The Gradual Repeal Of Dodd-Frank

The Dodd-Frank bill was passed in response to the financial crisis.  The intent was to reduce the potential for future financial crises.  The Wall Street banks have been chipping away at the bill so that it does not affect their ability to make money.  This article, and many of the comments that follow, describes the sections of Dodd-Frank that the banks have effectively neutered.  The Republican Party led the attack, and they used a familiar form of political blackmail to gain support from democrats.  The changes to Dodd-Frank were included in a budget spending bill which was needed to keep the government from shutting down.  The Obama Administration determined that the spending bill was  better than it would otherwise get from the GOP House.

The public uproar about the financial crisis, and the extensive use of taxpayer funds to bail out the banks that were responsible for the crisis, enabled the passage of Dodd-Frank.  Some of the strongest objections to the bailout came from the Tea Party wing of the Republican Party.  One might expect that the Tea Partiers would object to the GOP efforts to support Wall Street.  They seem to have a short memory.  On the other hand, the Tea Partiers also oppose government regulation.  Consequently, the establishment wing of the GOP has been able to position its opposition to Dodd-Frank as an attack on excessive government regulation.

GOP House Requires CBO To Use Dynamic Scoring On Tax Bills

As predicted, one of the first actions taken by the GOP House was to require the Congressional Budget Office to dynamically score tax policy changes.  The problem with dynamic scoring is that it almost impossible to determine the economic impact of a change in tax policy.  The GOP would like to cut taxes and use dynamic scoring to argue that the tax cut would not increase the federal budget deficit.  The dynamic scoring would show that the tax cuts produced enough economic growth to replace the tax revenue lost by the tax cut.  They will not allow dynamic scoring to be used to show that an increase in federal spending, for example on infrastructure, will pay for itself by stimulating economic growth.  The director of the CBO, who will be appointed by the GOP House, will be the judge in measuring the economic impact of tax cuts.  The fox will be put in charge of defending the hen house.

US Inflation Expectations Measured By Atlanta Fed Surveys

The Atlanta Federal Reserve reviews inflation surveys of professional forecasters, households and firms that actually set prices priced upon their expectations of future costs.  The results are interesting.  The forecasts of professional forecasters are very close to observed inflation rates and there is wide agreement within the group.  Households believe that inflation will be considerably higher than actual inflation, and there is wide variability among households.  For example, 13% of households expect inflation to be above 10%.  If they acted on their expectations, their behavior would be very irrational.  They would be foolish to save at current interest rates, and they would take on as much debt and they could service. A significant share of households are misinformed about inflation and its implications.  The expectations of firms are much closer to the expectations of professionals but there is more variance within the sample.  That may reflect differences between business sectors.

Why Are Yields Lower On German Government Bonds Than US Bonds?

Paul Krugman explains why government bonds in the eurozone pay lower interest rates than US government bonds.  Investors believe that US and German bonds are risk free.  Therefore, something besides the risk of default is needed to explain why German bonds pay lower interest than US government bonds.  Investor expectations about inflation, and the relative values of the euro and the dollar, determine the yield difference.  Investors expect inflation to rise by 1.8% in the US over the next decade.  They anticipate that inflation in Germany and the eurozone will increase by about half of the rise in US inflation.  Therefore, about 60% of the interest differential between the US and Germany is due to inflation expectations.  Inflation expectations are higher in the US because the US economy is stronger.  Investors also expect that the dollar will decrease in value relative to the euro over the next decade.  That explains the rest of the difference between the interest rate on US and German government bonds.  They expect that the dollar, which has risen in value versus the euro in recent months, will fall back to where it was prior to the recent  increase in the value of the dollar.

The bottom line is that investor expectations about inflation and the relative value of currencies explain the difference in interest rates between German and US government bonds.  It also explains why the interest on government bonds in Spain and Italy are also lower than US interest rates.  There is only a small risk premium on Spanish and Italian bonds versus German bonds.

Thomas Piketty Rejects The French Legion Of Honor Award

Thomas Piketty was awarded the Legion of Honor award by the French Government.  He joined a group of other notables who have also refused to accept the Legion Of Honor when it was offered.  Piketty claimed that it is not up to the government to decide who is honorable. Some speculate that he refused because he did not want the unpopular government to capitalize on his celebrity.  The government has done little to improve the French economy or that of the eurozone.  It could not even win an election against the far-right Le Pen party.

The Political Motivation For Republicans To Force Dynamic Scoring On CBO

Paul Ryan is the budget magician in the GOP controlled House.  His budget proposals incorporate dynamic scoring which the non-partisan Congressional Budget Office has refused to use in the past.  The House rejected the appointment of the Obama Administration's nominee who understands the flaws in dynamic scoring.  Now that they control the Congress they intend to put a director in place who will bless Paul Ryan's budgets by using his assumptions about dynamic scoring.  This article explains how dynamic scoring works and why Paul Ryan wants to force the CBO to use dynamic scoring when it looks at the implications of federal tax cuts.

Ryan's budget proposals assume that his tax cuts will be paid for by cuts in government spending. They also assume that reductions in government investment have no impact on economic growth.  Only private sector investments promote economic growth in Ryan's budget proposals.  Since that assumption is false,  Ryan's budget proposals will produce the result that he favors.  Budget deficits will increase and they will be used to justify further cuts in government spending on the social welfare programs that Republicans strongly oppose. Ryan's efforts to transform the non-partisan CBO in a partisan arm of the Republican Party is very clever and very sinister.  The CBO has long understood the problems with dynamic scoring.  The electorate does not understand it.  Conservative think tanks are doing what they can to make it acceptable to the public.  They are connecting it to Ronald Reagan's tax cuts which, they argue, led to the  economic growth that followed.  They do not mention the huge budget deficits that followed the tax cuts during the Reagan era.  They forced his successor to raise taxes in order to cut the deficits and to break his promise that he would not raise taxes if elected.  George H. Bush was not reelected and many believe that his decision to reduce budget deficits by raising taxes contributed to that result.  He was supposed to cut government spending to reduce the budget deficit in accordance with GOP ideology.

What Is Paul Krugman Afraid Of?

At year end we always get some coverage in the media about the celebrities that passed away and the big news events of the last year.  Ezra Klein's interview with Paul Krugman is a bit different.  Klein asked him several questions about important things and Krugman did his best to provide short answers to tough questions.

*  He knows what the Silicon Valley crowd claims about the impact of artificial intelligence on society, but he doesn't agree that artificial intelligence will replace human intelligence, and he is not very impressed by the role of high intelligence in society.

* Our current political system is subject to sabotage and it works.  The legislature is capable of sabotaging whatever policies are proposed by the executive branch when the presidency is held by the other party.  Klein suggests that we are capable of responding to crises, but Krugman suggests that it would be very difficult to get Congress to do another version of TARP to rescue a financial system that expects to be bailed out of trouble when it does whatever it can to increase executive compensation.

* There a lots of environmental issues and fracking is one of them.  He believes that it might be possible to do it right, but that the negative impacts of doing it wrong are usually local and do not reach the national level.  Lower oil prices may do what politics can't do.  It can't be cost justified at $60 per barrel.

* Income inequality and wealth inequality are related and there is a relationship between the rising share that is going to the top .01% and the bottom 70%.  Even new college grads find it difficult to find good jobs.  That is bound to create problems that will be difficult to solve.  The wage compression that took place under FDR, and the decades prior to 1980, required exceptional political leadership that was facilitated by a depression and a world war.  That kind of leadership is not visible in either political party.