Read this now: a trenchant oped by Greek finance minister Varoufakis

February 16th, 2015 at 4:54 pm

To me it reads like the correct dosage of mind and heart and as such comes across as both a rational and heartfelt approach to the least harmful/most potentially helpful way forward in resolving the debt/fiscal crisis.

I guess some clever austerian could argue that the claim “I’m not using game theory” would fit quite neatly into game theory. Which would be both deeply unfortunate and par for the course.

No, negotiating a currency chapter in the TPP will not cause a trade war or cost us jobs.

February 16th, 2015 at 9:39 am

You really need an anthology of catch-phrases you hear in this benighted town of DC to understand the difference between what people actually say and what they mean. When someone says “my good friends from the other side of the aisle…,” they’re not really good friends. And when someone says, “that will cause a trade war!” it means they badly want to pass a trade agreement that’s got a deep flaw, and rather than fix the flaw, they threaten you with the prospect of war.

This ridiculous tactic was on full display today in a NYT piece on how members of Congress are, to their great credit, insisting that the Trans Pacific Partnership (TPP) contain strong, actionable provisions against currency management by those with whom we trade. According to a spokesman for Rep. Paul Ryan, who’s working with the administration to pass the TPP, “retaliatory enforcement rules” against countries who manage their currency “could prompt a trade war” and “jeopardize our status as the world’s leading currency.”

Utter nonsense. To insist on such provisions could, as is the administration’s and Ryan’s real and legitimate concern, scuttle the trade deal on which they’ve been working for years, though that’s not at all a slam dunk. In fact, the article supports a contrary point I’ve made recently based on interactions with members of Congress that the only way Congress will ratify the treaty may be if our negotiators take action on currency.

A bit of background. A few months ago I wrote that there should be no TPP trade deal without a set of rules blocking signatory countries from managing their currencies to boost the value of the dollar, thus making their exports to us cheaper and ours to them more expensive (other economists have made similar points).

I later spoke about the issue to a group of House Democrats, many of whom favored the trade deal, and virtually all agreed that such a “chapter” in such a large and encompassing trade deal was essential.

What these members, many of whom have import-competing businesses in their districts, have come to understand is that it makes no sense for us to have to live with large trade deficits as has been the case every year since the mid-1970s. Members recognize that those deficits represent the import of lots of goods at lower prices than would otherwise prevail. But they also represent the export of millions of high value-added jobs that we/they can’t afford to ignore just because some partisan yells trade war or some negotiator frets that we’re giving them too heavy a lift.

Dean Baker goes through much of the substance, pushing back on the idea that rules against currency management are impossible to craft.

…defining currency manipulation is almost certainly much simpler than many other topics covered in the Trans-Pacific Partnership (TPP), like defining “bio-similar” drugs so that patent protections can be extended to them or defining the types of regulatory takings that could be actionable under the investor-state dispute resolution tribunals established by the pact. (For example, can a company claim damages for a higher minimum wage?)

In the link to my piece above, I go into some detail as to why the arguments that rules against currency management are impossible to write or enforce are misguided, and again, I’m not the only one with this view. Economists Fred Bergsten and Joe Gagnon were making these points well before I was.

This whole part of the debate is increasingly fraught with ridiculous arguments. Treasury Secretary Lew, a very smart, compassionate guy with whom I’m proud to have worked, is quoted in the piece saying: “…an enforceable provision on currency could have a negative impact on our ability to protect American workers and firms and set back our international efforts.”

That’s just plain scare tactics, as well as upside-down economics. To the contrary, and of course Lew knows this—he and his predecessors have worked hard to push back against currency pegs in personal negotiations with their counterparts. Our manufacturers and their workforces have long been hurt by the actions of currency managers making to make our goods less competitive in international markets.

Stop the foolishness and talk to us like grownups. There will be no “trade war” if we pursue a currency chapter in the TPP. There will be a lot of arguing and negotiating about what technically constitutes currency manipulation to gain an edge in trade. It could blow up the deal, and Sec’y Lew, Rep. Ryan, and others should explain to us and to members of Congress why that’s a more costly outcome to American workers and businesses than continuing to live with labor demand-draining trade deficits.

If they can do so, then let’s have a TPP. If they can neither make a convincing case based on facts, not war mongering and fear tactics, nor can they offer a convincing alternative for legislative actions outside of the TPP against currency manipulation, then they must either negotiate a currency chapter or accept defeat.

A few different articles that caught the eye in recent days…

February 11th, 2015 at 9:14 am

–Teresa Tritch, with characteristic efficiency, nails the essentials of the building Greek/German showdown, emphasizing the critical point that this isn’t a simple story of virtuous lenders and profligate borrowers. Both sides swam in de-Nile since Greece entered the eurozone, and now that the implosion has occurred, the Greeks cannot be the only ones to shoulder the blame.

In plain terms, that means creditors must take haircuts. If there’s one thing we should have learned from this excruciating long recovery from the bubble-induced Great Recession, it’s that while creditors should of course have superior claims to equity holders, their claims are not sacred. Insolvency happens, typically as a result of the very type of denial Tritch cites, and when it does, the best way to proceed is to rip off the band-aid, charge off some of the debt, and move on.

But that hurts the politically powerful creditors/rentiers, and Tritch makes a powerful point in this regard:

…the bailout of Greece clearly was not a rescue of the country, but rather a rescue of the creditors, who could have been ruined in a default…of the hundreds of billions of euros in bailout loans supplied to Greece by the eurozone and the International Monetary Fund, only 11 percent went to finance activities of the Greek government. Sixteen percent went toward interest payments, while the rest was funneled through Greece on its way elsewhere.

That observation immediately took me back to the days of the $85 billion US gov’t bailout of AIG, of which $13 billion went right out of AIG’s back door into the coffers of…wait for it…Goldman Sachs.

–Next, there’s this fascinating “when worlds collide” piece from the WSJ the other day. I try to pay a lot of attention to both dollar policy and movements, as well as financial market reform. But I wasn’t clever enough to foresee this interaction between the two of them.

The strengthening U.S. dollar is rippling through the financial system in unexpected ways, revealing what bankers say is a hidden flaw in a Federal Reserve proposal to increase capital cushions at the nation’s largest banks.

Big U.S. banks say that, under the rule proposed in December, the recent steep rise in the dollar’s value would force some U.S. firms to hold billions of dollars more in capital than foreign competitors, including weaker European banks, because of how the Fed plans to calculate a so-called surcharge levied on the eight most systemically important U.S. banks…the high exchange rate makes their dollar-denominated assets and operations look larger relative to their European peers.

As I’ve always maintained, you can get a lot else wrong in financial oversight if you get the capital requirements right. The idea is that you want the large and interconnected financial institutions to have a large enough buffer of their own capital to be able to cover their losses without facing a situation where their assets fall below their liabilities, otherwise known as insolvency. The banks resist, because higher capital requirements mean lower leverage ratios which cuts into profits.

The Fed recently proposed an increase in capital buffers for big US banks from around 7% to north of 10% in some cases. The fast-rising dollar complicates things because regulators compare banks holdings using the same currency, and when our banks’ holdings are converted to euros, their assets appear much higher than those of their counterparts abroad, implying the need for more capital to meet the proposed buffer zone requirements.

I’d expect the finance lobby to squawk and try to play the refs as the Fed proposal is being considered. Re that little story above about AIG and GS, recall that the day before the AIG rescue, top US Treasury officials, including Sec’y Paulson, met with Goldman’s CEO. But regulators must hold firm on this. It’s one of the most critical parts of financial reform and even as the current recovery finally gains steam, we mustn’t forget the costs of what we and other nations have gone through to get here.

–Finally, I read that CAP has a new report out on how rising income inequality makes it harder to finance Social Security. I figured they’d have a graph in there that I’d been meaning to update myself showing the share of earnings above the earnings cap (read the details yourself, but the idea is that the payroll tax that funds the program is capped at around $120,000 and as inequality pushes a larger share of earnings above the cap, Soc Sec’s financing takes a hit).

And there it was, as Figure 1. Note that the share of earnings above the cap have gone from 10% to 17%. An obvious fix here would be to adjust the cap not for average earnings growth, as is now the case, but to ensure that 90% of earnings were covered (some advocate getting rid of the cap altogether, but since we usually increase the benefits to those now paying more into the system, that would mean raising Soc Sec payouts to zillionaires). According to the Social Security folks, implementing that idea–covering 90% of earnings henceforth–would close 27% of the program’s 75-year shortfall.


Source: CAP

The tyranny of averages, “deltas” and the need for some version of zero-based budgeting

February 9th, 2015 at 9:40 am

I’m trying to finish my book so this post will be briefer than it should be as it’s a weighty topic, but let me scratch out the idea as a marker to return to it.

Reading much budget analysis of late, especially regarding spending levels and those unfortunate caps against which appropriators from both side are chafing, I’ve been struck by the paucity of substantive information. We generally all argue—and I include myself—about percentage cuts off of some baseline (e.g., spending levels down compared to 2010, or as a share of GDP) and there’s definitely a lot to be said for that approach, especially relative to GDP. After all, as the economy and population grow, there’s every reason to think gov’t services will need to expand as well.

But to make informed choices about our budget priorities, we need much more granular knowledge about the programs and weapons systems and research and so on that we’re actually funding. This perception struck me acutely when the generals recently went up to Capitol Hill to excoriate Congress about how the military couldn’t possibly live within the discretionary caps imposed by sequestration and prior budget acts. The claim “we can’t possibly defend the nation for $600 bn; we need $638 bn!” (I’m paraphrasing, but that’s the gist) may be right or it may be wrong, but to assume it’s right, as is the DC norm, makes no sense unless your mindset is simply “more!”

And I do not spare the non-defense discretionary side of the budget from this critique. A colleague, upset about the impact of the caps on programs to help low-income families, sent me a four-page table of all the programs that would either be cut outright or whose growth rates would be diminished. I pay a fair bit of attention to this sort of thing and my instinct is that she is correct to be worried. But I also believe we need to know more about how the people who depend on these programs would be hurt by the proposed cuts.

Right here at OTE we tried to engage in this sort of thing during sequestration, showing, for example, the impact of Head Start cuts on the ability of families to make ends meet (click on “sequestration watch”—we did 32 of ‘em!—h/t: GL). I recall one documenting lotteries to see which kids would be kicked out of Head Start. How could that possibly be good for America?

I sometimes fantasize, as only a DC wonk can, on the need for “zero-based budgeting” for the federal budget (that’s where instead of starting with last year’s levels and adding or subtracting, you build up the budget from the bottom up). That’s probably not realistic or possible, but I was recently speaking with a wise friend who’d been an appropriator for many years who basically said, “yes, that would be near impossible; and yes, we have to do it.”

Here’s my other, related big issue to this. Besides being stuck, in the absence of something like the zero-based approach, with hard-if-not-impossible-to-evaluate arguments about what constitutes the right levels of spending for various parts of the budget, we risk becoming a slave to historical averages. Hawkish politicians often argue for keeping expenditures and outlays at historical averages (which are, 1979-2014: 17.4% for receipts, 20.5% for outlays).

But we now face a spate of challenges that defy those averages: an aging population, climate change, new geopolitical conflicts (and the responsibility to care for veterans of those conflicts), infrastructure, inequality, poverty challenges.

We mustn’t be ruled by the tyranny of the average, nor by some arbitrary delta off of last year’s levels. To avoid that fate calls for much more granular work by budget wonks and the media. So, let’s break out the eyeshades and get to it!