debt

The lessons of student debt by Gillian Tett

Stop freaking out about debt by Yglesias

positive outlook

No bubble yet in the economy. Private sector sort of chugging along with banks still tight on credit to home buyers. Germany doing well with 5 percent unemployment. They did worksharing. (If the U.S. had rational fiscal policy, we'd be at more like 6 percent. Toss in worksharing and we're at 5 percent.) The Fed hopefully will be headed by Yellen and they will either maintain or improve their management. Hopefully Japan's growth overcomes the sales tax and Abenomics proves so successful that even the skeptics will have to admit it worked - that or they'll twist the explanation of the mechanisms of success to fit their views.

The deficit is no longer a problem in the U.S. Any deficit cutting is merely political (actually it has been with the sequester.) Affordable Care Act takes effect. It's working according to Krugman:

Yes, there may be some negative news stories about the glitches. But Obamacare is not up for a revote. As Jonathan Bernstein says, the only thing that matters is whether it works. And today’s heavy volume is yet another sign — along with abating health costs and below-expected premiums — that it will.

From David Warsh via Thoma:

The responsibility to take care of oneself will have been joined, however loosely, to the long-established right to emergency medical care.

Something like 25 million citizens, more than half of those who are currently uninsured, will enter into a relationship with a medical practice within the next few years. They’ll join more than 250 million Americans who are currently insured in the biggest undertaking to improve public health since the days of city sanitation and the war on communicable disease more than a century ago.

In many states, collective well-being will begin to improve almost immediately (the initial enrollment period extends through the end of March). In other states, especially those in the Southeast, where Republican governors have dug in against implementation of the law, a more complicated political game will play on. Everywhere, changes within the enormous health care sector, already underway, will gather momentum.

No wonder the fuss is so great.

At first glance, the statute bears a striking resemblance to mandatory vehicle insurance in the United States. Massachusetts led the way in broadening that market, too, followed closely by Connecticut. In 1925, the Commonwealth required automobile owners to get liability insurance in order to register their automobiles. New York followed suit, in 1956, and North Carolina, in 1957; other states quickly fell in line. Today only Virginia requires no insurance; residents of the state must at least post a $500 bond instead, and an overwhelming majority purchase insurance.

It will become the norm like Medicare and Social Security and it will be improved. The American healthcare system will move toward the international norm for advanced countries with lower costs and a healthier population with more security. Health care costs are driving government debt to the extent that the debt is a problem. With the cost curve bent, health care spending won't crowd out other priorities.

Obama signed Obamacare into law in 2010 and was re-elected in 2012. Scott Brown replaced Kennedy in 2010 as a Massachusettes Senator. Then Elizabeth Warren replaced Brown. Liberal De Blasio looks likely to be the next Mayor of NYC after Giulanni and Bloomberg. Warsh:

On Tuesday the Affordable Care Act goes into effect. It was passed by the Congress and upheld by the Supreme Court. The White House holds all the cards. The Defunders, the operating arm of the Tea Party in Congress, are certain to lose if the president remains firm. He should simply state: you don’t negotiate with terrorists.

As if to underscore the point, Senator Tom Coburn (R-Oklahoma), a veteran of the government shutdowns of 1995-96, told Politico last week that if If the Republicans succeed in shutting down the government Tuesday, “they’ll fold like hotcakes” after a week or two, when constituents begin to complain about the lack of service. “You do not take a hostage you are not going to for sure shoot. And we will not for sure shoot this hostage.”

And in the longer term? My guess is that Tea Party dissidents will lose ground in the midterm elections next year; that the GOP will split in the 2016 campaign and that a Democrat will be elected president; that in 2018 the Tea Party will further fade. And by 2020, the Republican governors who are successful in implementing the Affordable Health Care Act will be running for president, strongly, on the strength of their records.

After a week or two Boehner will fold. The consituents will complain. Led by Peter King, moderates revolted and Boehner assured them he'd work it out. With the deficits, debt and Obamacare no longer on the radar and with the economy improving, the Tea Party will fade.

Debt and demand by Ryan Avent

I don't get this. I don't understand why we would assume that pre-crisis demand was supported by or in any way dependent on higher levels of indebtedness.

I have a sense for what the story is (or one story is). Imagine (if you can) that America has experienced steady growth in income inequality, which has effectively concentrated an ever larger share of income in the hands of households with a lower marginal propensity to consume. Other things equal, such a shift in the income distribution will reduce demand and require a lower real interest rate to match desired saving with desired investment. The Federal Reserve, conscious of the need to keep demand near potential, dutifully pushed down its policy interest rate in an effort to reduce real interest rates (and was successful). This encouraged non-rich households to take on ever more debt, the better to generate higher levels of investment, mostly in the form of single-family homes. It simultaneously encouraged yield-conscious rich households to seek ways to channel their savings, via new financial products, into higher yielding debt instruments. Desired saving and desired investment balanced through the magic of Wall Street wizardry and everyone made out like bandits until the world nearly ended. Now, the Fed is trying to balance desired saving and desired investment once again, but it is finding it difficult to do. In part this is because deleveraging continues, but it may also be because new financial rules are blocking the flow of credit from rich households to non-rich, which is necessary to restore adequate demand.  

Does this story make sense? I'm not so sure. Part of the difficulty is in knowing what is driving what. But let's consider one thing. The trend in private-sector indebtedness moves very closely with the trend in America's current-account balance.

Emperor has no clothes

Wow what a week. This story in the New York Times by Jackie Calmes really struck me:

Economists See Deficit Emphasis as Impeding Recovery

When the emphasis has been the Deficit and government spending since 2010 thanks to Geithner, Obama, and the Tea Party. It's as if the boy yelled "The emporer has no clothes."

And DeLong on Moby Ben and Washington-Whale.

Powerful shit. About the hedge fund cranks (DeLong mentions in a comment that conservative economists like Marty Feldstein feel the same way.)

BERNANKE-HATERS AT THE SOHN CONFERENCE by DeLong

And Matthew Yglesias:

Hedge fund Bernanke hate: A lot of folks have remarked on the amazing outpouring of hatred for Ben Bernanke's allegedly inflationary monetary policies from the hedge fund set at the recent Sohn Conference, but I don't think anyone's really nailed it. Here's the thing about rich hedge fund guys. They're people. And like other people you may have met, they like money and don't like paying taxes. Where rich people are different is that they have a lot of money, so it's really tempting to say "hey lets take that money and give it to people who need the money more."

Rich people who don't like paying taxes don't like the idea of macroeconomic stabilization policy. That's because it'd convenient for them if the market economy could be not just a practical tool for allocating goods, but an moral framework imbued with deep ethical significance.

And that, in turn, is an idea that sits oddly with the concept that actually you have a bunch of bureaucrats in the Federal Reserve System making the economy plug along. So rich guys indulge fantasies of shifting back to a gold standard or something else that would restore divine right to the monetary system. But beyond that, the central banker they like best is the central banker who's most obscure. Conventional monetary policy was something economists and bond traders paid attention to, but nobody else. Alan Greenspan raising or cutting rates by 25 basis points wasn't a big spectacle. Since the easing (or tightening) was based on interest-rate targeting rather than quantitative monetary creation, you didn't get articles about "printing money". It was all just there in the background.

Ben Bernanke is as if the Wizard of Oz stepped forward from behind the curtain and turned out to be a really powerful wizard. The whole market economy turns out to be an elaborately orchestrated affair, with deep involvement by government central planners who weigh a variety of situations before determining outcomes. In that kind of world, there may still be reasons to eschew certain kinds of tax hikes. But they're practical, pragmatic reasons. They're not moral reasons, in which taxes violate the natural hierarchy of the market because there clearly is no such hierarchy.

Time magazine lists Yglesias as one of 2013's best political Twitterers along with Franke-Ruta. Zero Hedge is listed for economics! WHY Zero Hedge??? Is Time trying to be seen as edgy? So Zero Hedge criticizes the banks, so what?

Graeber and zombie Marxism

Robert Kuttner reviews Graeber in the NYRB.

review of a new book on Marx.

Graeber was right

Continuing this line of thought.

DELONG SMACKDOWN WATCH: MONDAY HOISTED FROM COMMENTS WEBLOGGING

Commenter Blissex:

But safer jobs and better wages are "inflationary", and booming speculative asset prices are not, so hurrah for the policy of a flood of cash.

Then Ronald Reagan came in, said what the US economy really needs is tax cuts, and that pushed the debt up by a lot.»

That was the beginning of the application of Jensenism (as Henwood, the author of "Wall Street The Book" calls it), but applied to whole countries: loading a company or a government with debt leads it to be constant pressure so it will squeeze its suppliers and employees harder and harder to repay the debt. 

And loading a company or government with debt offers the fantastic opportunity of asset stripping: taking out as much debt as possible to pay out large dividends. Which is what happened when the USA government borrowed from the OASDI trust fund to pay for massive tax cuts on high income or high wealth taxpayers.

My reply:

"That was the beginning of the application of Jensenism"*
Also known as the Littlefinger/Lord Baelish strategy.
Maybe Graeber had the right idea but was poor on execution. See Mexico/Brady bonds/Cold War.

In last night's episode Tyrion was made the new master of coin. He went through Littlefinger's books and discovered all he did was borrow, from Tywin Lannister and the Iron Bank of Bravos.

Yglesias references Game of Thrones.

Slate reviews last night's episode. My response:

"Tyrion was quick to see the problem of owing the Lannisters was one thing, but that owing the Iron Bank of Braavos was an entirely different problem, especially in a land that is being claimed by several other kings. I am fully looking forward to the episode where he singlehandedly implements an austerity model for the Red Keep."

Lord Baelish's strategy is basically "Jensenism" i.e. political conservatives' modus operandi regarding both companies and governments: load up on debt and loot. With companies it also puts pressures on workers to bargain away compensation gains. With governments (see Reagan and W.) it puts pressures on services and entitlements.

What Tyrion found out last night is in the books as is the basic fact that Robert Baratheon did nothing to oversee what Littlefinger was doing, dismissing it as "counting coppers."

But coincidently, Benioff's father ran Goldman Sachs for a while.

As far as new austerity measures goes, King's Landing is already under Greek-like conditions as we saw last season when the starving common people rioted. Lady Margaery and Highgarden are doing a little to mitigate things.

---------------------------
* Theories of Michael Jensen. A commenter here mentions "Jensenism" also. On a sidenote, "Game of Thrones" co-creator David Benioff's father is Stephen Friedman, former head of Goldman Sachs.

Allan Sloan Explains the Relationship Between Interest Rates and Bond Prices and How the Government Can Costlessly Eliminate Large Amounts of Debt by Dean Baker

Allan Sloan used his column today to explain a simple but often overlooked point, when interest rates rise, bond prices fall. This means that if long-term interest rates rise substantially in a few years, as the Congressional Budget Office predicts, then the bonds issued at very low interest rates today will be selling at large discounts. 

The implication of this fact is that in 2015 or 2016, the Treasury would be able to purchase back much of the debt issued today at substantial discounts. This would allow it to drastically reduce the government's debt at no cost. For example, if it bought back debt with a face value of $4 trillion at an average discount of 20 percent, it could instantly eliminate $800 billion in debt, reducing the debt to GDP ratio by almost 5 percentage points. 

This step would be pointless from either an economic or financial standpoint since it would not change the interest burden facing the country, but it should make many of the deficit cultists happy. Since these cultists, who largely control the economic debate in the United States, assign some mystical power to specific debt to GDP ratios, they should be pacified by the knowledge that we can buy bonds back at a discount to keep the debt burden under their magic number. This route is much simpler than raising taxes or cutting spending.

The Deficit Was Not Ballooning Until the Economy Collapsed by Dean Baker

Actually the deficits were not ballooning until the collapse of the housing bubble crashed the economy in 2008. The budget deficit in 2007 was 1.2 percent of GDP and the debt to GDP ratio was falling. The Congressional Budget Office projected that it would stay in this neighborhood for another decade or so even if the Bush tax cuts did not expire. The reason that the deficit became large and the debt to GDP ratio started to rise was that the collapse of the economy cost the government hundreds of billion in tax revenue annually and led to hundreds of billions of additional expenditures for unemployment benefits and other programs to counteract the impact of the downturn.  

While the Bush tax cuts may have been bad policy, in fact they were affordable in the context of an economy that was near full employment. If the collapse of the housing bubble had not sank the economy, there would be little issue about the sustainability of the debt.

The "Maestro"

Mr. Incompetent, the Economy Wrecker Alan Greenspan, Was Central to the Formation of the Campaign to Fix the Debt by Dean Baker

Baker makes the point that the Bush-era deficits weren't that bad until the housing bubble popped.

The burden of the (bad monetary policy) on future generations by Nick Rowe

DeLong responds

Dean Baker responds

Obama gives up on demand by Yglesias

The Untold Story Of How Clinton's Budget Destroyed The American Economy by Joe Weisenthal

(via Yglesias)

Dean Baker Reduces Uncertainty

Spanish Debt, the European Central Bank, and the Maginot Line by Dean Baker

Problems arise due to the distribution of the debt. If every third household borrowed $600,000, which was lent by the other two households, then this third household is getting deep in debt, with the other two are appearing to build up large amounts of assets.

This is what happened to Spain, the United States and other countries with serious housing bubbles. The other two households were willing to lend money to the third household because they thought it held an asset (a house) of great value. When this turned out not to be true, the third household found itself with an unsustainable debt burden and the other two households found themselves with assets of questionable value. If the third household can't repay its debt, then the loans are no longer worth their face value.

Central banks should be paying attention to the buildup of such unsustainable debt burdens. Unfortunately, the European Central Bank (ECB) was focused on building up its Maginot Line, being vigilant in its fight against inflation.

The problem now is to try to correct the imbalances created by growth of the housing bubble. Spain and the rest of Europe is getting little help from ECB which is still focused on reinforcing the Maginot Line rather than promoting growth in the euro zone. 

Something the followers of Steve Keen don't understand?

Wisconsin Recall Vote

David Brooks (Bobo) on debt

Dean Baker responds

Turning Our Backs on Unions by Joe Nocera

Noah includes himself as one of those liberals “who spent too much time beating up unions,” as he told me recently. (He and I are both members of the informal Washington Monthly alumni society.) His thinking began to change in the early 1990s when he read “Which Side Are You On?” It is a powerful meditation on the difficulties unions face, written by Thomas Geoghegan, a Chicago labor lawyer. Researching “The Great Divergence” reinforced Noah’s growing view that when liberals turned their backs on unions — when they put, in his words, “identity politics over economic justice” — they made a terrible mistake.

Republicans outspent Democrats on the Wisconsin recall vote 7 to 1.

Student debt up, all other kinds down by Doug Henwood