WORÞY READS: from 2021-05-14
A preview of my weekly read-around for the Washington Center for Equitable Growth...
Worthy Reads from Equitable Growth:
1) As I wrote, burning rubber and leaving skidmarks as you rejoin traffic at speed is not the same thing as boiling over and melting your engine—as my sister did one memorable day to her Saab on the BQE. My view is that we should not worry about an inflationary spiral from “overheating” until we have made back the 9%-points by which the price level today has undershot expectations of where prices today would be back at the start of the Great Recession:
Equitable Growth: Overheating Is Not a Concern: ’Plans for further public investments should be judged primarily on the merits of those investments. Arguments that the U.S. economy will overheat ignore the need for additional investments in the economy and rely on the possibility of future policy errors to argue against needed investments today…. The Congressional Budget Office’s estimates of potential GDP are highly influential, but critics argue, with substantial justification, that CBO analysts have been unduly pessimistic about the capacity of the economy in recent years, and thus overstate the risk of overheating…. The U.S. economy has 10 million fewer jobs today than it likely would absent the coronavirus pandemic and resulting recession. This is why now is not the time for concern about overheating…. Wendy Edelberg and Louise Sheiner of The Brookings Institution estimate that legislation of approximately the scale of the American Rescue Plan would restore actual GDP to potential GDP after the third quarter of 2021, cause GDP to exceed potential GDP temporarily by a modest 1 percent in the fourth quarter of 2021, and then allow GDP to roughly match its potential path in the middle of 2022…. Concerns about an overheated economy typically focus on a set of potential consequences that could arise if it remains overheated for a long time. If an economy remains overheated for many years, then that could lead to higher inflation. If the Federal Reserve, in response to that inflation, pushes the U.S. economy into recession by pushing up interest rates, then that could cause widespread harm…. This concern is less about overheating specifically, and more about extended overheating followed by a bad policy response…
LINK: <https://equitablegrowth.org/wp-content/uploads/2021/04/042627-overheating-fs.pdf>
2) This looks very much worth going to see next week:
Equitable Growth: Webinar: How to Strengthen U.S. Labor Standards Enforcement to Protect Workers’ Rights: ‘May 20, 2021 2:00PM - 3:30PM: The COVID–19 pandemic that led to record unemployment also devastated state and local government revenues across the country. With governments still facing extraordinary budget deficits, this fiscal crisis makes it even more difficult for state and local labor enforcement agencies to respond to labor violations, such as wage theft, just when this work is needed most. In this webinar, Equitable Growth grantees Janice Fine, Daniel Galvin, and Jenn Round of the Center for Innovation in Worker Organization at Rutgers University outline how labor standards enforcement agencies can strategically target high-violation industries. They will also describe how agencies can partner with worker centers, unions, legal advocacy organizations, and other community-based organizations to more proactively address labor rights violations…
3) A key problem in dealing with a large and dissipative finance sector—one that consumes nine percent of society’s income rather than the three percent that it consumed back in the 1950s, and yet does not show any signs of adding anything of value in exchange for that extra six percentage points of society’s income—is that the overwhelming bulk of payments to financial intermediaries are voluntary—not even semi-voluntary in terms of monopoly or monopsony rents. People think that they are getting a good deal when they pay the financial sector, even though the overwhelming evidence is that they are, in fact, not:
Amanda Fischer: The Rising Financialization of the U.S. Economy Harms Workers & Their Families: ‘Financialization refers to the process by which the financial sector—banks, private equity firms, hedge funds, stocks and derivatives exchanges, and other conduits through which money flows between those who have it and those who need it—takes up a larger and larger share of the U.S. economy, fails to allocate capital to its most productive uses, and increasingly results in the hoarding of economic, and thus political, power at the top of the income and wealth ladders…. Considerations such as worker welfare, the economic health of communities, the environment, and U.S. competitiveness on the world stage were best left to policymakers and civil society leaders, with business leaders’ only obligation being the maximization of profits…. Corporate leaders themselves use their outsized economic power to influence the policymaking process in their favor… feedback loops where enhanced economic power begets more political power, with workers increasingly short-changed…
4) Noah Smith and I thought about what we now believe about capital gains taxes on our podcast:
Noah Smith & Brad DeLong: Hexapodia Podcast: Capital Gains Taxes: ‘Key insights: (1) Arguments against higher taxes that may have been somewhat plausible back in the days of 70% or so maximum individual and 40% or so maximum capital gains tax rates simply do not apply now. (2) Right-wing parties that don't think they can credibly make the argument that cosseting their core constituencies is necessary for rapid economic growth search for some non-economic cleavage in which the rich and the right-thinking poor, or the right-colored poor, can be on one side and the people who seek a fairer and more equal distribution of income and higher taxes on the rich can be put on the other…. (4) Capital to fund investment is really not a big constraint right now—incentivizing savings in financial assets really is just pushing on a string. (4) Companies with investments that have high societal value in expansion need to be properly incentivized, and that is best done either by the smell of more profits next year from serving a larger market with lower costs of production through larger scale, or through the government paying and so getting prices righter than the free market can get them…
LINK: <https://braddelong.substack.com/p/podcast-hexapodia-xiv-the-capital>
Worthy Reads from Elsewhere:
1) True—i.e., base-effect adjusted—CPI-basis core inflation has been only 1.4% over the past year, more than a full percentage point below the Federal Reserve’s official target. We are still in a state in which it would be very good for the economy if there were more upward pressure on inflation than their currently is:
Gregory Daco: Base Effects on Inflation: ’How large was the base effect on US CPI inflation in April? About 2.4%-points of the 4.2% year-to-year headline reading. How large was the base effect on core CPI inflation in April? About 1.6%-point of the 3.0% year-to-year headline reading…
LINK: <https://twitter.com/GregDaco/status/1392803865834237952>
2) The pessimistic view of the coronavirus plague in India is that at the current pace it will kill 1,500,000 people and infect 90,000,000 over the next month—and, in the process, explore the genetic space it can occupy in a way to make it more virulent (although there does not seem to be selection pressure to make it more deadly):
Andy Mukherjee: The Real Covid Variant Risk From India’s Pandemic Wave Is Being Missed: ‘Out of self-interest, the rest of the world better help quickly to understand how a Covid variant is devastating the country… B.1.617… unfolding disaster in India… daily fatalities and new cases… officially reported [as] around 4,000 and 400,000… [estimated at] 25,000 deaths and between 2 million and 5 million infections… [by] Ashish Jha…. An entry driven by the B.1.617 spike protein was “partially resistant against neutralization by antibodies elicited upon infection or vaccination with"… Pfizer-BioNTech…. Allowing the coronavirus to run its course in a population of 1.4 billion would be morally reprehensible. It would also be dangerous: The longer it takes to tame India’s second wave, the higher the risk of a variant that does escape vaccine protection…. Singapore’s largest active cluster… is being chalked up to B.1.617.2…
3) Best-case—i.e., most optimistic scenario for employment—is employment corresponding to a “true” unemployment rate of 2.5% in 2023 with core inflation at 2.75%/year. That is enough to get inflation expectations up to the Fed’s target of 2.5%/year on a CPI basis. That is not enough for anyone reasonable to claim that an ever-upward inflationary spiral is on the way. The definition of “stagflation” is a world in which expectations are anchored on the belief that inflation is going to rise over time, hence an unemployment rate greater than the natural rate is required in order to hold inflation steady. That does not seem to be the world we are headed for in the optimistic scenario. And that stagflation equilibrium is much further away in the non-optimistic scenarios:
Laurence Ball & al.: US Inflation: Set for Take-Off?: ’How high is the ongoing US fiscal expansion likely to push inflation? This column presents new evidence that underlying (weighted median) CPI inflation has so far steadily declined since the start of the COVID–19 crisis, broadly as predicted by its historical Phillips curve relation. If the ongoing fiscal expansion reduces unemployment to 1.5–3.5%, as some predict, underlying inflation could rise to about 2.5–3% by 2023. If the fiscal expansion is temporary and monetary policy remains clearly communicated and decisive, there is little risk of a 1960s-type inflationary spiral…
4) I have not been terribly sympathetic to the view that the Obama administration’s focus on making the restoration of banker and business confidence job #1 was the best way to handle the Great Depression. I do note, however, that here John Maynard Keynes provides his brief for High Geithnerism: the financiers and the CEOs have us by the p---- so we must do our best to appease them:
John Maynard Keynes (1936): The General Theory of Employment, Interest & Money: ‘Enterprise which depends on hopes stretching into the future benefits the community…. But… reasonable calculation… [must be] supplemented and supported by animal spirits, so that the thought of ultimate loss which often overtakes pioneers, as experience undoubtedly tells us and them, is put aside…. This means, unfortunately, not only that slumps and depressions are exaggerated in degree, but that economic prosperity is excessively dependent on a political and social atmosphere which is congenial to the average business man. If the fear of a Labour Government or a New Deal depresses enterprise, this need not be the result… of… calculation or… a plot with political intent;—it is the mere consequence of upsetting the delicate balance of spontaneous optimism…. We must have regard… to the nerves and hysteria and even the digestions… of those upon whose spontaneous activity it largely depends…
LINK: <https://cruel.org/econthought/texts/generaltheory/chap12.html>
5) When Tim Duy left the open internet, the public sphere took a big loss:
Tim Duy: Fed Watch 2021–05–10: ’It strains credibility to argue that the enhanced unemployment benefits do not disincentive job search efforts. That said, I fear unemployment benefits receive outsized attention…. Financial support from tax rebates, ongoing pandemic fears, lack of access to childcare and schools, and retirements. Together, these factors point toward a fairly slow recovery of the labor supply…. There is also the fundamental issue that firing happens more quickly than hiring…. A level shift up in wages and prices does not by itself equate to a change in the underlying dynamic that would perpetuate into persistently higher inflation. We most likely will not have much sense of the persistence of inflation until the known base and reopening effects pass. That means the Fed will not want to validate any moves by market participants to pull rate hikes forward again on the basis of near-term inflation numbers…
NO LINK
6) Here we see a striking difference between Paul Krugman and Larry Summers. Krugman sees models as intuition pumps—and believes strongly, very strongly, that if you cannot make a simple model of it, it is probably wrong. Summers believes that our models are, at best, filing systems (and at worst tools for misleading the unwary)—and that the right way to think about the economy is as, in some way, a two-state system, with expansion being one state and recession the other, so that you cannot halt an expansion without tipping the economy fully into recession. My take? Of the last six tightening cycles, three have been followed by demand-shock recessions within two years of the tightening cycle’s end. I interpret this as: you gotta halt the tightening before you overdo it, and that is not the easiest thing in the world. But there is no law-like regularity there:
Paul Krugman: Wonking Out: Braking Bad?: ‘A more explicit critique comes from Larry Summers, who has warned that the stimulus may lead to stagflation. He appears to believe that the Fed can’t use monetary tightening to offset overheating generated by fiscal expansion without causing a nasty recession. But I have to admit to being a bit puzzled about why…. Summers[’s]… underlying macroeconomic model is pretty much the same as mine…. And that model seems to say that the Fed can indeed tap on the brakes if needed. Indeed, the Fed has done that in the past: in the 80s and again in the 90s it acted to rein in booms without causing recessions…. Claims that we can’t rely on the Fed to rein in inflation if the stimulus turns out to be too big have to rest on some departure from the workhorse model most sensible people use to think about macroeconomic policy…. Even if you’re uncomfortable with President Biden’s fiscal policies, you should be very cautious about making arguments against them that rely on novel propositions about why inflation can’t be contained. Conventional analysis says what Janet Yellen said: If the stimulus proves bigger than needed, the Fed can keep things under control. If you’re asserting otherwise, think hard about why you’re saying that…
LINK: <https://messaging-custom-newsletters.nytimes.com/template/oakv2>
7) Raising capital gains taxes produces large increases in societal well-being only if it is accompanied by effective loophole-closing. The very sharp Len Burman believes that it is indeed the case that the Biden Plan does this:
Leonard E. Burman: Biden Would Close Giant Capital Gains Loopholes—At Least For The Rich: ‘Critics of Biden’s proposal have several complaints. None hold water. Critics worry that raising capital gains taxes would lower the after-tax return for individual investors and drive down stock prices. However, taxable individuals hold less than one-third of corporate stock. The rest is owned by nonprofits, retirement plans, life insurance companies, and foreigners—none of whom pay individual income taxes on US capital gains and dividends…
LINK: <https://www.taxpolicycenter.org/taxvox/biden-would-close-giant-capital-gains-loopholes-least-rich>
8) Be warned, make a $75 donation to hard-right Republican Senator Josh Hawley of Missouri, and unless you are very careful you will find you have made a $150 donation, and unless you watch your credit
Paul Campos: Josh Hawley, Grifter: ‘I clicked on the link so you don’t have to, and discovered that my $75 contribution will keep happening every month automatically unless I unclick an already helpfully checked box that makes my contribution recurring. Also too unless I unclick another already clicked box I will make yet another $75 contribution on May 15th, to help stem the yellow red black brown tide of Joe Biden’s and Chuck Schumer’s and Nancy Pelosi’s Radical Left agenda. As always, Rick Perlstein’s now nine-year-old essay on the Long Con remains essential reading, although I suspect Sen. Hawley himself is strictly short-time, as they say in the rackets…
LINK: <https://www.lawyersgunsmoneyblog.com/2021/05/give-a-man-a-fish-and-he-will-eat-for-a-day>
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No doubt India's surge is a serious risk for the world, as well as a humanitarian disaster. So how should we respond. They want vaccines, and we seem surprisingly reluctant to send our growing surplus. But even if we did, it would only cover a few percentage points of the population. I fear that at this point many of those receiving the jabs, would have already had it, as I suspect that perhaps half the population may have gotten it by the time the shots are ready -and the delay between the shot and effective immunity is long. Of course it has been demonstrated that at least for the mRNA vaccines, that the resulting immunity is better than that acquired by natural infection. So even if the jab's arrive too late to have much effect on the current wave, they are still badly needed.
Another frightening outbreak is occurring in the nearby Seychelles. Notable because they have the highest nominal vaccination rate in the world. But they have used SinoPharm, and unless the Chinese are lying -or they have a real breakthrough strain, it should have been 75% effective.
Brad, I have been surprised by the following disconnect. State revenues should be off, and spending due to the pandemic was way up. So why is California reporting a record surplus? I'm guessing capital gains are the answer, but a $75B surplus when last summer we were expecting a deficit of similar magnitude -driven largely by the states portion of enhanced unemployment seems pretty extraordinary.