McCain gets this part right


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Problem is, none of them recognize imports are real benefits, exports real costs, so even when they are right it’s for the wrong reason.

Senate rejects move to kill ‘Buy American’ clause, but softens provision

Feb 4 (CBC) &#8212 Senate rejects move to kill ‘Buy American’ clause, but softens provision

The U.S. Senate rejected an amendment put forward by Republican Senator John McCain to strip the “Buy American” provision from the huge U.S. stimulus bill while agreeing to soften the language that had given rise to concerns of pending trade wars.

McCain’s amendment had stated that the “utilization of funds appropriated or otherwise made available by this act shall not be subject to any ‘Buy American’ requirement.” It was voted down 65 to 31 on Wednesday night.

The Senate, however, agreed to water down the language to include a requirement that indicates international trade agreements cannot be violated as a result of the “Buy American” provision.


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McCain petition


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Dear Donna:

I have long been a fighter against wasteful spending in Washington and long an advocate for a balanced budget — that will never change.

    Glad he lost, no deficit is a lot worse than any of the current proposals, even though they fall far short of my proposals:
     

  • Full payroll tax holiday with Tsy making the payments for us.
  • $300 billion to the states on a per capita basis with no strings attached.
  • $8 job funding for anyone willing and able to work.
  • Allow the Fed to lend unsecrured to it’s member banks (demanding collateral is redundant and disruptive with current FDIC arrangements).
  • Implement a strategy to immediately reduce gasoline consumption.
  • This reverses the current slide, and gives Congress time to implement their specific
    proposals in an orderly manner.

I realize we face extraordinary challenges with our economy today, but that is not an excuse for more irresponsibly from Washington. I hope you will join me in saying no to this stimulus package as it currently exists by signing this petition.

Sincerely,

John McCain
Chair, Country First PAC


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Fed to lend to CBs in unlimited quantities (day 2)


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I’m keeping an eye on crude prices rising a lot more than the USD is falling; so, I suspect the great Mike Masters inventory liquidation has run its course.

Inventories are at record or near record lows.

If there has been net demand destruction, it hasn’t yet showed up in OPEC or Saudi production numbers.

The Saudis only pump on demand, at their price, so as swing producer it’s their production that should fall, not anyone else’s.

However, there can be 90 day type lags; so, October Saudi production could be down but not be reported until early November.

___________________________________________________________________________________________________________________

This latest swap line expansion should be a target of Obama and McCain, but neither are touching it.

It’s a financial blunder, potentially of epic magnitudes.

It’s also an oversight issue of epic magnitudes that could dwarf the subprime issue at the first ECB USD auction tomorrow.

The $620 billion swap lines currently in place could swell to well over a trillion USDs.

It will reduce eurobanks cost of USD funds, bring down LIBOR, and normalize bank liquidity.

And the reduction of bank credit risk is bringing in credit spreads which makes room for equities to appreciate as well.

But that’s an empty victory that changes the lack of aggregate demand very little, if any.

And it adds a new element of systemic risk.

Unrestricted/’currency secured’ international USD lending has been tried before in the emerging markets.

Yes, this type of initial lending reduces financial stress, but then it must be sustained and increased to avoid a subsequent collapse, which then becomes inevitable.

Remember Mexico and the rest of Latin America?

It took a growing level of external USD debt to hold it together, until the number got too large and the controls impossible. And then it all fell apart.

All of these ‘top down’ measures that carry the hopes and anticipations of markets should continue to be let downs as no one addresses demand.

This happened in Japan after the banks were recapitalized and ‘healthy’ and nothing happened regarding lending.

Obama and McCain have a window to jump on this opening but don’t seem to be. McCain as the watchdog and Obama as the reformer are both letting us down. Again, as they show no insight and instead keep to their canned rhetoric.

Bush and congress missed a historic opportunity to move the US away from ‘materialism’ after 9/11.

I got a call from Congressman Gephart at the time, and I said this is an opening to show a different kind of leadership as people had turned ‘inward,’ with the following type of statement:

A nation is not richer because people sleep in hotels instead of staying at home. A nation is not richer because we eat out rather than have family meals at home. And now that we have become more introspective on life itself, we can continue this enlightened change of course, back to our real core values, and steer our efforts to educating our children and improving our health care service, etc. etc.

But instead, our leadership telling us:

“Get out of Church and get into the shopping malls!” in order to ‘save the economy’, etc. etc. Gephart didn’t do it. And we went back to the malls.

This go round was also an opportunity to make a fundamental change away from a lending based model to a more cash based model which seems to me has proven more stable over time and a lot more beneficial to human peace of mind.

We could have let most of our lending institutions go by the wayside and kept the banks that would be allowed to make more conservative home loans, installment loans, checking and savings accounts, and not much else. And the housing agencies operating a bit like the old savings and loan’s used to do, but this time with sustainable, matched treasury funding.

And rather than relying on lending for aggregate demand, which is inherently unstable, we could have supported aggregate demand with a fiscal package to provide sufficient income to buy our output and sustain growth and employment.

But instead we are first ‘fixing’ the lending institutional structure, without addressing aggregate demand.

It’s unlikely that costly (in terms of lost output and employment) credit bubbles will be reduced by first supporting the lending institutions and then supporting demand.


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Reuters: Obama says bailout may delay other programs


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(email to J. Galbraith – one of Obama’s economic advisers)

Hi,

The ‘bailout’ adds nothing to aggregate demand and should not be a factor regarding other spending initiatives.

Any chance you can straighten him out on this?

Warren

Obama: Wall St bailout may delay spending programs

by Steve Holland
NEW YORK, Sept 23 (Reuters) – Democratic presidential nominee Barack Obama said on Tuesday a $700 billion Wall Street rescue plan would likely delay some campaign spending promises, as the reality sank in of the costs of the mammoth bailout.

Obama, who faces Republican John McCain in their first face-to-face debate on Friday in Mississippi, said if elected he might have to phase in some of his plans such as an overhaul of the U.S. health care system.


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On the floor of the Senate today


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From the last two paragraphs it looks like another fiscal package is on the way?

Interesting how little damage to the real economy it takes to trigger a fiscal response – GDP last printed at 3.3% and the relatively modest job losses are not nearly enough to have triggered a fiscal response in the past from either party?

So it seems behind the rhetoric the Democrats in Congress are in fact reacting more to financial sector needs.

Probably because, like the Republicans, most of their constituents are also shareholders.

The move to broaden shareholdings has had profound political ramifications that has undercut the previous agendas of both parties.

A few months ago the far left in Congress was congratulating the Fed chairman for keeping inflation expectation well contained even as other prices were rising, after it was explained that this meant keeping wages in check.

Since when doe the ‘far left’ praise a Fed chairman for suppressing wages, especially when the cost of living is on the rise???

Having a nation of shareholders seems to have redirected overall public purpose?

The 30% corporate income tax means the government already ‘better than ownes’ 30% off all the US based equity- it’s the direct pipe, and easily increased or decreased by decree.

Equity held at this level has very different political effects than individual ownership of shares.

Yet there is no discussion of any of this, anywhere in the public debate.

Meanwhile, crude seems to be acting like the ‘Master’s inventory liquidation’ may have run its course and the Saudis are again moving prices back up as demand for their output remains firm and their excess capacity is too thin for comfort.

This drives down the USD, making our stocks ‘cheaper’ to foreigners, so look for more foreign takeovers, which will be spun as the US ‘needing’ foreign borrowers and being ‘rescued’ by them.

Reid: While Financial Markets Reel, Bush-McCain Republicans Call For More Of The Same

Washington, DC—Senate Majority Leader Harry Reid made the following statement today on the floor of the U.S. Senate. Below are his remarks as prepared for delivery:

“On the morning of October 30, 1929, President Herbert Hoover awoke the day after the biggest one-day stock market crash in American history, surveyed the state of the U.S. economy and declared, ‘The fundamental business of the country, that is production and distribution of commodities, is on a sound and prosperous basis.’

“In the coming weeks and months, President Hoover remained in an economic bubble, unaware of the extreme suffering of ordinary Americans – even declaring that anyone who questioned the state of the economy was a ‘fool.’ For Herbert Hoover, ignorance was bliss. And it wasn’t until the American people replaced this out of touch Republican president with a Democrat, Franklin Roosevelt, that our nation’s economic recovery began.

“Yesterday, nearly 80 years after the Hoover Administration took America with blissful ignorance into depression, the Dow Jones Industrial Average dropped more than 500 points – the biggest one-day decline since trading opened after the attacks of 9/11. With one major investment bank headed for bankruptcy, another sold at a bargain-basement price, and one of the world’s largest insurance companies teetering, investors rushed to sell their shares.

“With our financial markets reeling, the American people are wondering whether they will lose their jobs, whether they will be able to pay their child’s next tuition bill, whether their pension and retirement savings will be safe.

“There is no reason to think we are headed into an economic depression. There is no reason to panic. Yet one Senator – John McCain – woke up yesterday morning, surveyed the state of the U.S. economy, summoned the ghost of his fellow Republican, Herbert Hoover, and declared, ‘The fundamentals of our economy are strong.’

“For whom are the fundamentals of our economy strong? Not for the 606,000 Americans who have lost their jobs this year alone. Not for the commuters and truckers who are sending more and more of their hard-earned dollars to pay for fuel. Not for all those struggling to make one pay check last until the next, with record hme heating prices looming in the coming winter months. Not for cities and towns that have been forced to cut back on police, schools and firefighters because their tax base is shrinking. And certainly not for the millions of families who have or may soon lose their homes, or for the tens of millions who are seeing their home equity plummet.

“No matter what George Bush, John McCain or the ghost of Herbert Hoover may think, this economy is not strong, and the American people deserve better.

“This is not a time for panic. But it is a time to look back on the past eight years of Bush-Hoover-McCain economics and figure out what brought us to this point so that we don’t repeat the same mistakes. And the tragic truth is that this disaster was avoidable. In its palpable disdain for all things relating to government, the Bush/Cheney Administration willfully neglected the government’s most important function: to safeguard the American people from harm.

“In their simplistic philosophy of ‘big business equals good, government equals bad,’ the Administration and the Republican Congress failed to conduct oversight and let the financial sector go wild. Without anyone regulating their actions, market excess destroyed the financial prudence that allowed a firm like Lehman Brothers to prosper for 158 years. Vast fortunes were made virtually over night, and now vast fortunes have been lost literally over night.

“The unfortunate irony is that the Bush Administration’s zeal to favor big business has now crippled it – and left the American people to pay the price. President Bush did nothing to stop this disaster, and now it’s clear he’ll leave the mess to the next president.

“Now our nation must decide who is better suited to end Bush-Hoover economics and return sanity and security to our economy. Senator McCain says the economy is not his strong suit, so he went searching for an economic advisor who could bolster his weakness. Who did he choose? Former Senator Phil Gramm. The same Phil Gramm who, as a Senator, was responsible for deregulation in the financial services industries that paved the way for much of this crisis to occur.

“A respected economist at the University of Texas, James K. Galbraith, said that Gramm was ‘the most aggressive advocate of every predatory and rapacious element that the financial sector has’ and that ‘he’s a sorcerer’s apprentice of instability and disaster in the financial system.’

“It was Phil Gramm who pushed legislation through a Republican Senate that allowed firms like Enron to avoid regulation and destroy the life savings of its employees, and it was Phil Gramm’s legislation that now allows Wall Street traders to bid up the price of oil, leaving us to pay the bill. Warren Buffet called the result of Gramm’s legislation ‘financial weapons of mass destruction.’ And now, the architect and leading cheerleader for every mistake and neglect that created the Bush/Cheney financial nightmare is whispering into the ear of John McCain – who says he doesn’t know much about the economy.

“Whether you call it Hoover economics, Bush economics, or McCain economics, it is not a recipe for change – it’s a recipe for more of the same.

“For all of the college students worried about finding a job, the working families who don’t know how they’ll pay the bills, and the fixed-income senior citizens trying to figure out how to pay for medicine, we must do better.

“We can’t afford another Republican president who will follow his party’s ghosts down the path of recession, depression and more suffering. We desperately need a president who understands that working people, not industry titans, are the backbone of our economy. We need a president who will cut taxes for working people and senior citizens; end the windfall profits of oil companies and put that money back into the pockets of those who are paying record prices at the pump; and put millions of Americans back to work by investing in jobs on Main Street, not Wall Street.

“In November, we can elect that President who will break from the past and invest in the future. Until then, the Senate should pass a second economic stimulus plan that funds infrastructure projects that will create jobs; prevents cuts in desperately-needed state services; and invests in renewable energy, expanded unemployment benefits for victims of the Bush-McCain economy, and helps working people and senior citizens afford the costs of energy.

“I expect the House of Representatives to pass a stimulus bill in the coming days. When it arrives in the Senate, I hope it will be embraced by Senators from both parties as a critical first step on the long road from economic ruin toward economic recovery.”


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Comments to questions


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Looks like Q4 was the bottom for the real economy, and government spending now kicking in strong for quite a while to keep things muddling through.

Housing has been ‘subtracting’ from GDP with exports picking up the slack.

From this point it won’t take much of an upturn in housing to pick up any slack that might be happening with exports.

Also, while unemployment figures lag quite a bit, seems to me GDP is strong enough to see a few unexpected new jobs in time for the elections.

Meanwhile, seems chunks of the financial sector are still hurting due to the reduced demand for financial services, but they’ll figure it out with new and rehashed products and come back strong, but maybe not to the benefit of existing investors.

Been watching a lot of tv lately:

The Democrats really got blindsighted by McCain’s Rambolita as the convention was forgotten within 24 hours, and the Republicans found someone to rally around.

Seems Biden has turned into a big weight around Obama’s neck as the enthusiasm flows away and they become ‘old news’ and another case of peaking too early. And now with the convention pretty much canceled, Bush and Chaney are kept off prime time to McCain’s benefit, and with New Orleans II now a ‘model of federal efficiency’ the Democrats are scrambling for something to say.


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Re: Resource allocation


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>   
>   On 8/3/08, Craig wrote:
>   
>   Ok. And the irony is as prices fall, demand increases again.
>   Until consuming governments get their head around that fact
>   and put some kind of floor under crude prices to incent
>   substitution (which may be beyond their thinking and/or impossible
>   politically), it seems like crude prices are gonna play rope-a-dope
>   with consumers.
>   
>   
>   Craig
>   
>   

Crude will be rationed as is everything else (scarcity, etc.).

The question is how. Ration by price or by other things?

Rationing by price is the most pervasive and means the wealthy (by definition) outbid the less wealthy for the available supply.

Make you wonder why the Democrats support higher prices, as that means they support their supporters going without while the wealthy drive any size SUV they want. Much like wondering why Obama supports Bernanke after Bernanke explained to Congress how he’s keeping inflation down by keeping a lid on inflation expectations after explaining the main component of inflation expectations is workers demanding higher wages, meaning Obama, Kennedy, and the rest of the left is praising Bernanke for doing a good job of suppressing wages.

Non-price rationing is less common but not unfamiliar, such as mandating cars get an average of 27 mpg, minimum efficiency standards for refrigerators, windows, etc. This takes an element of rationing by price away and results in the wealthy consuming less and leaving some for the less wealthy to consume a bit.

So seems to me the logical path for the Democrats would be something like my 30 mph speed limit for private transportation, which is ‘progressive’ and also drives the move towards public transportation with non price incentives as previously outlined. But there hasn’t even been any discussion of a progressive policy response. All seem highly regressive to me.

So I expect the world’s new and growing class of wealthy will continue to outbid our least wealthy for fuel and other resources.

Also, there may be limits to how high we want world consumption/burning of fuels for all the various ‘green’ reasons.

That would mean drilling and other production increases are out, as would be increased use of coal via the electric grid for electric cars.

And, again, it would be the world’s wealthy outbidding the less wealthy for consumption of the allowable annual fuel burn, as somehow allocation by price continues to rule.

Most paths keep coming down to the continuing combination of weakness and higher prices.

Warren

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(comments from my brother, Seth, who was cc’d)

>   
>   I think democrats have lots of business and profits waiting
>   in govt subsidies for wind and solar. If oil prices fall that goes
>   away for now and they can’t produce on the subsidies for
>   them-cynical view but probably true
>   
>   There are also a lot of wealthy democrats and they want their
>   votes. Poor people all vote for democrats anyway-even with
>   declining lifestyles they are not going to McCain. So I think
>   Obama is pandering to the wealthy-it might be who he is-no
>   one really knows.
>   
>   With all of their green talk I have not seen any of them reduce
>   air travel, suv caravans or turn off the a/c in the capital. Just a
>   way to get votes and sound concerned. I saw a tv program
>   about how the chinese olympic swimming building is a green
>   sustainable building. It is 7 acres, pools, 25,000 people.
>   they finally said it uses about 25% less energy than a comparable
>   building would have. That is not green or sustainable, especially
>   since the building was not needed in the first place. I think “green”
>   is about making money, not the environment.
>   
>   
>   Seth
>   

I just can’t allow myself to be that cynical like you new yorkers!

:)

Warren

>   
>   
>   I think I am cynical usually, but this green thing drives me nuts
>   it started 30 years ago but is now all about money
>   when I see some lights turned off in Times Square (even in the
>   daytime) or the 5 huge spot lights on the CBS building lighting up
>   Katie Couric’s 50′ x 30′ poster which are on 24 hours a day turned
>   off, then I will believe it is about resources and not money.
>   there is a long way to go.
>   they advertise expensive green buildings here-I am not kidding-the
>   big thing is thermostats with timers on them and bamboo floors-didn’t
>   we have those 30 years ago??
>   
>   they talked about the oscar ceremony being green this year-the
>   celebrities were all giddy about it-what they did was use red
>   carpet made of recycled fibers????? what is that?
>   absolutely nothing-
>   anyway, time to calm down. too much excitement here
>   seth –
>   
>   

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WSJ: An economist who matters


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An economist who matters


by Kyle Wingfield

(Wall Street Journal) Robert Mundell isn’t in the habit of making fruitless policy recommendations, though some take a long time ripening. Nearly four decades passed between his early work on optimal currency areas and the birth of the euro in 1999 – the same year he received the Nobel Prize for economics.

The Euro had nothing to do with the optimal currency area considerations.

Back in America, there’s an election going on. There’s also been a spate of financial problems, not the least of which is a weak dollar. But Mr. Mundell says “the big issue economically . . . is what’s going to happen to taxes.”

Democratic nominee Barack Obama regularly professes disdain for the Bush tax cuts, suggesting that those growth-spurring measures may be scrapped. “If that happens,” Mr. Mundell predicts, “the U.S. will go into a big recession, a nosedive.”

Even if the lost aggregate demand is more than replaced at the same time?

One of the original “supply-side” economists, he has long preached the link between tax rates and economic growth. “It’s a lethal thing to suddenly raise taxes,” he explains. “This would be devastating to the world economy, to the United States,

Even Laffer, the originator of his curve, does not agree with that.

and it would be, I think, political suicide” in a general election.

That may be true, but so far polls don’t show it.

Should taxes instead be cut again, I ask him, to stimulate the sluggish economy? Mr. Mundell replies that he favors a ceiling of 30% on marginal rates (the current top rate is 35%). He recounts how the past century experienced a titanic struggle over whether tax rates are too high or too low: from a 3% income tax in 1913; up to 60% during World War I; down to 25% before Congress and President Herbert Hoover raised taxes back to 60% in 1932 and “sealed the fate of our economy for a long, long time”; all the way up to 92.5% during World War II

When real output more than doubled, even as 7 million of our best workers went into the military.

before falling in three steps, reaching 28% under President Ronald Reagan; and back to nearly 40% under Bill Clinton before George W. Bush lowered them to their current level.

Deficit spending is much more of a driver of aggregate demand than marginal income tax rates.

In light of this fiscal roller coaster, Mr. Mundell says, “the most important thing that could be done with respect to tax rates now is to make the Bush tax cuts permanent. Eliminating that uncertainty would be more important than pushing for a further cut – in the income tax rates, anyway.”

One tax that he would cut, to 25%, is the corporate tax rate. “It could be even lower,” he says, “but I think it would be a big step to lower it to 25% . . . I made that proposal back in the 1970s.”

Very small potatoes from a macro point of view.

A long-haired Mr. Mundell spent that decade not only arguing for the euro, but laying the intellectual groundwork for the Reagan tax-cut revolution. Mr. Mundell says those tax cuts remain “as important to the United States as the creation of the euro was to Europe – a fundamental change.”

The deficit spending of the Regan years was the driver of the expansion- tax cuts and spending increases.

Combined with Paul Volcker’s tight-money policy at the Fed, which Mr. Mundell also championed, supply-side economics killed off stagflation.

And not the drop in crude prices due to a 15 million barrel per day supply response when natural gas prices were uncapped and utilities switched from oil to gas (and coal, etc.)???

Seems Mundell is pure propaganda.

Or at least it killed it off at the time. With prices again rising as growth slows, some economists are worried that stagflation could be making a comeback. Not Mr. Mundell – not yet.

He draws a comparison with the situation in 1979-1980. Start with the dollar price of oil, which he calls “one of the two most important prices in the world” (the other being the dollar-euro exchange rate, which we’ll get to in a moment).

“If you look at the price level since 1980,” he begins, “oil prices would naturally double by the year 2000. So from $34 a barrel in 1980 to $68 a barrel. And then . . . because the inflation rate’s about 3.5%, it would double again by 2020. So the natural price . . . would be something like $136 in 2020.

So ‘naturally’ doesn’t include inflation???

More to the point, the inflation rate was about 3.5% for 20 years or so with oil prices under $20, so now with oil spiking to $140, inflation should fall to the Fed’s target of maybe 2% due to a modest output gap?

“Now, we [already] got to $130-something, but . . . I really think the price is going to settle down, probably below $100, if not below $90. What I’m saying is we’re not so far off track.”

Guess he forgot the first week of micro that shows how monopolists set price?

As an economist, he should know Saudis are necessarily setting price.

American motorists still shocked by $4-a-gallon gasoline might think we’re rather more off track than Mr. Mundell suggests. Bolstering his case, he immediately moves on to another commodity often invoked to demonstrate inflation: gold.

“The price of gold in 1980 was $850 an ounce. And the price of gold today is about the same. It’s astonishing,” he says. “It’s true, gold did go up” to more than $1,000 an ounce earlier this year, “but the public doesn’t believe that there is inflation. If there was big inflation coming, then you’d see the price of gold going up to $1,500 an ounce very quickly, and that hasn’t happened.”

If they could take Nobel Prizes away, that statement would put him at risk.

In any case, don’t expect to hear Barack Obama or John McCain talk about the weak dollar’s contributions to any problem. “As [journalist] Robert Novak once put it, it’s like cleaning ladies who come in and say ‘I don’t do ironing.’

Good thing he isn’t running with a statement like that.

[Politicians] say, ‘I don’t do exchange rates,'” Mr. Mundell chuckles. “They think they can only lose by talking about exchange rates, because they don’t know enough about it, and it’s hard to predict anyway, for anyone.”

If Mr. Mundell had his way, there wouldn’t be anything for politicians to say about exchange rates. They would be fixed – as they were under the Bretton Woods arrangement after World War II until 1971, when President Nixon took the U.S. off the postwar gold standard and effectively launched the era of floating exchange rates.

“It’s a very poor and a dangerous system,” Mr. Mundell says of the floating regime, “because it creates exaggerated swings in the exchange rate.”

Vs. exaggerated swings in unemployment. Fixed foreign exchange regimes regularly ‘blow up’ with double digit or higher unemployment, negative growth, and actual blood in the streets. They have been abandoned for very good and practical reasons.

Case in point is the dollar-euro rate. From a low of about 82 cents in 2000, Europe’s common currency has risen fairly steadily and has been valued at more than $1.50 since late February, even breaking the $1.60 barrier once.

Without any negative growth, moderate inflation, and, in the Eurozone, declining unemployment.

“What people have to realize is there’s been a fundamental change in the way markets work in the past 20 years,” Mr. Mundell says. “Now, exchange rates are driven not so much by trade but by capital accounts and capital movements, and the huge amount of liquidity that’s sloshing around the world.”

Guaranteed he can’t discuss ‘liquidity sloshing around the world’ beyond that rhetoric.

Central banks world-wide, he notes, are trying to reach an equilibrium between dollars and euros in their $6.5 trillion worth of foreign reserves. Roughly two-thirds of these reserves are kept in dollars now, so they have about $1 trillion left to move into euros.

“If you did a hundred billion dollars” annually, Mr. Mundell points out, “you’d need 10 years to build that up, and that amount of capital movement has a tremendous effect in keeping the euro overvalued. It’s not good for Europe

It does help their real terms of trade, but maybe he doesn’t think that’s ‘good.’

and . . . ultimately it would cause more inflation in the United States.”

It already is, but here he’s denying it.

But this continuing shift doesn’t mean that the dollar’s status as the world’s dominant currency is in danger, at least not in the short run. Countries like Iran may be pushing for the pricing of oil in another currency, “but it wouldn’t happen unless Saudi Arabia and the Gulf states moved in that direction, and I don’t see any way in which they would do this,” Mr. Mundell says.

He also doesn’t ‘see’ that it doesn’t matter what currency anything is ‘priced in’ as it’s just a numeraire. What matters is the currency they ‘save in’ as he mentions when he estimates how they want to hold their reserves and how that matters.

“It would be very damaging to the relations between the United States and the Gulf countries. There’s an implicit defense alliance between those, and that’s what overrides as a top priority.”

Nor is there a macroeconomic argument for demoting the dollar. “Remember, the growth prospects for the United States are probably stronger than that of Europe, because you’ve got continued and substantial population growth in the United States, and zero population growth in Europe,” Mr. Mundell says. “Quite apart from the fact that the U.S. economy is innovating more rapidly, and the population is younger and not getting old as rapidly, so they pick up new technology faster. So I look upon the United States still as the main sparkplug of economic growth in the world.”

He misses his own argument. It’s about what currency non-residents want to ‘save in’ that determines reserve levels and the dollar being a reserve currency.

As for the euro’s overvalued status, he forecasts deflation in Europe,

Negative CPI???

along with a slowdown and an end to its housing boom.

Already happening to some degree.

The answer, he suggests, is for the Federal Reserve and the European Central Bank to cooperate in putting a floor and a ceiling on both the euro and the dollar. “You have to grope” to the appropriate range, he maintains, but a good starting point would be to keep the euro between 90 cents and $1.30.

That would mean the ECB buying $ and giving the appearance that the $ is ‘backing’ the Euro as the ECB collects dollar reserves. This is probably unthinkable politically for the Eurozone as they want the Euro to be the world’s reserve currency, not the $.

Even better, in his mind – and now we’re really talking long term – would be to have a global currency. This could take the form of a new money or a dominant existing one to which all others are fixed – probably the dollar. “As Paul Volcker says,” Mr. Mundell relates, “the global economy needs a global currency.”

With no global fiscal authority to regulate aggregate demand? That’s a prescription for economic disaster.

To get there, he proposes holding a new, Bretton Woods-type meeting in 2010 at the Shanghai World’s Fair. Mr. Mundell, who has been spending “a lot of time” in China advising the government, says reviving an international system of fixed exchange rates would be a tremendous help to Beijing as it tries to fend off demands from U.S. and European politicians that it appreciate or float its currency.

Here, he recalls Washington’s similar “bashing” of the Japanese yen in the 1980s, and its ultimately disastrous effects: “Japan got stuck with an overvalued currency for a decade, and suffered from a perpetual deflation in its housing market from 1990 until just a couple of years ago. And China doesn’t want to have the same problem.”

Japan ran/allowed a budget surplus from 1987 to 1992 that wiped out demand and the economy didn’t begin to recover until subsequent deficits got over 7% of GDP.

China isn’t making that mistake.

Another part of his solution is for Asian countries to form their own currency bloc. If they did so, he says, “it’d be comparable in size to the European and the American bloc. And then it would not be so much the question of . . . the U.S. and Europe bashing China” or other rising economies.

He totally misses the roll of aggregate demand.

These three currency blocs, he predicts, would be large enough to weather wide swings in their exchange rates. But the swings would still do economic damage, so “the best thing you could do is to stabilize them, and that’s where the global currency comes in.”

Could it happen? Mr. Mundell allows that three decades may pass, but predicts that like the euro and the Reagan revolution before it, the global currency’s time, too, will come. Any skeptics might want to review the last few decades before betting against him.

I agree the world might do something counter productive like that. Unless there’s something worse they could do that pops up.

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Bloomberg: Jason Furman now top dog for Obama


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Obama Names Rubin Ally Furman to Economic Policy Post

by Kim Chipman and Matthew Benjamin

(Bloomberg) Barack Obama’s presidential campaign today named Jason Furman, who worked closely with former Treasury Secretary Robert Rubin, as economic policy director.

Not a good sign – Ruben has the fundamental accounting identity of national income accounting- government deficit = non-government surplus – completely confused. He thinks deficits take away from savings when they add to savings.

Furman, 37, most recently worked as an economist and budget expert at the Brookings Institution in Washington, where he headed the Hamilton Project, an economic policy research group aligned with the Democratic Party that was founded by Rubin, now chairman of Citigroup Inc.’s executive committee.

A bunch of deficit terrorists.

Obama today begins a two-week tour of tightly contested states including Missouri and Florida to tout his plan for jumpstarting a slowing economy. The Illinois senator says he, not Republican rival John McCain, is best suited to create jobs, provide tax relief and revive the middle class. Obama, who has struggled to attract lower-income workers, seeks to link McCain to what he deems the failed policies of President George W. Bush.

All he’s going to do is link himself to higher taxes and link McCain to tax cuts. Not a good strategy!

Hamilton Project

Furman’s appointment allies Obama’s campaign with leading economic centrists in the Democratic Party, foremost among them is Rubin, 69, who helped found the Hamilton Project in 2006 and is on the group’s advisory council. Furman is a former adviser to 2004 Democratic presidential nominee John Kerry.

Rubin orchestrated President Bill Clinton’s economic policy of promoting free trade and reducing the federal budget deficit.

Clinton caught the tail wind of the 5% GDP deficits of the early 90’s that pumped in income and savings, and allowed the economy to expand until the surpluses generated by the countercyclical tax structure destroyed almost $1 trillion in net financial equity and caused the economy to collapse in 2000.

Obama says he favors free-trade pacts as long as they include stronger protections for workers and the environment. He also advocates budgeting rules that require new spending proposals or tax changes be paid for by cuts to other government programs or new revenue-generating sources.

Pay Go – he’s all about ‘fiscal responsibility’ which is the road to high unemployment, slow growth, and expanded inequality.

Furman and Austan Goolsbee, a University of Chicago economist who until recently was Obama’s top economic adviser, told reporters today that Obama’s “pay-as-you-go” position contrasts with McCain’s. They claim that the Republican senator from Arizona doesn’t provide details about how he would pay for his economic proposals.

McCain has it backwards and is anti-deficit as well, as he wants to cut taxes now to bring deficits down later. But while that strategy is confused, at least it will initially add to demand, employment, and growth. And inflation…

Consequence of Bush Policies

They also criticized McCain, 71, for what they say are proposals that would increase the federal budget deficit and fail to provide short-term stimulus to the economy

Most any increase in the deficit will add aggregate demand and help support GDP.

and tied him to Bush policies they said were responsible for the current economic slowdown.

He let the deficit get too small as it tailed off after the 2003 fiscal package.

Note they never mention inflation, and McCain probably doesn’t either. When you believe the Fed alone is responsible for inflation, you can run any deficit you want without worrying about it. And it was Bernanke who ran to Congress urging them to add to the deficit not long ago, indicating he also believes inflation is solely up to the Fed.

“We did not arrive at the doorstep of our current economic crisis by some accident of history,” Obama said today. “This was not an inevitable part of the business cycle that was beyond our power to avoid. It was the logical conclusion of a tired and misguided philosophy that has dominated Washington for far too long.”

Right – fiscal responsibility is the enemy, and both parties push it.

McCain’s campaign responded today, saying that Obama’s proposals will lead to higher taxes, further weaken the economy and hurt job creation.

Why is Obama taking the initiative of branding himself as the symbol of higher taxes?

“While hardworking families are hurting and employers are vulnerable, Barack Obama has promised higher income taxes, Social Security taxes, capital gains taxes, dividend taxes, and tax hikes on job creating businesses,” McCain spokesman Tucker Bounds said in a statement.

Obama opens the door to damaging counter-punches with every economic initiative.

Neither party has any obvious economic initiative to ‘fix’ things, so they are both better off allowing the other to lead and then get shot down by the press. Obama seems to be falling into this trap more than McCain.

McCain Fundraiser

McCain today attended a fund raiser in Richmond, Virginia, raising $800,000 for his campaign and other Republicans.

Obama today repeated his calls for a middle-class tax cut, an overhaul of energy policy, the rebuilding of the country’s infrastructure, protection of Social Security and making college more affordable.

And, as per ‘Pay Go’ higher taxes elsewhere to pay for it.

He also singled out Exxon Mobil Corp., the world’s biggest oil refiner. Obama said he would seek to tax oil companies such as Irving, Texas-based Exxon on their record profits.

First, these wouldn’t be nearly enough. Second, he opens himself to all kinds of destructive criticism he can’t respond to about the presumed failures of this in the past, effects on investment and equity prices in general if government can target specific companies for extra taxes, etc. Also, about 75% of Americans are shareholders, and want their stock to do better.

“We’ll use the money to help families pay for their skyrocketing energy costs and other bills,” Obama said today.

The critics will say that directing more money to help pay for energy will only encourage more consumption, even higher prices, and inflation, as well as promote all kinds of environmental damage.

Obama says that McCain’s tax proposals would result in almost $2 trillion in breaks for companies, including $1.2 billion for Exxon alone.

You hear this with every election, and with subsequent examination of the details, it always seems to evaporate.

The Congress is in Democratic hands, and Obama was a senator, so why didn’t he/doesn’t he propose this kind of legislation?

Furman said in an interview that the Obama campaign’s economic goal is based on “broadly shared, bottom-up growth,” similar to the views espoused by groups such as the Hamilton Project and the Economic Policy Institute, a Washington research group funded partly by labor unions.

Not a source of broad based support.

‘Empower People’

“You need to empower people to make the economy work for them,” Furman said.

Sounds like Reagan?

As Obama’s economic policy director, Furman said his priority would be to expand the range of advice and proposals flowing to the presumptive Democratic nominee by reaching out to a wider group of economists.

???

“My key mandate, which came directly from the senator, is to bring him a diverse set of voices and ideas, because that’s the kind of debate he likes to hear to make up his mind about his economic agenda,” Furman said. He named Rubin, former Treasury Secretary Lawrence Summers and former Federal Reserve Vice Chairman Alan Blinder as advisers the campaign would turn to.

Bringing back both Rubin and Summers- Letting the foxes back into the chicken coop.

Furman also named Jared Bernstein of the Economic Policy Institute and James Galbraith, a University of Texas economist and son of economist John Kenneth Galbraith, who was an adviser to President John F. Kennedy.

Galbraith and Ruben on the same team? What’s next, Mitt Romney as Obama’s VP?

Furman attended Harvard University in Cambridge, Massachusetts and the London School of Economics and received a doctorate in economics from Harvard. He worked as an economist in the Clinton administration and at the World Bank.

Goolsbee will continue to play a leading role in the campaign, Furman said.

Why not?!


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McCain Economic Policy


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A Q&A With McCain Adviser Douglas Holtz-Eakin

by James Pethokoukis

Douglas Holtz-Eakin is the director of economic policy for Sen. John McCain’s presidential campaign. He’s also a former director of the Congressional Budget Office. I recently caught up with Holtz-Eakin at McCain campaign headquarters and chatted with him a bit about taxes, the size of government, and energy policy. (To get his take on Clintonomics and the 1990s, see this.) Here are some excerpts:

Are we headed toward bigger government?
Senator McCain’s position is that there is a role for government, and the primary thing is that you identify government’s role and make sure that it does it well. The striking thing that has come out of the campaign is the degree to which the American people have lost trust in their government to pursue genuine national priorities, and there are three instances in which this gets voiced pretty clearly; probably the most vivid is the immigration debate, where people simply did not believe that the federal government [would secure the borders]…so Senator McCain made it his commitment that he will secure the border and have the governors of the border states certify that it is secure before any other steps on immigration are taken….

If we promote domestic demand in Mexico and full-employment, they will build a wall to keep us out.

And earmarks have led to the undeniable perception that Congress is interested in taking care of their friends and not the nation, and [earmarks] have led to political corruption and in some cases criminal corruption. And the third is trade…where the perception is that trade deals are no better than earmarks, and that is really troubling and you have to fix that before you do anything else as far as getting the government’s role in the economy correct. [People] want it to work, they really do.

Financial regulation would seem to be one area where government needs to work better.
I don’t think there is any sensible observer of our regulatory system that says this is how you would do it if you drew it up from scratch…. Neither is there a sensible observer who would say, “Look, there is no role for regulation.” So that debate is an artificial one. The real question is what will be effective regulation of financial markets going forward…. Senator McCain is a very practical person and he likes to get things done, and so his approach, for example, on the mortgage crisis has been fundamentally pragmatic: Let’s target the assistance…. You don’t want to have some poor American taxpayer reach into their pocket and help someone who was just flipping houses in California…. And when we do this, let’s do it in a way that helps us not return here again. And both lenders and borrowers should have to give up a little bit to get some taxpayer help…. I like to think that the debate has come where he is. People are saying “no broad bailouts.” He said that a long time ago.

If we sustain domestic demand with fiscal policy, income is stabilized which supports housing and all other economic endeavors.

How does the state of the budget look to you?
If you look at the last full fiscal year, close the books on 2007, we raised 18.8 percent of GDP in [tax revenue] and spent a bit more than that, and we ran a modest deficit by postwar standards….

Yes, not nearly enough to sustain a reasonably small output gap. That’s what started softening demand back in 2006 – the budget deficit got too small.

You roll the clock forward and you see the spending part of the budget explode, real pressures,

Define ‘pressures’? Political pressure from those who don’t understand fiscal policy is about getting effective demand right and not ‘balancing the budget’.

and there is no way you can tax enough to meet those pressures—

The only pressure taxing generally addresses is inflation, and he never mentions that ‘pressure’.

It’s about inflation, not solvency. (See below)

and if you tried, you would do such harm to the economy that it would ultimately fail.

Yes, a deficit of maybe 5% of GDP is probably ‘neutral’ over time given current institutional arrangements, though for any given time frame it may be appropriate to run a larger or smaller deficit.

So the right approach is to take a comprehensive look at the spending commitments, undertake reforms in healthcare to slow the growth of Medicare,

Why? Do we want to reduce support for senior health care? No, he’s afraid of government solvency, as below:

commit to solving the Social Security [solvency problem],

THERE IS NO SOLVENCY PROBLEM.

That’s inapplicable with non-convertible currency and floating fx.

(US government checks don’t ever bounce, etc.)

which is a political problem more than anything else, deal with nondefense discretionary spending. That’s the recipe…. Let’s commit to getting the economy growing, and the revenue will be there.

This implies that revenues (from taxing or borrowing) are a precondition for spending. That is not the case with our non-convertible floating fx currency.

In fact, government is best thought of as spending first and then collecting taxes or borrowing. It’s the funds that the government spends that are used to pay taxes and buy government securities (where else can they come from???).

A close look at monetary operations tell you the same. For example, when the treasury borrows or collects tax payments and builds its balances at the Fed, the Fed has to do repos and add that amount to the banking system. Every ‘reserve drain’ requires a ‘reserve add’. The Fed calls this ‘offsetting operating factors’.

This is not a revenue problem; this is a spending problem.

If anything, it’s an inflation problem, but, again, he never mentions that.

How will you balance spending and the tax cuts Senator McCain has proposed?
It’s not that complicated…. He wants to repeal the [alternative minimum tax]. That’s about $60 billion in additional revenue losses. Fine. We have $60 billion in discretionary spending that was sourced to earmarks. He believes that should go away…. The one that is going to be getting attention is if we cut the corporate income tax from 35 percent to 25 percent—which is a competitiveness must—you, in some static sense, lose $100 billion a year ballpark. That’s real. But you can broaden the base. There are $30 billion a year in rifle shots that you should go after. You can count on some economic feedback, some 30 percent. So that gets you to $60 billion. So the net loss is $40 billion, and we think we can get 40 more in spending.

How about just letting the deficit go up with domestic demand as weak as it is?

The only reason not to be inflation, again, never mentioned.

How would a President McCain make Social Security solvent?
He believes it can be fixed without raising taxes….

That is, he believes, it has a solvency problem as he previously stated.

If you just do [indexing benefits to prices rather than wages] you can fix it over the long haul,

Yes, you can cut promised benefits. That’s a political choice. Government spending is not constrained by revenues. It may be constrained by inflation, again, never mentioned.

and he is perfectly willing to have personal accounts be part of this as long as they are not a substitute for fixing the basic challenges facing the system. When he becomes president, he will ask Congress to do it. He will send them a bill, up-or-down vote, let’s go.

Personal accounts are a ‘wheel spin’. At the macro level, they substitute government bonds for social security ‘investments’ and nothing more, apart from a lot of wasteful transaction fees.

What would his approach to tax reform be?
Look at our current tax code, and the striking number is the one that came out of the president’s tax reform panel. Take a comprehensive measure of the costs of administration, compliance, and economic distortions—it’s $140 billion a year. That is a seriously large number, just wasteful.

And way understated. I estimate true compliance costs of the income tax system at over $1 trillion.

So the first step is, the current tax code is a disaster. And what we want to do is keep taxes low because we are raising enough revenue,

Taxes are about removing aggregate demand to ‘make room’ for government spending, not raising revenue.

and they have to be fairer and simpler.

More to the point is the distribution of consumption, yet another key issue never even mentioned.

So, we said, let’s get rid of the AMT because it’s starting to hit the middle class…. And let’s make sure it is pro-growth

Doesn’t say how getting rid of the amt is pro-growth. If government cuts spending as he indicates, aggregate demand will fall by at least the marginal propensity to ‘save’ of those with lower taxes, for example.

and competitive….

What does ‘competitive’ mean in this context? Somehow add to exports which is also a flawed concept?

In 2000, he ran on a march to a flat tax, from the bottom up, and that signals how simple he would like things to be if he could get there.

Interesting stringing together of rhetoric, seems to say simplifying the system rather than addressing the questions of distribution of consumption has priority.

Why is getting rid of budgetary earmarks important?
The earmarks are not about the numbers; they are about the message you are sending to the American people. You cannot go to the American people and [cut spending] when they believe someone else is getting theirs on the side. If you want to deal with entitlements and the broader spending problems, you need to get the high ground.

Hillary Clinton says she can manage the economy better than McCain. Can any president really manage our $13 trillion economy?
No one should try. It’s a bit of a cheap shot, but I can’t bring myself to not say it: The last ones who tried this were the Russians. You don’t manage economies. You just don’t because you can’t. The key is to have some principle, to have a rudder that says, “This is something the private sector does, and here is the framework in which they should do it.

Yes, markets work only within institutional structure. That’s why they need to manage.

Go….” But the government has to do defense, the government has to take care of poor people, it has to step in during emergencies and have an effective response—those are places where we belong, and we have to be able to manage that because it sends confidence that we can then go get the other stuff right.

What is the key to dealing with healthcare?
The fundamental problem with healthcare is rising costs.

Empty rhetoric. Doctors are getting less and less, hospitals are running lean, particularly with service staffs.

The focus on the Democratic side is covering everybody. That’s a laudable goal, but the reality is even if you were to snap your fingers and cover everybody who was uninsured … and in exchange for their insurance you had them pony up $3,000 apiece, you would raise $150 billion, which is a lot of money, and now everyone would be in the system and given 6 to 8 percent cost growth a year, you would chew up that $150 billion within a year, and now everybody is in and it’s getting more and more expensive every year and that is why companies drop insurance and people can’t buy insurance. The Democratic formulation solves the wrong priority first.

Totally misses the point.

It’s about the amount of real resources we want to direct at healthcare: doctors, buildings, research, nurses, supplies, drugs, etc, etc.

There are a finite amount of ‘workers’ and infinite wants. So, for example, more people in health care might mean fewer people on Wall Street, fewer real estate agents, etc. Those are the tough decisions…

McCain favors a cap-and-trade system to deal with carbon emissions rather than a carbon tax. Former Bush economist Greg Mankiw says a carbon tax would be far simpler and transparent. Any thoughts on this?
The carbon tax is never going to look like anything that Greg Mankiw draws up in his blog. It will be a real-world carbon tax, which will have the same complexities and issues that a cap-and-trade system does. So the issue is which real-world policy, which will never look as clean as it does on a blackboard, will be effective. The senator is quite convinced that to bring the broad environmental community on board, cap-and-trade is the most effective way…. And there is international experience with it, which is important since this is fundamentally a global problem. So the realities dictate that cap-and-trade is probably the most fruitful approach. But point No. 2 is that you have to do something. We can’t spend $400 billion a year on imported oil and finance Hugo Chávez…so let’s get serious. And the most serious way to do something is to in fact innovate, but the only way we innovate is if there are market incentives to innovate, and that is exactly what cap-and-trade produces.

Allocating by price – there are other alternatives to reduce consumption that never get discusses. Dropping the national speed limit to 30 MPH is just one example.

Bottom line: both parties are all ‘budget balancers’ that will most likely continue to deliver a substantially sub-optimal economic outcome.


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