Saturday, August 31, 2013


The President has announced that he will ask Congress for authorization to strike Syria in response to the clear and convincing evidence that the Assad regime launched a chemical attack against civilians, killing well over a thousand people, including at least two hundred children. The President said the US is obligated to respond to prevent other rogue governments or terrorist groups from thinking they can use chemical weapons without reprisal or consequence. Officials are preparing an Authorization to Use Military Force that will be presented to Congress this week or next. Senate Majority Leader Reid is considering recalling the Senate to act on the AUMF this week. Speaker Boehner has said the House will take it up the week beginning September 9, when the House returns from recess.

This move has caught essentially everybody off guard. The assumption was that the President would act unilaterally, after conferring with Congress. Even after Prime Minister Cameron lost a close vote for the British to support a strike, most analysts were confident the President would act and order a limited strike. No one forecasted that he would invite Congress to the table and ask them to vote for or against a strike authorization, in effect requiring them to share in the decision responsibility, and to put an end to the endless armchair quarterbacking.

This is a brilliant move, in my opinion. The Commander in Chief has requested authorization to conduct a military operation that his Executive team and the military think is necessary. Will Congress say no? I don't think so - my guess is the probability is 80% he will get the vote. Critics will say that he is reacting from a position of weakness, after the loss of Britain as a partner. I see it as moving from a very strong position. He's saying, "Support me and support the country to do what your Commander in Chief is certain is necessary." Saying no to that request will, I believe, be politically very difficult.

All this makes a quick 60 day extension CR on the budget, from October 1 to December 1, even more likely. It might even allow a similar extension on the debt ceiling, say from October 15 to December 15. We can't be shutting down the Government or threatening a debt default when we are engaging in a military operation.

What we cannot know yet is how this may shuffle the political deck - whether one or more key groups get caught on the wrong end of things in the coming AUMF vote, and then feel they might need to reconsider their budget strategy.

Friday, August 30, 2013

A Definitive ACA Study

The Rand Corporation has recently released what I take to be a definitive analysis of the ACA and its affects on insurance markets. And it's all good news for Obamacare fans. Topline conclusions:
  • Assuming all States finally embrace the Medicaid expansion, the uninsured rate in the US will more than fall in half, from 19% to 8% of the population, leaving 22 million uninsured in 2016, half of whom are undocumented immigrants.
  • Comparing pre and post-ACA premiums on an apples to apples basis (holding age, smoking status and actuarial values constant) premiums will go down slightly across the US, though some states are projected to show substantial (up to 43%) increases.
  • The Rand simulation model results concluded that the individual mandate and subsidies would be sufficient to encourage strong Exchange participation among all age segments of the uninsured.
  • Like the CBO, Rand sees fairly steady levels of employer-based insurance, which means there will be no "dumping" of employees onto the Exchanges. This projection is supported by Rand's projection that the small business, small group premiums will not change from current, pre-ACA levels.
The biggest and most consistent criticisms of ACA is that it will cause premiums to rise dramatically; that young, healthy people will not sign up; and that employers will push employees out into the Exchanges. The Rand study says these criticisms are wrong. Since their conclusions back up what the CBO has already forecasted, I think this argument has been settled. And very soon, we will have real world results.

Thursday, August 29, 2013

Shutdown/Default Update

One of the true policy pundit insiders, Ezra Klein of Wonkblog at the Washington Post, put up this headline for a post yesterday afternoon: "I'm Sacred of the Debt Ceiling. You Should Be, Too". Ezra is known for balanced, thoughtful reporting, although he makes no bones about being on the Progressive side of things. But he is not an alarmist. So what's up?

Let's listen to Ezra in some detail:

The closest thing to a plausible case (for an agreement) I’ve heard is some kind of negotiation that Democrats portray as a deal to fund the government and replace sequestration and that Republicans portray as a deal to raise the debt ceiling. But for that to work, the two sides actually need to agree to something. The Obama administration isn’t going to delay the health care law for a year or accept heavy new cuts without tax increases. Republicans aren’t likely to accept tax increases. So, what’s the case for believing they can reach a deal, exactly?

The Democrats’ quiet hope is that House Republicans will overplay their hand and, as terror mounts over the debt ceiling, Senate Republicans will cut a meaningful deal with Obama and the House will let the package pass by waiving the Hastert rule. That’s possible, of course, but hardly likely. House Republicans don’t like getting jammed by the Senate, and powerful conservative groups have been policing Hastert rule violations much more aggressively of late.

And then there’s the possibility of simple miscalculation. Remember when Boehner’s “Plan B” failed on the floor of the House? When the farm bill failed on the floor of the House? When the Transportation, Housing and Urban Development appropriations bill failed on the floor of the House? The odds of Boehner and Cantor thinking they can pass something and simply being wrong about that are not zero.

And that’s the problem. None of the safe outcomes are likely. None of them even look particularly plausible, at least right now. And that’s scary. If you’re not at least a bit worried about the debt ceiling, you’re not paying close enough attention.

I Love This

This is a closeup of the President talking to Martin Luther King's only grandchild. I love it! (

Wednesday, August 28, 2013


Today marked the 50th Anniversary of Martin Luther King's March on Washington and his nation-transforming "I have a Dream" speech. Glorious! (Pictures and video from

Tuesday, August 27, 2013

Changing Complex Systems

Both American healthcare and American higher education are complex systems. Although the public does not know this yet, our healthcare system is undergoing a huge transformative change that is bending the cost curve downwards. In my opinion, the ACA has caused this. I think a similar process of transformative economic change has just been initiated by the President with his new program proposals for Higher Education.

How do I defend those statements? First, let's go back to the early sixties when President Kennedy called on us to put a man on the moon by the end of the decade. And we did. I was down in Montevideo, Uraguay, standing outside an appliance store, watching those fateful first steps Neil Armstrong took on the moon in the summer of 1969. Breathtaking. The crowd looking in the store window cheered. How did we pull that off?

There were lots of specific pieces of the puzzle that were filled in in highly specific ways. But I want to talk about the organizing principle - the declaration of vision that President Kennedy made on May 25, 1961 in his television speech. This declaration created a new possibility for us, a new, living vision that animated us in complex ways, and served as a strange attractor that bounded, funneled, and ultimately directed our creative actions to accomplish that miracle 8 years later.

In her book A Simpler Way, Meg Wheatley explains how the three domains that can influence change in complex systems are: the system's identity, the relationship quality between the system's constituent parts, and the breadth and depth of the information sharing within the system.The declaration of vision by President Kennedy affected the identity of the complex system that was the emerging space exploration movement, led, but never contained by NASA. This proved sufficient to create a highly complex, essentially self-organizing system, aiming broadly at space exploration, and, specifically, at putting a man on the moon by the end of the 60s' decade.

Monday, August 26, 2013

Dr. Stephanie Kelton

I want to introduce you to a person who, I believe, will be a leader in the transformation of public attitudes toward what we feel America can do to help create a truly Good Society. Her name is Stephanie Kelton. She is the Chair of the Economics Department at the University of Missouri, Kansas City (UMKC). She is one of the leaders of the rapidly ascending Modern Monetary Theory (MMT) school of macroeconomics. If the GOP leads us close to a debt ceiling cliff, or over it, she will be one of the go to people that the media will ask: "What is going on? Where do we go from here? Is catastrophe inevitable?"

Here is a picture of Stephanie when she appeared on Up With Chris Hayes, before Chris was promoted to MSNBC primetime:

Here is her new Twitter profile page, which I just love. Do you see the fabulous, well-flowered owls in the front? Stephanie's old Twitter handle was Deficit Owl, to distinguish herself clearly from any and all of the Deficit Hawks:

Saturday, August 24, 2013

37 Days

Yes, 37 days until launch. Obamacare Exchanges will open on October 1. Supporters like Sarah Kliff at Wonkblog are saying things are pretty much on track. Opponents like Yuval Levin at The Weekly Standard are predicting disaster (Levin's article this morning is titled "Going, Going, Gone"). Which will it be? Readers will know that I am forecasting success; but I wanted to highlight Levin's article as a very articulate example of those who truly believe the ACA cannot and will not work.

Levins argument in summary:

The young and healthy 18-35 year old contingent will not buy in, and if they don't, the program will fail. Premiums will rise significantly for this group, even after considering subsidies. They don't want or need the full range of Essential Benefits that the ACA requires insurers to provide and that the law mandates that they buy. They want and need only Catastrophic Coverage, which the ACA makes it very hard to get (only offered to those under 30 who have no affordable health option - i.e., exchange coverage costs more than 8% of income). In short, the ACA mandates insurance they don't want, or need, and raises its price (even after subsidies) compared to what they would pay pre-ACA. It won't work. Obamacare is doomed.

Read the article. It's very well written. And it's wrong. Take a look at Thursday's post just below this one for a detailed reason why the 18-35s' will buy. Here's the summary:

Levin and conservatives assume 18-35s' (those without employer-based insurance) don't have insurance currently because they don't want it or need it. That's not true. They don't have it in most cases because they cannot afford it, their employer doesn't offer it, or they have been refused coverage. Only 17% (22% of men and 11% of women) say they choose not to have it:

Thursday, August 22, 2013

The Young Invincibles

Will they sign up for Obamacare? That's the big question.

If they don't, the ACA has a problem, probably not terminal, but serious. The 18-35s are the healthiest adult cohort, and we need them in the insurance risk pool to keep premiums under control. Is it fair to have the young subsidize the old, or, more precisely, the relatively healthy cohort reducing costs for those relatively less healthy? I think so, but the fairness issue is not the point right now. ACA workability is. And to have it, we need the 18-35s to sign up.

I think they will. But many, probably most conservatives do not. You surely know the argument, but here's a summary:

The young and healthy don't need extensive, comprehensive insurance, and they don't want it. When not covered by an employer's plan, they select bare bones catastrophic insurance that covers them for major disasters, but does not take care of routine medical costs. Obamacare is a one-size-fits-all model, where, by mandate, individuals will have to buy much more insurance than they need, in order to subsidize the less healthy post 35s'. The ACA needs the 18-35s' to sign up, or else premiums will skyrocket, eventually killing the whole program. The $95 first year penalty is way too low to really get this cohort to sign up. Because of this, Obamacare will fail.

That's the argument. I'm sure you all have heard it, spoken by Conservative pundits like George Will with absolute certainty. I have consistently discounted this critique, because it has almost never been connected to a robust analysis of the uninsured demographics together with estimated subsidy calculations. Take a look at this chart from Ezra Klein's Wonkblog at the Washington Post:

Wednesday, August 21, 2013

Debt Ceiling Showdown?

I am beginning to rethink my earlier forecast that the GOP leadership will be able to steer their base away from a debt ceiling showdown. Here's my rationale:

The Conservative dream strategy is to get a Budget resolution that specifically defunds Obamacare through both Houses, and send it to the president before the end of September, forcing him to veto it, so he can be blamed for a shutdown. Problem is - this won't happen. Such a Budget resolution won't get through the Senate. So September 30 will approach, with no unified position, and I predict a last minute CR, continuing funding at current levels, including Obamacare, lasting until, say, December 1, after the debt ceiling end date, which will be some time in November, but possibly sooner.

House Conservatives will be convinced to support the CR by their leaders telling them, "Let's get the CR through, and put all our ammunition into the Debt Ceiling fight." And the Budget Battle of October 2013 will be underway. And here's the Big Problem: Obama will not negotiate over the debt ceiling. He has said this repeatedly And consistently GOP leadership has said that the President has to wake up and get real, that he does not have any choice. They think he will hold out until late in the game, then cave. They're wrong.

With just a few days to go until potential default, what will the GOP do? More generally, what will they do at the point they realize the President will hold firm - will they quickly move a clean debt ceiling increase through both Houses, or will they go straight for the abyss, or will they try a clean resolution and cut it too close?

If they get a clean resolution signed in time - an enormous defeat for the GOP, the fight will move to the end date for the CR. Will they still be loaded for bear, itching for a fight, or will they get a sudden case of moderation politics. At this point, it seems like that could go either way, but right now, I want to focus on what happens if a debt ceiling increase resolution is not completed in time.

What will Obama do? And I want to stress that though the odds of this scenario showing up are not yet, in my mind, over 30%, they are a long way from zero. What would the President do?

Tuesday, August 20, 2013

Some Good News

The Boston Consulting Group just released a report titled The US as One of the Developed World's Lowest Cost Manufacturers, predicting a major uptick in manufacturing employment, leading to 2.5 to 5.0 million new jobs by the end of the decade, causing a 2-3% drop in the unemployment rate. This is really good news. Let's take a look:

 China will still be slightly lower cost, but the US will be significantly better positioned than Germany, France, Italy, the UK or Japan. Labor costs, adjusted for productivity, and lower energy costs, sparked primarily by the shale gas revolution, account for the bulk of the US advantage. Take a look at labor cost comparisons:

Monday, August 19, 2013

Obamacare Rollout

Here's a prediction: By this time next summer, every single one of the GOP predictions about Obamacare will have been proved wrong: Now let's count the ways:
  1. Young, Healthy Won't Sign Up: This is the central flaw in the ACA, per the best of GOP pundits.The structure is wrong; its incentives are "perverse", which means they will accomplish the opposite of what was intended. The $95 year one penalty is way too small to be a real incentive for the young and healthy to sign up. With this group staying out, the risk pool will be "soured" with mostly unhealthy folks; costs will go up causing premiums to skyrocket; and the program will collapse.
  2. Upfront Premiums Will Skyrocket: Because Obamacare requires coverage of preexisting conditions; because the ACA requires all Exchange participants to offer standardized policies at four different levels of coverage, with no "bare bones" policies, no ability to discriminate based on gender, and only limited ability to discriminate price-wise on age - premiums will explode, right out of the gate.
  3. Employers Will Dump Workers into the Exchanges: Shortly after the ACA passage in 2010, conservative pundits began predicting disaster for employer-sponsored insurance. One reputable estimate predicted that 30 MM workers would lose their employer coverage. Carly Fiorina, former HP CEO, said on Meet the Press this Sunday, "We all know that the most repeated President Obama quotation from the beginning was that if you had insurance, then you would be able to keep it - this is just not going to be true."
  4. Healthcare Quality Will Go Down. Costs will Go Up: Dumping many millions more people into the healthcare system will lead to a shortage of doctors. Waiting times will shoot up. And the stress on the system, plus rapid increases in premiums, will cause healthcare costs to move up.
  5. State Exchanges Will Not Be Able to Open On Time: The delay of the employer mandate; the delay in the system for income and corporate insurance verification; and the delay in the new out of pocket caps for large group policies - all are indications that Obamacare is not ready for primetime, and that its October 1 kickoff will be a "train wreck."

Friday, August 16, 2013

Do You Feel It?

Have spent more than an hour with this post from Yves Smith at Naked Capitalism and reading through the almost 200 comments. Here's how Yves starts out:

A Disturbance in the Force?

Perhaps I’m just having a bad month, but I wonder if other readers sense what I’m detecting. I fancy if someone did a Google frequency search on the right terms, they might pick up tangible indicators of what I’m sensing (as in I’m also a believer that what people attribute to gut feeling is actually pattern recognition).

The feeling I have is that of heightened generalized tension, the social/political equivalent of the sort of disturbance that animals detect in advance of earthquakes or volcanic eruptions, of pressure building up along major fault lines. The other way to articulate this vibe is that it is as if events are being influenced by a large unseen gravitational or magnetic force, as if a black hole had moved into the ‘hood. We can’t see the hidden superdense object, but we can infer that it’s distorting the space around it.

Yves is one of the smartest bloggers I've encountered on the Internet, with a focus on economics, finance and politics. Former manager at Goldman Sachs. Very knowledgeable in mortgage-backed securities. A true heavyweight, particularly looking at Wall Street, and what went wrong. She wrote a penetrating, and for me, riveting account of the GFC in her book Econned.

Fairly quickly after Obama's election, when it became clear he was not going to take on the banks in a serious way (nationalization, reinstituting Glass-Steagal, tough prosecution of mortgage fraud), she turned anti-Obama. She began a relentless and always well-written attack on Obama, the true Manchurian candidate, who was elected on a Grand Deception, and whose focus is supporting the 1% elite, and tearing down the social safety net. The site is hard left, and I have rarely found a dissenting voice in the comments.

Today's post is right in line: essentially 100% agreement with Yves that there clearly has been a "disturbance in the Force", and something deeply ominous is imminent. Do you remember in the original Star Wars when Obe wan Kenobe says this, the Death Star has just concluded a successful test of its Death Ray, where an entire planet was vaporized. Do you feel it?

Thursday, August 15, 2013

Obamacare Savings

Do you remember when President Obama promised that the "average premium under Obamacare would drop by $2,500"? And Conservatives hooted and hollered, and called the President a liar. Remember? Well here's a chart Jonathan Cohn at the New Republic put together based on a new Kaiser study:

$2,672 savings for a family of four, buying in the individual market, at the silver plan level, based on the average subsidies across the entire individual market. Looking at what the savings level is across only those entitled to subsidies, the number is 77%. But on average, families in the individual market will save $2,672.

The study summary does not show how this compares to what they have been paying before, other than to say that the overall average premium prices will be somewhat elevated from prior numbers. Still think the President's $2,500 promise will be pretty close.

Tuesday, August 13, 2013

Republican Myths

There are a lot of them. Over time, I have developed a small amount of perspective, allowing me a modicum of self-control. And then I read stuff like this from former Senator Phil Gramm in this morning's Wall Street Journal, and I just lose it. I thought the GOP argument that the US Affordable Housing public policy goals, working through Fannie and Freddie, had driven our otherwise perfectly efficient financial system onto the rocks, had been thoroughly debunked by the Financial Crisis Inquiry Commission (whose full report is here). Apparently not.

Instead it has been elevated to the unassailable status of Republican Myth - irrefutable, not subject to analysis or fact-checking, returned into the conversation periodically to assure the faithful that the written-into-stone, surely God-given stories of Creation, Sin, Judgment and Redemption - in other words, the real and Republican truth about how the world works - are still being told, are still true, and will be with the faithful forever. Benghazi has this status. The IRS "scandal" soon will. And so I guess the Fannie/Freddie Caused the Whole Damn Mess has joined the mythic lexicon, and will forever be reintroduced by unimaginative but loyal GOP banner men, when someone around the campfire asks for stories about the Great Financial Crisis of 2008.

Here's the story outline: In 1977, under Carter, Congress passed the Community Reinvestment Act (CRA), written to encourage bank mortgage lending to inner-city, mostly minority neighborhood. Banks would be measured, in part, on how they performed in making mortgage loans to minority communities. The next big step was the 1992 Housing Act, signed by Bush I, that set Affordable Housing Goals for Fannie and Freddie. Initially 30% of the GSEs' portfolios had to be made up of Affordable Housing Mortgages - loans to folks whose income was below the AMI (Area Median Income). In 2000, under Clinton, this target was raised to 50%. Bush took it to 55% shortly before the Crash.

And that's what did it; that's what caused the Crash: Government interfered in the marketplace, directing its Bureaucracy to ensure lots and lots of loans were made to poor people. These perverse, new incentives, encouraging loans to low income (read minority) people inevitably caused, even forced the system to spin out of control and crash. It's not our fault. And it certainly cannot be the market's fault. No - as always, it's the Government's fault.

If you want to get a full-throated expression of this viewpoint, read Peter Wallison's solo dissent to the final, excellent FCIC report here. Wallison argues that, driven by the Affordable Housing Goals, Fannie/Freddie put together huge sub-prime portfolios; they in fact dominated and set the operating and credit patterns for the entire market; and the inevitable crash came in September, 2008, driven by the GSEs' bad policy direction and an out of control Fed.

Monday, August 12, 2013

Darkness and Light

This post struck a deep chord with me, from David Coates, Politics Professor at Wake Forest University:

Ultimately in the world of democratic politics, the forces of darkness can only be defeated by the forces of light. There is a lot of darkness around right now, which is why it is time for men and women of goodwill to reassert their political presence. Now is the time for those of us who still believe in the possibility of the American Dream to put some light back into the current political discourse, by moving this economy and society away from a Republican trajectory anchored in selfishness, inequality and social division towards a Democratic one based on shared prosperity and a mutual respect for all.

I am cautiously optimistic, because I feel the GOP has gone and is going too far. They are mad at everybody. Check out this post from Jan Schakowsky Democratic Rep from Illinois. Why is the GOP doing this - subtracting key groups from their potential support base: Women, African Americans, Latins, Other Immigrants, Millenials, Gays, and now, even Seniors? Baffling, and not a little bit frightening. I am only optimistic because I feel they will lose in 2014.

Why I Forecast a Shutdown

Have gotten some feedback suggesting that my Shutdown post may be grounded more in my visceral preferences than objective analysis. To be objective, in this context, would seem to mean being indifferent to the outcome, and that if we have a preference, particularly a strong one, our judgment is slanted, and we will only find what we are looking for - and that most likely will not be the truth. I find this sort of critique entirely valid: if you know I consistently discredit one side of an argument (the GOP), then you should ask whether I am objective about predicting a shutdown that might disable the GOP, or whether I am only seeing what I want to find.

I really do want to see a shutdown this Fall, since I do believe a shutdown would greatly enhance, and quite possibly ensure a Democratic takeover of the House in the November 2014 midterms; and despite the risks of one party governance, I do want one party control for a period, long enough for the GOP to redevelop its center-right core, and to separate from its intolerant right wing. I want the No Government wing to be split off from the Small Government wing, since the former group, I believe, contains the bulk of the current GOP's intolerance, nativism, lack of compassion, lack of personal accountability, and the seemingly endless stream of fact-free analysis.

So if I have a strong preference for a shutdown, do I also have a good fact set to support my prediction. Let's see what I can present as supporting evidence for my prediction that there is an 80% chance of a shutdown this Fall:

My rationale for predicting a shutdown is based on five estimations:
  1. The Senate will not approve a Continuing Resolution on the Budget that defunds Obamacare, though the House will. This will take most of September, and will end in a short term fix, i.e., a 60 day CR extension (from September 30 through the end of November).
  2. We no longer have a deficit or medium-term debt problem. Democrats know this. Most Republicans do not.
  3. Obama will not negotiate further spending cuts, unless part of a package replacing the sequester and including new revenues. Since most in the GOP do not believe the deficit/debt picture is now stabilized (#2), they will be sure he is bluffing when he says this. And they will be wrong. This will lead to the shutdown.
  4. Some time in September or October, a bipartisan plan will clear the Senate, replacing the sequester with roughly $600 billion in cuts and a similar amount in loophole-closing revenue increases. The House will ignore this, but it will form the basis of the deal to end the Shutdown.
  5. Obama will not negotiate on the debt ceiling, though the GOP will think he is bluffing until it is almost too late. At the last minute, a debt ceiling increase will be rushed through.

Sunday, August 11, 2013

Neoliberal Orthodoxy

In Forbes on 8/04, Peter Ferrara in his Op-Ed, compared Obama's recovery to Reagan's. Our President, predictably, came up way short. The column was a full-throated statement of the neoliberal (read Conservative) economic orthodoxy. Here are excerpts:

Taxing or borrowing a trillion dollars out of the private sector to spend a trillion dollars in the public sector is not going to increase jobs or economic growth overall on net.  At best, it will just shift jobs from where the market directs to where the government directs.  More likely, it will be a net drag on the economy, because the market spends money more productively and efficiently than the government...

But jobs and middle class prosperity are not created by government spending, which just takes more productive jobs and spending out of the private economy.  In a capitalist economy, economic growth, jobs, middle class prosperity, and opportunity for the poor are created by capital investment driven by decentralized markets, which aggregate the choices and revealed preferences made by hundreds of millions of consumers and workers, to increase production of the goods and services desired by those consumers, most efficiently as driven by decentralized market competition.  The effective knowledge aggregated by decentralized markets is far greater than any centralized collection of so-called experts can even conceive...

Obama has increased government spending, deficits and debt, which only drains the private sector of the resources to create good middle class jobs, and economic growth and prosperity.  And he has cheerled a weak dollar Fed monetary policy that only chases off investors who don’t want to invest in dollars that the Fed is depreciating over time.

To summarize:

  1. Government spending is "taken out" of the economy through taxes or borrowing and therefore cannot create net new jobs or economic growth.
  2. Jobs and growth are created by private capital investment in a decentralized, free and efficient marketplace.
  3. Government attempts to replicate this from the center will fail.
  4. Government deficits and debt "drain" the private sector of resources needed for jobs and growth.
  5. The Fed's easy money policies will cause inflation (i.e., investors are driven off, markets tank, yields rise, creating inflation) and will debase the currency.
The only thing missing from the list is the need for "expansionary contraction", i.e., austerity. But I have no doubt this is on Ferrara's full list. 

This is what economists call Neoliberalism. It is Conservative and Republican orthodoxy. It has England and the Eurozone in its thrall, and, unfortunately, way too many Democrats, including (on a bad day) our President.

And it's almost entirely wrong, from an empirical point of view. #1 is wrong. #2 is partly correct (private investment is a key source of job creation, just not the sole source). #3 is partly correct (the Government should not try to replicate the "wisdom" of the marketplace, but there is much that Government can do well). #4 is wrong. #5 is wrong. And the unlisted austerity is also completely wrong.

Take note, my conservative friends, I am not only claiming that I disagree with your policy framework; I am saying that the neoliberal framework is just plain wrong. I am not an economist by academic training: it is not my vocation, but it has, through study in the last three years, become my avocation. Over the next few weeks, and as a regular part of my posting, I will present the framework I am certain is correct. It is rooted in Keynes, carried forward by Minsky and Godley, and brought into its most complete form by the Post-Keynesian School, called Modern Monetary Theory. More on the key ideas and leading lights to come.

Saturday, August 10, 2013

Default Danger

I just read a post on TPM, which has me wondering and worrying whether I have underplayed the danger of our country going into default. I have assumed GOP leadership would keep us from going there. The comments from this TPM reader causes me to question that. Here's an extended quote fom the TPM reader TW's comments, which TPM published:

 I work in the investment industry and I am watching the town hall meetings, this thing with McConnell and it’s bringing flashbacks to 2011. I don’t think most people understand just how close we were to a real meltdown that summer. Without Biden and McConnell, there would have been a default and that would have dwarfed 2008. Now normally, the country would be able to count on the fact that they averted disaster last time, so therefore, they will find a way to avert it again this time. But as I’ve thought about it all week (and for some time before this week), I’ve had a nagging thought that this is all wrong. But, I couldn’t put a finger on it either.
But after seeing the coverage of the town halls this week and listening to the right wing turn on their own, little by little, I guess I get it now. These people really are nihilistic and the only thing that will satisfy them is a total breakdown of government. Only then, they believe, can we have our “freedoms” and our “rights”. I don’t pretend to understand how you mentally get to that point, but that’s where they are.

Now, I know that there have always been crazy people in this country throughout our history, but there has also always been rational people who think first about the country and act accordingly. But that’s not where we are today. Rational people have been voted out or left and in their place are the Lee’s, Cruz’s, Rubio’s, etc. And while they claim to be capitalists and free market proponents, they couldn’t negotiate themselves out of a paper bag in the real world, and they have no understanding of practical economics. You can spout Ludwig von Mises all you want, but it has no practical application to the real world.

Which brings me back to McConnell. For all of the issues I disagree with him on, at least he was rational and would cut the deal to keep us from going over the big cliff. If he’s gone over to Crazyland and Boehner has abdicated any remaining parts of his speakership, then what’s left?

And all this comes as economically, our world is getting better. I realize that there is a ways to go with unemployment/underemployment, housing, etc. but this economy is still getting better. The market is up because of that fact. I know there’s a lot of noise around what’s driving the market, but at the end of the day, professional investors would not be pushing money into the market if they didn’t think the overall economy was headed in the right direction.

So, yes, I am worried. A government shutdown can be dealt with, that won’t kill the economy, but the debt ceiling/default will. And without someone who can/will cut a deal, it’s unnerving to watch. At this point, I think we are in a more dangerous position than 2011.

I apologize for the length, but you guys are on the right track here with your reporting. This is the story of the fall, and very few people are talking about it yet.

I don't think we will default. But this is a thoughtful comment from an obviously thoughtful man. We need to pay attention. And we should most likely be more than a bit worried.

Thursday, August 8, 2013


I am predicting a Shutdown, most likely in November, when the debt ceiling limit is reached. I think we'll get through the September 30 date, when the Government needs a new budget, but it will be close.

 I now put the odds of a Shutdown at 80%. I am also predicting that the debt ceiling may be threatened but not breached, as GOP leadership does seem to know this is a No-No. Nevertheless there is a chance the GOP will miscalculate, sending the US towards default.

 First, September. This is when the "Defund Obamacare" battle will be fought. Senators Cruz, Lee and Rubio will lead the charge in the Senate. Most Members of the House GOP caucus will take up the banner. The White House will say No Go. And we'll have a game of chicken right up until near the end, when moderate Senate Republicans will convince the GOP to fold and sign a 60-90 day Continuing Resolution, kicking the can into December or a bit beyond. If they mistime it, there may be a short shutdown, until the CR is put in place and signed by the President.

Then the real talks will begin. And here is where it gets interesting. A group of 8 Senate Republicans, including Senators McCain, Graham, and Corker, have been meeting with the White House in an attempt to find a way around the spending impasse. Reports on progress have been "medium rare" - good vibes and listening, no specific progress. I think what has happened in these talks is that a significant core of Senators know the White House will not do a deal without new revenues. If this has been communicated in such a way that the Group of 8 believe the White House will not move off this position, then we have a good chance (better than 50/50) to get a New Cuts plus New Revenues (about $600 Billion of each) deal to replace the Sequester. This deal, likes its close cousin, Immigration Reform, will pass the Senate with 10-15 GOP votes joining with all Democrats.

This might happen in September. I think it is more likely to happen in October, after the first crisis point has been passed. And like Immigration, it will be up to the House to decide the bill's fate.

So what's your guess? Mine is that after losing the September 30 battle, the House GOP will force a shutdown. The debt ceiling will get a clean bill raising it for up to a year. But the Government will shut down. And after 2-6 weeks of closure, a deal will be done, most likely in line with what the Senate may have done - a Sequester Replacement Bill, about $600 billion in cuts over 10 years combined with about the same amount of new tax revenues from closing loopholes, replacing the across-the-board $1.2 trillion in the current Sequester program. If the Chained CPI change to Social Security is also thrown in (modestly reducing future Social Security benefits by using a lower number inflation calculator), the President will get some modest job stimulus.

If this is the result, or something close to it, this will be a staggering loss for the GOP. Remember the deal Obama was trying to negotiate with Boehner in the Summer of 2011: $2.8 trillion in cuts with $1.2 trillion of new tax revenues. The above deal is $2.8 trillion in cuts plus interest savings and $1.2 trillion in new taxes. But in the summer of 2011, Obama was willing to make the upper end tax cuts permanent. Two years later: same deal, but the taxes on the wealthy have already gone up. Staggering.

Wednesday, August 7, 2013

ACA Subsidy Calculator

Here is a screen shot of the ACA Subsidy Calculator from Kaiser. I have been playing with it and it's simply terrific. Answers lots of questions! And here's the link.

A Worthy Opponent

Alison Lundergan Grimes is the Democrat taking on McConnell in the 2014 Kentucky Senate race. From this video, she looks just terrific! Right now, she's polling a little bit ahead, and McConnell also faces opposition from the Right in the form of Tea Party candidate Matthew Bevin. I intend to support Alison.


I have recently had a "big discussion" with a very good friend, more or less on the following question: "Which Comes First: Loans or Deposits?"

 If deposits come first, then this validates the loanable funds theory that I learned in Econ 201 - that there is nationally a pool of savings, stimulated by interest rates, that forms the basis for what level of investment is possible in the economy and, similarly, how much money the banks can loan out. In other words, Savings, largely determined by Interest Rates, decides how much Investment there will be, and how much Banks can loan out.

There's lots of mainline ideas/concepts/beliefs that fall out of this loanable funds model. Will just focus on two:

          *Government Crowding Out: If there is only so much money available for lending/investment, then Government deficits, requiring bond market financing, will "crowd out" worthwhile private industry projects, causing, at a minimum, interest rate inflation and deferral/cancellation of much private investment.
          *Fed Control of Broad Money Supply: If Reserves and Deposits come before loans, and the Fractional Reserve/Money Multiplier is an accurate way of describing the banking system, then what the Fed does via monetary operations ultimately determines the broad money supply with its dreaded ability to create inflation.

These are two core tenets of neoliberal orthodox macroeconomics. I am now convinced they are both wrong.

          *Deposits do not come first. Loans do. Loans create deposits - i.e., money out of thin air. Bankable customers and asset/equity ratios are the constraints on lending, not the supply of funds through deposits. So bond-financed deficits do not compete with private investment projects in a limited pool of funds called the savings pool. And as Keynes showed us long ago, Savings are not a function of Interest Rates; rather Savings are determined by the level of Income in the Economy, the Tax Rates, and the Propensity to Consume versus Save. It is actually more accurate to say that GDP/Investment levels create Savings, and not the other way around.
          * The Fed controls the supply of Base Money (Reserves plus Currency). Banks control Broad Money (M1, M2, M3). Shadow banks too, when they make collateral based repo loans. The Fed is not as powerful as everyone in the world thinks they are. The Fed simply does not control the broad money supply through reserve management or anything else. They do control rates, both short and (through their ability to do unlimited QE) the long rates as well.

Some of you may well disagree with these two conclusions. But for the moment, imagine I am right, and then do your own noodling how shifting the macroeconomic ground in these two areas might affect the rest of the economic policy landscape:

          1. Government and Private Industry Investment are not in competition anymore. What is spent by Government does not reduce what Private Industry can do.
          2. Banks can loan what they want to, whenever they find creditworthy customers, subject only to capital constraints.
          3. Banks control the money supply, not the Fed. But the Fed has a lock on short interest rates, and long rates, if they want to commit their unlimited buying power.
          4. Deficits do increase broad money by injecting new net financial assets into the economy (over what is removed by taxes) in the form of Demand Deposits (M1). But QE does not increase broad money, since the Fed is trading reserves for bank-held securities (asset swap); this does increase base money, but not broad money, as reserves cannot and do not enter the economy.
          5. If the Fed does not control the broad money supply, but does control base money and rates, how could the US suffer a bond market meltdown as long as the Fed will always be a buyer? Doesn't this mean that the Bond Vigilantes arguments we always hear are groundless ? (Yes.) And isn't this why Japanese Government bonds have never jumped out of control, despite huge deficits and debt? (Yes.)
          6. Finally, if Government deficits do not crowd out private spending or cause interest rate inflation, can we then begin to consider the idea that deficits are not automatically inflationary, and that like any form of increased spending, whether or not deficits will cause inflation depends not on monetary issues, but rather on fiscal concerns - is there spare capacity in the economy? (Yes!)

This, I believe, is very big stuff. Most of us have been getting the macroeconomic picture wrong - not as a matter of values or political preference, but as a matter of economic, operational fact. And this is one of the biggest problems our country, and the rest of the world, faces. MMT gets it right. Neoliberalism (our country's economic orthodoxy) gets it wrong. We have much to do!

Friday, August 2, 2013

The Elements of GDP

The above chart shows GDP growth rates (solid blue) and its components(data from the Federal Reserve of St. Louis):

  • Consumption - PCE in red; about 70% of GDP
  • Government - WO68RCQ027SBEA in purple, about 22% of GDP
  • Investment - Business (PNFI - Private Net Financial Investment) in green; Private residential (PRFI - Private Residential Fixed Investment) in orange; combined Investment is about 13-15% of GDP
  • Net Exports (Exports - Imports) - not shown; generally 5-7% of the economy
Here's the macroeconomic equation:

          GDP = C + G + I + (X - M)

Since Imports invariably exceed Exports, Net Exports (X - M) is regularly a 5 - 7% drag on GDP. They are not shown above, because FRED did not have a comparable, year-over-year, quarterly comparison(not inflation adjusted).

Just a few things to notice from this chart:
  •  Consumption growth rate hugs the GDP line, and fairly much defines it - understandable, since this is about 70% of the total. Modest growth has been pretty steady since early 2010
  • Housing investment turned south in mid-2006, well before the September 2008 Lehman moment.
  • Business investment cratered in late 2009, recovered nicely, hitting its peak at the end of 2011, and is trending down.
  • It looks like the housing upturn has legs.
  • The laggard is Government. Essentially no growth since the middle of 2010
  • Going forward, if Housing continues strong, helping to offset the somewhat weak Business Investment, we should continue to see modest GDP growth. If the Government were to invest in infrastructure, or similar job-building programs, growth would accelerate.
A few other observations:

  1. It's very hard to look at this chart and argue that the big increase in spending after the Lehman crash did not positively affect the economy. Government spending jumped up in mid-2008 and stayed high and quickly growing into the second quarter of 2009 - precisely when Consumer Spending, Business and Private Residential Investment turned up. The stimulus worked.
  2. Government spending moderated in early 2009, with its growth rate cut to near zero in early 2011, where it has remained. The GOP incessant arguments about runaway spending is crap.
  3. Notice that Business Investment grew strongly in the Summer and Fall of 2011, a time of enormous political uncertainty over the debt ceiling. The GOP argument that regulation and tax uncertainty causes business to sit on their money is also crap.
  4. And can you detect any negative change in consumer spending and residential investment from the 2013 tax increases, including the increase of 2% in the payroll tax? This last item should be a fiscal drag, holding private consumption back, but it didn't do that this time around. The perpetual argument that tax increases for the top 2% will quickly affect overall spending is hogwash. PCE has been quite steady. Business investment has trended down, but this began in early 2012, and it has stabilized since the January 2013 increases.
And finally, the most obvious thing from this chart for me is that the Government is not spending nearly enough to move us into a strong growth position. Pete Peterson, among others, have made us terrified of deficits and government debt. They are wrong. Almost completely. But they have won the day on the political playing field, because even the President and the Democrats have taken a partial austerity stance. More on this to come.

Meanwhile, we're doing OK. Obamacare will kick Government spending up a notch in 2014. I'm hopeful that the US energy transformation via fracking will underpin new business investment. Immigration would be a strong positive, if it passed - but I'm afraid it won't, at least not before the 2014 mid-terms. We need more Government investment, in infrastructure, education, and manufacturing. Again not likely, unless Dems retake the House.

But we're doing OK on a GDP basis, not so well on an income equality basis; but to address this, Dems need to retake the House.

Thursday, August 1, 2013

Debt and Budget Hijinks

Booman asked a good question on his blog today:

"Will Obama really be willing to watch our credit rating be destroyed and the global economy collapse (i.e., by refusing to negotiate over the debt ceiling)?"

My response in Comments:

Booman's question was would the President risk our credit standing in the world by going to or over the brink?

My answer: He will hold firm. As we cross over the brink, he will order his Treasury Secretary to keep paying the bills, citing the 14th Amendment. There is a much smaller possibility that he will have Treasury mint a Trillion Dollar Coin and deposit it in Treasury's General Account at the Fed. The Fed is obligated to fund such deposits at the value claimed by the Secretary. Tricky, but possible. For Obama, who doesn't like tricks, unlikely.

Will the GOP go to the brink? That's the real question. GOP thought leaders are utterly convinced Obama will fold, and when he doesn't, they will offer a clean bill, since there won't be time to negotiate. They (the GOP) will not take us over the edge, unless they miscalculate.

 Another reason the brink may not be hit is that the September 30 deadline likely will come before the debt ceiling drop dead date. If the GOP shuts down the Government and gets humiliated in the aftermath, they will be in no mood for another fight.

The battle will be in September over the CR. To increase the pressure, Obama and Lew may work to have the debt limit reached at about the same time. If this happens, I predict we will see a cave on the debt ceiling (clean bill) and a temporary CR, which will just move the budget talks closer to the 2014 elections and well into Obamacare's successful roll out.

In this case, there will, I predict, be a shutdown, and the GOP will lose the House in 2014.