“All this uproar around JP Morgan’s big loss is unwarranted.  Sure, investors lost a bunch of money on a bad, sloppily-managed bet.  But that’s the point: investors, not taxpayers, lost money.  If anything, this shows that Dodd-Frank type reforms are not necessary.”

To which I say: nonsense. 

First, a deal involving derivatives of this magnitude, where the inherent risk was so poorly understood, could easily have generated losses multiples higher than the ones we’re learning about now–losses that are growing, btw.

But the more important reason why it’s nuts to go to the “reform-is-irrelevant” place is that at the heart of Dodd-Frank is something I’ve written about a lot here: deeper capital reserves.  To their credit, JPM had enough of a capital cushion on hand to absorb a large loss like this.  But that’s no accident.  It’s a direct outcome of Dodd-Frank’s capital reserve requirements and the subsequent actions by large banks to build up their reserves in anticipation of the new rules. 

The fact of inadequate reserves–overleveraged banks whose bets couldn’t be covered by their capital on hand–was a major factor in the crash, and if anything, this episode reminds us just how important it is to get this right going forward.

To suggest the opposite–that this somehow shows reform is not necessary–is like saying sure, we crashed the car into a wall but the airbags deployed and only the passengers, not any bystanders, were hurt.  Therefore, we don’t need airbags.

–It would obviously be best for the economy—already too shaky—to resolve this sooner than later, but Rep Boehner’s stance precludes that.  We probably don’t bump up against the debt ceiling until February, so I don’t see this particular fight taking shape until after the election.

–The R’s have proved to be impossible to negotiate with over this issue.  After all the self-inflicted pain of the last debacle, they finally agreed upon what became the Budget Control Act.  That created a process that included the supercommittee and the auto-cuts known as sequestration, but now, by dint of their own budget, House R’s have reneged on that agreement.

–Basic game theory, well known to highly advanced academics and mobsters: when dealing with an intractable, unreliable opponent, the side with a) the most leverage, and b) the skills to use that leverage can win.  The administration has such leverage in both the scheduled defense cuts and tax increases.  Stand firm on both counts even if it means facing the fiscal cliff, for to cave is to walk a big step closer to permanence of the Bush tax cuts, to say bye-bye to new revs, to take defense spending off the table, and to say hello to even deeper cuts in discretionary programs to help the least advantaged.

This morning’s WaPo, for example, raises the question of what Gov Romney’s private equity experience will play out in the next few months.  The Post’s fact checker linked to the piece below in regards to this theme, and I also heard former Obama official Steve Ratner commenting on the issue this AM, arguing that it was unfair for the President’s campaign to criticize Bain’s record on jobs.

I don’t speak to the campaigning—not my bailiwick.  But this piece, written during the R’s primary, when Gingrich and Perry were gettin’ all up in Romney’s face re Bain Capital, tries to get at the fundamental economic issues in play.

What Does it Mean When Romney Says “I Understand the Economy?”

Jan 13, 2012

This whole dust up over candidate Mitt Romney’s tenure at the private equity firm Bain Capital has been surreal.  Obviously—I think it’s obvious—his R competitors who are attacking him, like Perry and Gingrich, are faux OWS’ers—it’s awfully hard to imagine they really have a problem with Bain and others like them.

But other than the fact that politicians can be hypocrites, is there anything voters can learn from this episode (and I suspect most of us already knew about the hypocrite thing)?

I think there is, and it has to do with how Gov. Romney thinks about economics.  He keeps stressing how he understands the economy, while President Obama does not.  But I submit to you that few people know what a person means when they claim to “understand the economy.”   I know I don’t.  Do you understand the economy like Arthur Laffer understands it or like Paul Krugman understands it?

For example, here’s an interchange that conveys a certain understanding—a not uncommon one, but a profoundly incomplete one.

A woman at a campaign stop complained that because her company moved out of state, she now faces a five-hour commute to work.   What, she asked, would Gov Romney do to keep good jobs in Iowa?

According to this account: “Sometimes it’s counterintuitive,” replied Romney, a former businessman, explaining that businesses often invent new, more efficient ways to compete.

“The term is called productivity. Output per person,” he said. “Our productivity equals our income.”

I’m not playing “gottcha” here—his response wasn’t a gaffe.  There are many in business, and many in economics, who believe this or something close to it—productivity is really output (or aggregated national income) divided by hours worked.   And more output per hour provide the potential for higher living standards.

But here’s the rub: for decades, for most American workers, that potential has not been realized.  Our productivity has anything but “equaled our income.”

In the decade of the 2000s, productivity grew 28% while real median household income fell 7%.  Since 1979, productivity is up 84% and real median compensation, including fringe benefits,* rose 12%.

To me, and not just based on this snippet, of course, it sounds like Romney probably really does understand the part of the economy he’s come to know in his business career.  It’s an economy whose metrics are return on investment, rates of profit, and particularly in the PE world, leverage, or debt financing, since a) profit margins for the PE guys are significantly amplified if they can borrow their investment capital, and b) there’s a huge tax advantage since they can deduct interest payments as a business expense.

You will note that the word “jobs” isn’t on that list.  And the reason for that is very simple: the metric of job creation is not how PE firms measure their success.   Grading PE firms on job creation is like grading chess masters on their ability to dunk the basketball.  It’s a non-sequitur.   Here’s one of Mitt’s former colleagues, quoted recently in the LA Times:

Bain managers said their mission was clear. “I never thought of what I do for a living as job creation,” said Marc B. Walpow, a former managing partner at Bain who worked closely with Romney for nine years before forming his own firm. “The primary goal of private equity is to create wealth for your investors.”

The economy that Gov Romney understands is the economy of Wall St., not Main St., and it’s by no means the only economy you want your president to understand.  In today’s America, the president needs to understand the economy measured by middle-class incomes, paychecks, the quantity and quality of jobs, rates of poverty, income gaps.

And sure, the president must also understand that part of the economy measured by productivity and profits.  But if he thinks understanding the latter is “understanding the economy,” he is dangerously wrong.

*It’s important to add benefits to this type of calculation so you’re not leaving off an important and growing part of the wage bill.  To construct median compensation for this calculation, I multiplied the median wage by the ratio of aggregate compensation to aggregate wages.  This essentially assigns the average benefit package to the median worker, which is too generous.  And you still get the large gap stressed in the text.

Right, but what matters in terms of foot-on-the-accelerator is the change in the budget deficit, and the fact is we’ve been letting up right as the economy appears to have a slowed a bit.  Add state fiscal drag and the growing unemployment insurance cuts and you get the picture.

On the first point, the figure compares the budget deficit so far this fiscal year with the one from the same months of last FY.  Last year’s was $150 billion more negative.  Annualized, that’s enough to drive the unemployment rate a half-point higher than it would otherwise be.

Source: Treasury Dept.

Then there are all the state job losses, which are also keeping the unemployment rate elevated, as I show here.

Finally, as my CBPP colleague and UI expert Hannah Shaw points out, over 400,000 long-term unemployed persons in 25 high-unemployment states have lost UI benefits so far this year as the extended benefits program is ending in states across the land. 

Just look at those unemployment rates in the table below—10.9% in CA, 9.1% in IL, 8.8% in MI, 9.9% in NC.  These are areas where labor demand is still way below the level needed to provide anything like a welcoming job market.   Yet we’re kicking folks off the roles.

So, next time someone asks you for whom the austerity bell tolls, tell them it ain’t just the EU.

Here’s the thing: it is logically indefensible to simultaneously maintain the following two positions:

1)      We can no longer afford Social Security.

2)      We can afford—nay, we must afford—the permanent extension of the Bush tax cuts.

Over to CBPP’s own Kathy Ruffing:

The revenue loss over the next 75 years from making all of the Bush tax cuts permanent would be two times the entire Social Security shortfall over that period.  (See figure.)  Indeed, the revenue loss just from extending the tax cuts for upper-income people would be more than two-thirds as large as the Social Security shortfall over the 75-year period.

Now, to be clear, Social Security is funded not through the taxes which feed into general revenues but through the Social Security Trust Fund.  There are many ways to achieve trust fund solvency, some of which call for higher payroll taxes, such as increasing the maximum taxable salary level (raising that threshold to once again cover 90% of earnings would close about 30% of the 75-year shortfall in the trust fund).

But that larger point here is that assertions of what we can and can’t afford need to be considered from the perspective of the “asserter,” the winners, and the losers.  No such assertions should ever be taken at face value.

OK, I’ll now quietly slip back into the tupsy-turvy, through-the-looking-glass world of DC logic.

First off, all hedges are gambles in the sense that they are bets that an interest rate or the price of an index will move in a certain direction.  What makes them hedges is that the direction of the bet is usually the opposite of the direction of another bet.  If that sounds confusing, just think of it this way: if you lose money on bet #1, the hedge should help you gain money on bet #2.  On a beautiful day, I leave the house in short sleeves.  But I hedge against rain by carrying an umbrella.

Where the commenters have it right is that hedging goes way beyond this simple relationship and in that sense, I agree, it often goes beyond hedging as the concept is understood.  And the JP case of hedge #2 as described in the link above sounds like a good example of that.

I will say that the culture of financial markets and hedge funds does not recognize this difference at all.  I was recently in an investment meeting regarding funds for an organization of which I was a member.  The investment adviser was explaining how a hedge of a hedge of hedge had lost money for us.  I asked, “So, where’s the hedging in that?”

He looked at me like I was an alien and kindly tried to explain that this isn’t really how hedging works in contemporary finance.  ”It’s really a misnomer,” was his ultimate point.

A simple Volcker rule which prohibited trading of depository (and thus back by the USG) banks’ own accounts–their profits–would clearly help here.  I know…devil in the details and all that.  But the JP case should remind us that it’s not that hard to identify the multiple-level hedges that seem more of a profit play than a hedge play.

*On a related note, a commenter asked if Glass-Steagall (GS) would have prevented JP’s loss.  Here’s my reply:

GS wouldn’t have prevented an investment bank from betting its money on derivatives like this, but it would have hived off the investment bank from the depository bank, thus reducing bailout risk. The fact that bank deposits are insured by the FDIC means that if the depository (as opposed to investment) bank loses enough on its bets, the taxpayer ends up on the hook since the FDIC is backed by the US gov’t. JP/Chase is a bank-holding company with depository banks as subsidiaries so we need a Volcker rule to play a similar role to GS here.

Three Updates:

1) This NYT piece provides useful amplification of the points above.  Apparently JP was lobying for an exemption to the Volcker rule for a type of hedging called “portfolio hedging,” which the Times describes as “…a strategy that essentially allows banks to view an investment portfolio as a whole and take actions to offset the risks of the entire portfolio. That contrasts with the traditional definition of hedging, which matches an individual security or trading position with an inversely related investment — so when one goes up, the other goes down.”

Such a broad exemption would allow the very type of multiple hedging that generated the loss, versus the simpler vanilla version described above.

2) From ThinkProgress re MA Senate candidate Liz Warren:

In an email today, Warren called on Congress to reinstate Glass-Steagall:

I’m calling on Congress to put Wall Street reform back on the agenda and to begin by passing a new Glass-Steagall Act. This was the law that stopped investment banks from gambling away people’s life savings for decades — until Wall Street successfully lobbied to have it repealed in 1999.

A new Glass-Steagall would separate high-risk investment banks from more traditional banking. It would allow Wall Street to take risks, but not by dipping into the life savings and retirement accounts of regular people.

3) Excellent piece on this when-does-a-hedge-stop-looking-like-a-hedge angle in the LAT:

Dimon continues to explain this trade away as a “hedge.” It may not have been anything of the kind. First of all, a hedge reduces risk: If one investment might lose a lot of money if markets move in one direction, you create a hedge that will make money under those circumstances so your losses are limited.

Yet JPMorgan already is massively long corporate debt as a result of its normal course of business, which is lending money to corporations. A “hedge” that replicates that same position isn’t a hedge at all. There’s evidence that the department where the Whale worked was, in fact, replicating Morgan’s real-life business of lending to corporations, but using fancy derivatives to do so — creating a “synthetic” bank, as traders would say, without actually lending to corporate customers as real banks do.

If that’s true, the question is why? To put it another way, if JPMorgan had $350 billion sitting around idle (the sum the Whale’s department appeared to have to play with), why not use it to do something that helps the economy — such as, you know, lending it to businesses? Instead, JPMorgan used the money to buy chips to play in the derivatives casino, which doesn’t help the economy one bit.

–What happened?

The bank invested in corporate bonds, then bought insurance as a hedge against losses on the bonds.  The form of these insurance policies are those good old credit default swaps (remember them from the meltdown days?) where JP makes bets with other banks that pay off if the underlying bonds go bad.

Now, here’s where the trouble starts.  They then added another level of hedging, essentially selling insurance policies on the first hedge.  So now, if the firms backing the bonds do badly and the bonds default, JP is covered by hedge #1.  But under hedge #2, as long as the companies covered by the insurance do well, JP collects insurance premiums from investors betting the other way.

The bet on the second hedge grew so large that other banks recognized that if the economy were to look a bit more shaky, the underlying CDS index could flip and JP could lose big.  Remember, these are derivatives—securities whose value is tied to a price.  So for JP to lose money on hedge #2, they don’t have to actually pay out like a real insurance company.  They just have to make a wrong bet of the direction of the index.

JP had such large bets of hedge #2 that counterparty banks recognized JP would be cornered if the CDS index spiked.  And that’s just what happened.

–Will JP need another bailout?  Are we headed back into another financial recklessness-induced recession?

Though the extent of the losses are not yet known, that’s not likely.  JP appears to be handily able to cover the losses.  Of course, we should not forget the reason they’re back in the black had a lot to do with $95 billion in bailout funds from the TARP, which they’ve since paid back.

–What does this say about financial oversight reform? Would a fully implemented Dodd-Frank bill have prevented this loss?

That’s the most interesting part of this.  The answer to the second question is not entirely clear, though I think if the rules were properly implemented and enforced, Dodd-Frank would have prevented this outcome.  Hedge #1 would probably be legit but hedge #2—the one that blew up—looks more like the type of proprietary trading the Volcker rule is intended to block.  (The usually careful and reliable Allen Sloan gets this wrong today—the facts of the case and the magnitude of the losses aren’t even known yet and he’s somehow determined that the case proves we don’t need the protection of a Volcker rule.)

It’s also possible that under Dodd-Frank transparency rules regarding derivative positions, market participants and more importantly, regulators at the Federal Reserve, would have seen that one bank—actually one trader at one bank—was getting cornered such that a reversal in the index had the potential to cause sudden and systemically dangerous losses.

But the fundamental truth here is the one known since Adam (Smith, that is) and amplified by the great financial economist Hy Minsky: humans underprice risk.  Their proclivity to do so increases as the business cycle progresses and confidence takes over (remember, JP’s bet was unwound by the fact that the economy wasn’t as strong as they thought).  The advent of a global derivatives market with notional trades in the trillions greatly amplifies the risks.

The fact that humans like Jamie Dimon—he who presided over JP’s self-proclaimed “fortress balance sheet”—he who inveighed against financial reform as imposing unnecessary oversight on such skilled risk managers as he and his staff—fall prey to this fundamental truth only underscores the lesson of this episode in financial hubris.

And that is this: financial markets are inherently unstable.  They will neither self-correct nor self-regulate.  Their instability poses a threat to markets and economies and people across the globe.  Therefore, they need to be regulated.  That’s not to say that anyone knows the best way to do this yet in order to balance the necessity of oversight with the dynamics of the markets.  We don’t know where to set the speed limits.  It must be an iterative process.

But we do know they need to be set, and JP’s loss should be taken as a warning that our tendency is to set them too low.  And it should be taken as an even bigger warning against positions like that of Gov. Romney that Dodd-Frank should be repealed.

Why?

“Because whatever you do, you got to do your thing.”

But allow me to hit you with some highlights.

First, I very much appreciate where Larry starts out:

I would just begin by saying that while it’s not our subject today, whether we get this expansion to a sustained reasonable growth rate that is consistent with a return to full employment is the single most important economic issue facing the United States. And we will not achieve any other objective, whether it is sustained fiscal help, the ability to combat poverty, the ability to be strong in the world if we do not achieve that and, therefore, maintain the momentum.

True dat.  Which is why I think we in Washington way overweight the importance of tax reform relative to income growth, inequality, poverty, and enough decent jobs for people.  I understand that the tax structure is related to these real variables, but not nearly as much as you’d think, listening to the intensity of the tax debate.  We could get taxes “right”—i.e., raise the revenues we need through a simpler, less distortionary tax code—and still suffer from persistent problems in all these other areas.

Larry stresses the importance of revenues (which, as far as I can tell, was a point of consensus at the event, including by conservatives), progressivity, and the kind of “small responder” arguments I make here (though, to be fair, he frames this difference more in terms of current weak demand conditions than I do, suggesting that responsiveness could increase in a less slack economy; sure, but not that much).  But I thought some of his most important comments were in regard to simplicity.

A lot of people in the tax reform debate get away with a fair bit of mythology regarding how simple the code would be if we just closed loopholes and lost a bunch of deductions.  Surely there’s some truth to that, but it’s just as likely to go the other way.  Larry’s example of all the computations invoked if you had to pay capital gains on the sale of your house (you currently do not have to do so as long as the gain is less than $500K) struck me as exactly right.  Same with the VAT or flat tax, once you start exempting necessities or protecting favored groups, like the poor, from first dollar taxation.

Does that mean greater simplicity is unachievable?  No, but it’s harder than people tend to make it sound.  That said, if we were simply to disallow ways in which taxes are sheltered and avoided, I maintain we could achieve considerable simplicity, and raise more revenues to boot.  For example, ending the deferral of foreign earnings, or the tax preferences for one income type over another.  Those kinds of changes, it seems to me, would obviate a lot of current and complicated efforts to exploit the code.

So, check it out, preferably while you’re exercising!

A: Well asked.  Let’s see about well-answered.

No one knows the outcome, and as you suggest, it depends on who wins the election, but I must admit I’m counting on a few factors:

–Enough legislators will want to avoid recession.  I’m not trying to be dramatic, but that’s the conclusion of the CBO, Bernanke, and others, broadly based on the idea that the economy will be growing at around 2% and the cliff amounts to a fiscal contraction of around 3.5%.  Obviously, there are Kamikazes up there (though we don’t know the composition of the next Congress), but let’s hope they’re outnumbered.

–R’s will take credit for a massive tax cut. It’s not my preferred scenario, but I fear politics will push us off of the cliff.  At that point, taxes go up by something like $280 billion…in one year.  No one wants that—the President will have insisted that only the highend—about $80 billion—should have expired.  So there’s an agreement to be had that cuts a ton of taxes and the cutters can brag on that.

Yes, this invokes some funky baseline issues—the big tax cuts will be relative to what we call current law which assumes full sunset.  Under the current policy baseline, the above would look like something of a charade.

Anyway, that’s the magic.

“Is that it?  That’s all you got?!,” you ask.  “Yep,” I answer.

Q: What’s going on with financial reform?  How much of it is in place?  How effective do you think it will be?  Seems like “too-big-to-fail” banks are bigger than ever.

A: Hey, I just did a radio show on that—the excellent Warren Olney show in LA—here’s the link.  The setup was, “are some of our banks still too-big-to-fail?”

The answer, as I see it, is probably yes, but that’s not really the right question.

First, as I stressed in the show, the issue is less size than interconnectedness.  Lehman was about fifth or sixth in terms of size but its debts were held by many other institutions across the globe.

Second, Dodd-Frank, aka financial reform, is in the midst of being implemented.  That made up a large part of the discussion on the show, so take a listen, but to break it down, the banking lobbyist basically argued that “everything’s going fine” and the consumer advocate argued, “no, it’s not.”

From what I’ve seen, the CFPB (consumer protection bureau) is actually up and running and providing useful consumer services, but the director is only a recess appointee who’s likely toast at the end of the next session of Congress (I hope I’m wrong—this guy Cordray is excellent).

On the show I discuss two key components of the bill left to implemented: capital reserves and the Volcker rule.  Both are critical in the following sense.  It’s actually hard to imagine that if there’s another massive debt bubble there won’t be any bailouts.  So we should try to minimize the likelihood of such large debt bubbles.  One way to do that is by insisting the banks not become over-leveraged which implies keeping a lot more capital in the vaults than was the case during the bubble.

As you can hear from the industry guy, they don’t like that…they want to use their capital to leverage up and make multiples of it as returns.  As so they should.  But Dodd-Frank insists they keep more of a cushion on hand and that’s a key regulatory fight right now.

As for the Volcker rule, there’s the same basic tension between regulators crafting the rule and banks who want to trade more of their books like they used to in the bad old days.  Here’s my take.

Q: Re my post on a model of leverage as a function of higher inequality: Why doesn’t the increased risk of lending based on increased debt/income ratio show up as a higher cost of borrowing?  Doesn’t the risk seeking behavior of the lenders have to be increasing as they become more wealthy to keep the price from increasing? If they were risk neutral, the cost of borrowing should increase as the risk does, shouldn’t it?”

A: Not necessarily, and if you read your Hy Minsky, necessarily not.  You’re right that the demand for loanable funds would lead to higher interest rates, all else equal, but if enough money floats to the top, the supply of funds will increase to meet the greater demand and the price of borrowing will remain the same.

But there’s also the debt bubble, instability problem.  Minsky believed that as recoveries mature, risk tends to become underpriced in financial markets.  I’m trying to think of examples of that…hmmm…

Q: (re same post) Do you think a similar model could be developed where certain countries play the role of the big savers, and certain other (stagnating?) countries play the role as the big borrowers?

A: Absolutely.  The joke during 2000s was that re China, they sent us toxic toys and we sent them toxic assets…ha-ha, right?

Q: Re my post on how absent all those state and local layoffs, the unemployment rate could be a point lower: How much additional stimulus would have been required from the Federal government to the States in order to have kept those layoffs from occurring?  How much GDP has been lost as a result of the decrease in employment?  Are these not the benefits and costs of “austerity”?

A: Rough estimates, a point of unemployment equals around two points of GDP, or about $300 billion.  That’s about what we had for fiscal relief in the Recovery Act, and it worked well—probably among the most efficient components of the act.  With a multiplier of 1.5—that’s my guess for state fiscal relief right now, we could get there with $200 billion (200*1.5=300).

But the costs of stimulus are actually a lot lower than that right now, because the Federal gov’t can borrow at very cheap rates, and in generating more growth, help to spin off more future revenue to pay down this debt later.

How cheap? DeLong and Summers argue that under current conditions, “fiscal policies may reduce long-run debt-financing burdens.”  That’s a little Laffer-curvy for me, but if you factor in the long run losses from all the slack we end up with by sitting on our hands when real interest rates are negative, they’re surely more right than wrong.

Q: From my post re Apple’s tax-avoidance machinations: Would trading the corporate income tax for a VAT make it easier, more transparent, harder to avoid, and harder to demonize?

A: Definitely harder to avoid, but a number of questions arise.

First, is it realistic to believe that we could adopt a value-added tax?  Not to put too fine a point on it, but “no.”  At least I don’t see how we get to there from here in the medium term—and I say this as a veteran of literally decades of tax debates that ended with: “…and that’s why we need a VAT!”

Second, an important question here is the incidence of the VAT—who pays the national sales tax, which is what the VAT reduces to, versus who pays the corporate tax.  The sales tax tends to fall on the consumer, i.e., the incidence of the VAT keeps getting pushed along the supply chain until the end of the line.

But the incidence of the corporate tax is less well understood.  I think it largely falls on capital, though my evidence is in no small part drawn from the observation that since capitalists complain about it, its incidence must fall on capital.  If I’m right, then this idea is regressive.  In fact, I’m sure it’s regressive, but perhaps with the revenue you’d raise from a VAT you could offset that regressivity (though, admittedly, that sounds complicated, and you’re trying to make things simpler!).

Q: Re my post of the limits of the Fed:  Countries like Sweden, Israel and Australia that have pushed their own currencies’ inflation to about 4% have done the best in this recession. The Fed could just announce that they will increase money supply until they get 4% inflation, and that will set market expectations. Should the promise be held as credible, it would move the market almost immediately. The same thing happened in Switzerland, they said they would print money until the current devalued to X level, and almost overnight it went to that level. Then, their exports became more competitive.

A: Right, and not only competitive exports through currency devaluation but also faster debt deleveraging (as inflation erodes the nominal value of debt burdens).  You’d have to balance this against deeper real earnings losses, however.  Real wages are already down around 1% yr/yr, and this would lead to something more like 2% losses.

But it is an idea you’ll hear from a lot of folks these days, and by no means radicals—Ken Rogoff, for example, espouses this route to recovery.

But remember how the Fed works at a time like this.  They’re out of room on the interest rate so they buy debt.  Putting aside their stated desire not to do a lot more debt purchases right now, perhaps if they committed to numerous more rounds of QE, such liquidity flooding would raise prices as you suggest.  But as I noted in the post, I suspect they’d end up “pushing on a string” and absent greater demand, nothing much would change.  True, more exports and more deleveraging translates into greater demand, so this is certainly a legit idea but it’s not as surefire as some folks seem to think.

Q: How about tying the Bush tax cuts to the unemployment rate? They would not sunset until unemployment falls to some very low level.

A: I think it’s fine to sunset the highend cuts ASAP.  Otherwise, they risk becoming a pretty much permanent fixture of our tax system.  But re the rest of the cuts, I very much agree re tying the sunset to the unemployment rate and have suggested as much in various posts.  BTW, to some extent, in a progressive tax system, you get this effect anyway.  As the economy improves and incomes begin to grow again, people move into higher tax brackets.