechanism that gives China a trade surplus with the U.S. gives the U.S. capital from China.

Amusement, I say, because the demand for a return to the Deutschmark from inside the country is not very well thought through, regardless of the responsible positions of some of our commenters. In the case of Germany, capital export was not very well managed. Bill Black, you may recall from a couple of weeks ago, compared the German banks to girls gone wild who would put up anything for the promise of a slightly higher bond yield. Granting that the large and hidden derivative exposures of the banks is also a major problem, What would happen if the Eurozone split into two currency areas?

Let's leave aside the German preference that they bring the strong economies in with them, and imagine a Eurozone composed of everybody but Germany. And a Deutschmark zone composed of Germany. One thing is, the bonds Germans hold in non-Deutschmark countries would lose value to the same extent as the currency. This would be a very effective and appropriate tax on the root causes of the crisis.

Having Germany leave the Euro zone is in fact a plausible answer to the problem. Not that it would do what the Germans of our sample seem to think, but it would allow trade to be normalized in the absence of a willingness to stand together with all Europeans. We leave you with a segment from an interview with James K. Galbraith, not last month, but last spring, in the furor of the Greek crisis.


James K. Galbraith.

And it is playing out just as he suggested.

The Euro will survive until the breakdown of the social framework. The social framework could be strengthened by the Eurobond suggestions now under consideration, but Germany will not allow that. According to the FT, Angela Merkel, Germany’s chancellor, has publicly rejected the two most high-profile proposals for changes to the EU’s system of responding to the debt crisis – increasing the size of the EFSF or creating a Europe-wide bond.

Look forward to a mess.

1 comment:

  1. All the European bail outs have been bail outs for banks, and mainly German banks. The sooner the banks have to take haircuts and the debt burden on sovereigns and tax payers reduced, the sooner the economies can recover. I cannot see Greece or Ireland lasting more than a couple of years, before the government bows to the inevitable and defaults.