A Very Special New Year

This New Year's eve will be special.  In addition to watching the end to 2012 celebrated in Time Square, we may also get to go over the fiscal cliff together. That is a new feature of American Exceptionalism. It is a gift from our exceptional Congress.

Happy New Year.

The Painless Way To Reduce Budget Deficits Is To Decrease The Unemployment Rate

We are being told by very serious people that we must inflict pain on ourselves to save the nation from future bankruptcy.  We all know that medicine only works when it it tastes bad, or when it is painful, therefore; common sense tells us that we should get ready for a dose of pain.  This article suggests that we have already endured the pain. Cuts in private spending, or belt tightening, is painful and we have done that.  Our national savings rate has doubled during our current recovery.  Now we are being told that more pain is needed before we can be redeemed for our sins.  That is, government spending on entitlements must be cut as well.  That is we should do what Japan did to deal with budget deficits and cut federal spending.  That would be a good idea if we want the same result that Japan got from its austerity program.  The pain was real but their economy got worse.

The article provides several graphs which point us in the direction that we should be taking, and does not require painful medicine. The correlation between the unemployment rate and federal budget deficits is remarkably high. The best way to reduce budget deficits may be to create jobs for the unemployed.

Another form of medicine that is being proposed is also painful for those with high incomes. Raising their taxes is painful, but it won't do much to reduce budget deficits.  If we want to reduce growing income inequality, we should make the tax system more progressive, but it is not a good solution for reducing budget deficits.

We tend to lump Social Security along with Medicare and Medicaid when we talk about entitlement reform. We would be better off if we focused on the real driver of future increases in government spending.  It is healthcare price inflation.  That rate has been slowing down in the last three years and that is good sign. The Affordable Healthcare Act may slow the price inflation rate as well.  In any case, reducing healthcare price inflation should receive most of our attention.

Implications Of A Decline In Labor's Share Of Income

Most of our attention has been focused on our short term business cycle.  The recovery has been slower than our typical recovery from recessions and economists differ on how to explain the slow recovery and what should be done about it.  This article raises a concern about longer term policy issues. In particular, it focuses on how we fund Social Security.  It is funded by taxes on earned income under a ceiling, which today is $110,000, but which increases with the rate of inflation. Our long term projections of government's ability to fund Social Security is based upon assumptions about the growth of the economy, and the distribution of income.  If the share of income going to capital increases faster than labor income, Social Security funding will decline because most of the growth in income will be above the income ceiling.  That explains why many want to cut Social Security benefits. The choice is between a cut in benefits, or changing the method of funding.  Those with incomes above the ceiling, prefer benefit cuts to raising the income ceiling.

It is likely that the growth in income inequality will follow the current trend.  Capital's share of national income will grow as capital replaces labor, and labor income falls relative to capital income.  The nation will be richer, and able to afford Social Security benefits at the projected benefit levels, but not with the current method of funding which depends upon more equal growth in capital and labor income.

Consider Your Mancard Reissued. Buy An Assualt Weapon

This op-ed shows that the firearms industry understands the motivations of many who purchase assault weapons.  It describes some of the ads, and images, on the web pages and catalogs of the manufacturers.  Bushmaster shows troops in full combat gear armed with an assault weapon.  Bushmaster deleted the ad on their web page which told purchasers that buying an assault weapon "reissued their mancard" after the Newtown massacre.  Apparently, they saw the connection between the fantasies to which they appeal and the Newtown assailant.  People who believe that their manhood has been threatened are dangerous. Most do not commit murder to reissue their manhood. but 100,000 murders are committed annually in the US.  Many of  them are by men who asserted their manhood.

Why Did Cancer Treatment Centers Of America CEO Give $12 Million To Freedom Works?

Richard Stephenson is the founder and CEO of CTCA which is a for-profit organization that targets people with late stage cancer.  Stephenson contributed $12 million to Freedom Works which provides funding for the Tea Party.  He did this through an anonymous third party organization.  I was puzzled by the relationship between CTCA and Freedom Works until I learned that Medicare does not pay for CTCA services to its patients.  Although Stephenson has been active in right wing organizations along with the Koch Brothers, he may also have a financial interest in blocking the expansion of Obamacare.  Private insurers are the source of funding CTCA patients.

The comments following this post about CTCA are also revealing.  It targets desperate cancer patients with sleazy ads which suggests that they can provide treatments and patient care which are not available in hospitals.  CTCA is the sub prime lender of the hospital industry.

What's Driving Purchase Of US Treasury Bonds?

This graph shows that fixed income investors substituted AAA rated mortgage bonds for US Treasury bonds during the housing bubble.  The market for mortgage bonds shrunk dramatically when the housing bubble and securitization market collapsed.  Fixed income investors have increased their purchase of US Treasury bonds as a result.  Lower yielding Treasuries have replaced the demand for mortgage bonds.  Apparently, there is a large market for low risk fixed income securities.  Moreover, these data show that the purchase of government debt does not "crowd out" out the private debt market and drive up private interest rates, and reduce business investment, as many economist assume. There is a large market for risk free debt that depends upon US treasuries in the absence of alternative low risk securities.

The Dean Of NYU's Business School Shows Us How To Earn $1,200 Per Hour

Glenn Hubbard, is a prominent economist who, in addition to being the Dean of NYU's business school, was Mitt Romney's chief economics adviser.  He has made an exceptional living supplementing his academic salary by lending his name,and the reputation of his academic position, to those who can afford his hourly rate.  He was exposed in the film Inside Job as one of the highest paid expert witnesses available in the market for expert witnesses on economics subjects. Matt Taibbi caught him at his game as expert witness for Countrywide.  Hubbard testified that his research showed the Countrywide was not at fault when in originated bad mortgages during that led to its demise.  Hubbard's research showed that Countrywide's default rates were no worse than those of a control group. What he did not say in his testimony, was that the control group, that he used in his "research", was doing the same faulty underwriting as Countrywide had done. Under cross examination, Hubbard was forced to admit that he failed to inform the court about the similarities between his control group and Countrywide.  He was also forced to admit that he had not bothered to examine the underwriting process that Countrywide used to originate the bad mortgages.  It was not easy for the cross examining lawyer to squeeze these admissions from Hubbard, but he succeeded after considerable efforts by Hubbard to evade the direct questions that he was asked.  Hubbard's efforts to evade the direct questions which undermined his testimony, showed why he is worth $1,200 per hour.  It took an expert attorney to expose his "research" for what it was.