Author: Derek Thompson

Facebook has faced backlashes before, but this time feels different. Despite amassing an empire of nearly 500 million users, the company is in the midst of a public relations fiasco, with users, tech columnists and even the FTC slamming CEO Mark Zuckerberg for privacy violations. So Zuckerberg took to the Washington Post today to defend Facebook’s record and name the company’s leading principles.

There’s just one problem. If these are Facebook’s principles, the company isn’t doing a great job adhering to them. Let’s look at the first three:

1. “You have control over how your information is shared.”

Is it fair to say users have control over their information if the rules governing the information keep changing?

In 2007, no Facebook information was public to the broader Internet. At the end of 2009, basic stuff like name and gender became searchable through Google. In December, the company added “likes” and friends to the Internet-public stockpile. In April 2010, it added photos. Without pressing a button, the average default public user would have seen dramatic changes in how his information was shared through Facebook between 2007 and 2010.

The company is working on a simplified privacy system in the next few months, and one hopes that it will be simple, intuitive and wary of the balance between those who want to lock down all of their information and those who don’t mind transparency. But the fact is, it’s in Facebook’s business interest to have users default to public and then to slowly grow the definition of the word public. Facebook’s privacy rules have evolved and personal control over information has sometimes been a casualty of that evolution.

2. “We do not share your personal information with people or services you don’t want.”

This is a strange principle for a company now infamous for sharing personal information with people and services users didn’t expect. Examples abound, but Time magazine’s Dan Fletcher noted one of the more infamous episodes in a new article:

In 2007… default settings in an initiative called
Facebook Beacon sent all your Facebook friends updates about purchases
you made on certain third-party sites. Beacon caused an uproar among
users — who were automatically enrolled — and occasioned a public
apology from Zuckerberg.

In another snafu, Zuckerberg’s photos surfaced on the Web — some were excerpted by Gawker — before he reclaimed them behind the privacy wall. Facebook’s privacy rules and updates have been so complicated and messy that even its founder and CEO has been a victim.

3. “We do not give advertisers access to your personal information.”

Before we parse this statement, let’s review the company’s ad strategy. Facebook gives advertisers access to buckets of information. So if Ford wants to show ads to a 30-year old in D.C. who likes red sports cars, Facebook can scrape together all the thirtysomethings in the D.C.-area who express an interest in sports cars or The Fast and the Furious and put targeted ads by their pages.

Does this count as giving advertisers access to personal information? It’s tricky. Ford does not get to see a list of names. Instead it gets to show its products to a pool of Facebook users. But the more you share, the more access advertisers get. As the Time cover story explains, “if three of your friends click a
Like button for, say, Domino’s Pizza, you might soon find an ad on your
Facebook page that has their names and a suggestion that maybe you
should try Domino’s too.”

At best, these principles are conspicuously inarticulate attempts to
split the difference between Facebook’s business interest (openness)
and users’ chief concern (privacy). At worst, Facebook is engaging in
corporate recidivism — shoving its privacy settings toward publicity,
apologizing with an homage to privacy, and then swiftly re-offending.

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The weird thing about all of this is that, as a user, I don’t really care. I’m Facebook friends with my boss, my colleagues, and my mom. I don’t place (or leave) information on Facebook I don’t want public. Sure, there are some photos of me I would rather not appear on the 5 o’clock news. But I certainly wouldn’t think of leaving Facebook in indignation over the privacy updates, complicated as they are.

As somebody who’s interested in the future of the Web and Web-advertising, I do care, quite a bit. See, I actually like what Facebook is trying to do with Open Graph, which collects articles and information that users “like” on Facebook widgets throughout the Web and pools it together to personalize our experience on sites like Yelp, Pandora, and the Washington Post. But when Zuckerberg goes national with equivocal statements like the ones above about privacy and user expectations, he damages the potential of his brand and his ideas.

Congress will get moving on spending bills now that financial regulation has passed both houses of Congress and moved on to conference committee. Passing a self-described “jobs bill” when 16% of the country is unemployed or forced into part-time work should be a bipartisan cinch. Instead, Republicans and Democrats seem to have reach the opposite conclusion: that another $100 billion on items like public school and Medicaid payments will make them look like reckless spenders.

Washington has created a strange feedback loop on the deficit. D.C. doesn’t explain where the red ink comes from (almost entirely from the revenue nosedive and automatic spending increases). So the public misunderstands and fears the deficit as proof of Big Government. So Washington, reflexively, misunderstands, fears, and kowtows to the public’s misinformed reaction. As a result, politicians treat an item like Sen. Harkin’s $23 billion public school rescue plan — which amounts to 0.6% of the budget — as dead in the water.

Regular readers know that a leading concern of this blog is the way the White House talks about economic policy. Obama could have repeatedly and clearly explained that not all deficits are the same. Instead, he’s peppered his speeches with hackneyed false equivalencies — if families are tightening their belt, then government can, too — that have obscured the issue.

Spending more than you earn during and immediately after a recession is an appropriate prescription. But the same way an injured patient shouldn’t be given a pillbox of Valium with infinite refills, our injured economy needs to wean itself off its deficit medication. Some of that spending-revenue gap comes down naturally when people earn taxable income. Some of that spending-revenue gap comes down naturally when states and families stop leaning on the government for emergency spending — whether in the form of public school rescue plans for states or jobless benefits for families.

But some of the long-term spending-revenue gap is structural. After the recession clears up, we still won’t collect enough money to pay for the promises we’ve made to Americans. The economic term for those promises is debt. And the only way to solve our debt crisis is to fulfill those promises (which will require more revenue), or to change the promises themselves (which will require less spending).

There is no reason why simple arithmetic should be beyond Washington’s power of explanation. But it is. And until the president learns to make the argument for spending, he’s trapped by a deficit-hawk vocabulary that’s hurting his party and, vastly more importantly, his economy.

United States – White House – Unemployment – United States Congress – Economic

Germany’s Parliament voted today to approve a $185 billion contribution to $1 trillion bailout plan designed to calm the debt crisis sweeping through euro-zone states. Many analysts doubt that the emergency fund will help troubled countries like Greece avoid defaulting on their debt. But the fund could buy time for Greece to manage an “orderly restructuring,” whereby it would agree to pay current boldholders a certain fraction of the promised loans. (Read an explainer of the Greek debt crisis here).

The bailout is horribly unpopular in Germany. But that’s a little ironic, because it’s ultimately designed to save not only Greece and Portugal, but also the entire European Union. It’s essentially a bailout for the euro. And no European country benefits from the euro’s regime more than Germany.

The common take on Europe’s mess is that Greece’s debt crisis might be Europe’s problem, but surely it’s Greece’s fault. The EU didn’t force Greek tax evaders to be evasive. It didn’t force the government to regularly spend 50% of GDP while it collected a little more than a third of domestic product in taxes. The country got drunk on its own red ink. It made its own hangover, right?

Well, Steven Pearlstein spins things differently. The problem isn’t just the profligate peripheral states like Portugal, Italy and Greece. The problem is at the heart of Europe, both metaphorically and geographically speaking. The problem is Germany.

To understand why, you have to understand the German economic machine. Follow the money. Germany is Europe’s leading exporter of goods. It runs a huge trade surplus, which means more money is coming into the country than going out. That should make wages rise, along with the currency value, and Germans should spend their valuable income on products from other countries, shrinking the trade gap. But that’s not happening. Germany’s currency cannot adjust with respect to its European trading partners because they’re all on the same currency. The euro is strangling Germany’s neighbors, who need to devalue their currency so that wages and prices can up to 20%. But it’s also keeping Germany’s trade surplus alive.

Here’s Pearlstein:

What Germans won’t accept is that they wouldn’t have been able to sell
all those beautifully designed cars and well-engineered machine tools
if Greeks and Spaniards and Americans hadn’t been willing to buy those
goods and German banks hadn’t been so willing to lend them the money to
do so. Nor will they accept that German industry was able to thrive
over the past decade because of a common currency and a common monetary
policy that, over time, rendered industry in some neighboring countries
uncompetitive while generating huge real estate bubbles in others.

What’s the solution? Well, we’ll need more than an emergency plan. We’ll need extraordinary action on the part of the European Central Bank. We’ll need the ECB to stop worrying and learn to love expansionary monetary policy. Pearlstein says the European Central Bank needs to do something like the US Federal Reserve did in late 2008: bring down interest rates and buy up assets, like Greek bonds.

European Union – European Central Bank – United States – Greece – Eurozone

US retail sales rose 5.7% in April, after a 7.8% jump in March, which was the best year-over-year improvement since August 2005 at the peak of the housing boom. But unemployment is near 10 percent. Why are Americans shopping? Three quick theories.

1) People are skipping mortgage payments to go to the mall. Yep, it’s a theory.

2) Low prices. The upside of really, really low inflation — April saw the smallest 12-month increase in consumer prices since 1966 — is that stuff is cheap if you have money to spend. Mass market retailers like Wal-Mart and Home Depot both slashed prices through March on thousands of products. Falling energy prices, helped along by trouble in Europe, also free up wallet space.

3) The stock market. Ben Steverman at BusinessWeek reports: “Fidelity Investments said May 19 its average account balance rose
more than 55 percent from Mar. 9, 2009–the market’s lowest point last
year–to Mar. 9, 2010.”

It’s unlikely that Congress will get to a climate change bill in 2010. Between financial regulation, another jobs bill, the summer hiatus, the fall midterms and necessary end-of-year tax reform (pre-2001 tax levels and the estate tax are scheduled to reappear in January 2011), there’s little time to debate, amend, conference and pass the most complicated and far-reaching energy legislation in American history.

But let’s talk about it anyway! Doug Elmendorf, the Congressional Budget Office chief, recently published five economic lessons about climate change on his blog. Most of the lessons are self-explanatory. For example, Lesson One: if you want to account for the negative externality of pollution, you have to price it, with either a direct tax or an overall cap. Good lesson. Lesson Four is more debatable: An efficient system for reducing greenhouse gas
emissions would probably lower overall GDP, employment, and households’
purchasing power.

Although estimates are very uncertain, most experts project that the long-term loss in gross domestic product (GDP)
from a policy like the American Clean Energy and Security Act of 2009
(ACESA) would be a few percent, which is roughly equal to normal growth
in GDP over just a few years. Employment
would probably also fall slightly as production shifted away from
industries related to the production of carbon-based energy and
energy-intensive goods and services, and toward the production of
alternative and lower-emission energy sources, goods that use energy
more efficiently, and non-energy-intensive goods and services; workers
would follow those shifts in demand, but that would take time and
entail costs. The reduction in households’ purchasing power would
occur because resources would be devoted to achieving a goal not
included in measured income. CBO estimated that the loss in purchasing
power from the primary cap-and-trade program that would be established
by ACESA would rise from about 0.1 percent of GDP in 2015 to about 0.8
percent of GDP in 2050.

I’m torn on this point.

On the one hand, it makes sense that introducing a tax on pollution will have short-term costs. One of the costs will appear in monthly bills. Energy companies will pass along the higher cost of energy to consumers, and the government will probably promise rebates to lower-income families. But the rebate won’t cover all of the cost for all customers, and it shouldn’t. Richer families can afford slightly higher energy prices, and with an elevated debt burden the government should be prudent with its rebates. Another cost will be in employment. Faced with a new tax, some carbon-based energy produces might lay off workers. Demand will shift to lower-emission energy companies and the long-term impact could be a net positive energy jobs — especially if national renewable energy companies replace our demand for foreign sources. But you’d be crazy to expect payrolls not to change at carbon-heavy plants.

On the other hand, an energy bill with efficiency programs and guidelines will almost certainly have long-term cost savings — savings the CBO typically does not score. A McKinsey survey found that setting energy efficiency standards for appliances and upgrading the energy efficiency of new buildings could produce hundreds of billions of dollars in savings within a decade. On top of that, you have the incalculable impact of the United States leading an international effort to reduce greenhouse gases and diffuse and potentially devastating impact of climate change.

So you can see the climate change bill at least three ways: (1) it’s a big tax, (2) it’ a big investment, or (3) it’s a big insurance policy against catastrophe. Most Republicans will use the CBO numbers to make the first case. I fall somewhere between two and three.

The Committee for a Responsible Federal Budget designed a budget simulator that challenges users to limit the US public debt burden to 60% of GDP by 2018. I took the challenge yesterday, and faced some blowback over my tax-heavy plan to remake the budget.

The criticisms of my plan in the comment section were provocative and smart. So rather than bury my responses in an old article, I wanted to address them in a fresh post. Here we go:

1) Marketkarma: “You are really nailing wage based coastal high-earners.”
That’s basically right. I’m eliminating a lot of deductions that benefit blue state rich folks: the mortgage interest deduction, which is valuable for people with high mortgage interest payments as a percent of their total tax burden; and the state and local tax deduction, which hits states with a disproportionate share of high-income households and relatively high state/local taxes (see this Tax Policy Center article by Kim Rueben). I also elected to add another tax bracket for millionaires and let the Bush tax cuts expire for families over $250K.

MK estimates that my reforms might take these folks effective local/state/federal tax burden to more than 60%. I don’t know if that’s accurate. I certainly give some coastal high-earners a proper bludgeoning, but the richest families are already losing the value of some of these deductions because of the Alternative Minimum Tax, which uses a different set of taxable income and deduction rules to determine wealthier families’ tax burden.

Federal tax burdens on the rich have fallen dramatically in the last 30 years. In 1988, President Reagan’s last year in office, the top 10 percent, 5
percent and 1 percent of income-earners paid total effective tax rates
of 27%, 28% and 30%, respectively. Under 2009 law, these groups will
pay the feds closer to 22%, 23% and 26% of their income — across the
board, an approximate difference of five percentage points. We can afford to raise these rates to pay down the debt over the next 20 years.

2) Kill the Bush tax cut?
Two commenters — Steveinch and RustyJohn — suggested that we let the entire Bush tax expire at the end of 2010. Arithmetically, this is an attractive option. Compared to President Obama’s plan to renew the tax cut for families making less than $250K, letting the whole thing go would shave an additional $2.1 trillion off the debt. Repealing health care reform, by comparison, saves about 12% of that: $260 billion. But letting the whole Bush tax cut go — including the tax credits and marginal rates for lower-income folks — would kick the economy in the stomach just as it’s starting to breathe normally again.

Ultimately, the most important takeaway from the budget simulator is that a 100% spending-side solution to our debt is pretty much impossible. You can freeze discretionary spending, slash subsidies and enact major entitlement reform by means-testing benefits and raising the full retirement age. But very few itmes come close to the impact from letting the Bush tax cuts expire and taking the axe to tax expenditures like the deductions on state and local taxes and mortgage interest. This isn’t the opinion of your tax-loving author. It’s just math.

The Greek debt crisis is, ultimately, a story about the European Union and the euro that binds its member states in a straitjacket of currency and monetary policy. But what if the euro doesn’t last the year? What if it doesn’t last the summer?

Reuters blogger Felix Salmon plays Nostradamus on BBC Radio 4, narrating the fateful end of the euro — from the future date of August 2010 — over a soundtrack of war drums, wolf howls, thunder cracks and women screaming (the future of Europe sounds a lot like Bram Stoker’s Dracula).

In short, the (hyperbolic, but instructive nonetheless) vision goes like so: Germany tries to stop the contagion of Greek debt with a $500 billion bailout fund, the people reject it, and Greece, Spain, Portugal, Italy, and ultimately France decide to go it alone on a new currency — the Neuro. The amounts to default — massive default. The Neuro initially trades around 75 Euro cents, and Europe returns to a system of multiple floating currencies.

The radio segment ends there, but future prescient installments might highlight the impact of massive default on the continent. The F-PIGS zone would be subject to massive bank runs as depositors freaked about their checking accounts facing 25% devaluation. The defaults would ricochet throughout the European banking system. Much of the defaulted loans are held by other European banks, which means when one country’s government defaults, another country’s banking system totters, requiring its government to spend itself deeper into deficit to save its financial system. In the long run, multiple currencies might make sense for Europe. In the short run, the continent would be lucky to experience only a short double-dip recession.

European Union – Greece – Member State of the European Union – Government – Multilateral

The Committee for a Responsible Federal Budget designed a budget simulator. Awesome. Now everybody can stabilize U.S debt in the comfort of their homes.

The goal is to achieve a debt level less than 60% of GDP by 2018. You should try it. I did. Below you can read up about how I stabilized the U.S. debt by 2028 (sorry I can’t find a better way to capture all the answers on one page without screen shots).

Some notes on my quick budget plan: the decision to curtail the state and local tax deduction and limit the mortgage deduction would be contingent on a recovery in the housing market and lower unemployment contributing to higher state taxes. This is one of the difficulties of designing a debt-busting plan in a recession. Some of the most valuable items would probably lead to you to double-dip if you passed them too quickly. I would also like to see a higher rate on the VAT and a carbon tax option.

Ultimately the real lesson you learn as you play is that stabilizing debt, even when the method is box-checking, is painful.

United States – Gross domestic product – Value added tax – Recession – Unemployment

European states in the splash zone of the Greek debt crisis will almost certainly have to cut back on spending and raise taxes, triggering a double-dip recession throughout the European Union, and hurting US exports.

But what if Europe’s debt disaster actually works out for the United States … kind of? Tim Duy finds three reasons:

1. Capital Gains for the U.S. Scared investors are running from peripheral EU states that look like they could follow Greece into the abyss. (It’s called the contagion effect: explanation here.) Running from Europe, investors might seek shelter in US investments, driving down our interest rates and giving companies looking to hire more access to capital. Duy concludes, “the odds of sustainable recovery look better
every day.“

2. No Tightening from the Federal Reserve. Some liberals and moderates are concerned that the Federal Reserve might try to prematurely tighten its monetary policy by selling assets to squeeze inflation before we’ve achieved sustainable recovery and consistent job gains. But the crisis in Europe makes it more likely that the Federal Reserve will sit tight and keep money easy. After all, a Greece default — which is all but certain — could shock high-debt, low-growth states like Portugal and Spain and send jitters throughout the global economy. The Fed, nervous about feeding those fears, will probably keep interest rates low for an extended period of time with the European debt bomb ticking.

3. Cheap Oil. A weak Euro and a stop-start European economy means cheap oil, relief at the pump for the re-emerging American consumer, and marginally higher demand for cars. An exogenous oil shock helped to pop the housing bubble in the mid-2000s. Cheap gas is an economic lubricant.

In short, Duy suggests that the European debt crisis “puts a lid” on interest rates and oil prices. Cheap borrowing and cheaper oil won’t offset a major debt tsunami if the European situation takes a turn for the worse and spooks banks and stock holders. But in the short term, the United States might reap the benefit of turmoil across the Atlantic.

James Madison owned 5,000 acres. George W. Bush ran an oil business. But no president amassed more wealth than our first one. George Washington’s net worth was equal to $525 million in 2010 dollars, according to a study from 24/7 Wall Street.  By comparison, eight presidents — including Lincoln, Grant and Wilson — had net worths below one million dollars.

An arresting thought: President George Washington’s salary was two percent of the total US budget in 1789.

It’s interesting to see the list as a kind of shadow economic history of the United States. The first dozen presidents tended to have significant, but fragile, fortunes predicated on real estate and commodity speculation that was tied to fluctuating crop yields. James Madison, for example, amassed a $100 million fortune (remember, all numbers are adjusted for inflation to 2010 dollars) but died after significant depreciation of his tobacco plantation.

But our presidents’ net worth numbers take a plunge in the mid-19th century after the Panic of 1837 produced a six year recession. 24/7 explains:

Beginning with Millard Fillmore in 1850, the financial history of the
presidency entered a new era. Most presidents were lawyers who spent
years in public service. They rarely amassed large fortunes and their
incomes were often almost entirely from their salaries. From Fillmore
to Garfield, these American presidents were distinctly middle class.
These men often retired without the money to support themselves in a
fashion anywhere close to the one that they had as president. Buchanan,
Lincoln, Johnson, Grant, Hayes, and Garfield had almost no net worth at
all.

Starting in the early part of the 20th century, many presidents came into office with significant inheritance through corporations (Theodore Roosevelt, Franklin D. Roosevelt, John F. Kennedy, and both of the Bushes). But since LBJ, five presidents from Nixon through Obama came from little or no inheritance.

After financial regulation, jobs, and jobs, and jobs. That seems to be the Democrats’ plan for the last few weeks on Capitol Hill before everybody goes home to raise money and worry about November.

The New York Times reports:

The House, which in December narrowly passed a $154 billion stimulus package
that hit a wall in the Senate, plans to debate a substitute of at least
that size that Democratic Congressional leaders have negotiated; it
would extend myriad popular business tax breaks and aid for the
unemployed and hard-hit states.

This is good news, and the $154 billion economic package was chock full of increasing automatic stabilizers like unemployment benefits, which are as effective an economic stimulus as you can get in a recession (see the CBO graph above). The Senate would be wise to pass something similar.

But the important thing for people to understand about the next jobs bill and its impact on November is that there is no magic wand for job creation. It takes a lot of money and a lot of time to bring down unemployment from 10 percent, and it’s practically impossible to make more than a one percentage point difference in six months — especially with Republicans and moderate Democrats nervous about the deficit and demanding offsets under PAYGO rules for the entire bill. Both the White House and the Federal Reserve predict end-of-year unemployment at 9%.

Politically, it’s savvy to go into the summer with a something called a “jobs bill.” Practically, a “jobs bill” is an elusive concept. You can fill the legislation’s pages with jobless insurance to juice demand for goods, and small business tax cuts to lower the barrier to hiring, and infrastructure money for shovel-ready projects (especially if they’re green!), and even a school bailout fund to save teacher jobs, and all these things might be smart, but their relationship to jobs created is implicit and uneven.* Their relationship to the unemployment rate — which might yet increase as more formerly discouraged workers re-enter the job force — could be even more tenuous.

That said, here are 9 job creation strategies that might or might not work.

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*It’s also politically complicated that the easiest jobs to keep are local government jobs. That’s the aim of the the Local Jobs for America Act introduced by Rep. George Miller (D).

The European Union experiment could be coming to an end. As the euro continues to slide, a wide range of interested parties — from international investors to op-ed pages — are seriously considering the once unthinkable: Greece might become the first country to drop the euro.

Last week the EU and the European Central Bank unveiled a trillion-dollar bailout plan to stem the “contagion” from Greece’s colossal debt burden, but there is not enough money to back up Europe’s debts. Greece will almost certainly default and switch to a cheaper currency to avoid a long and painful recession.

Here are two reasons why Greece will have to leave the euro and three reasons why it will still be in a world of hurt (thanks to AEI’s Desmond Lachman):

2 Reasons for Greece to Bail
(…really, two sides of the same coin)

1) Wages Must Fall. Wages and prices in Greece will have to fall by nearly 20 percent for the country to regain competitiveness. There are a couple ways to achieve that. One is a deep, lasting, painful recession. How deep, lasting and painful? As Paul Krugman notes, “unemployment has risen from 6 percent before the crisis to 22.3 percent
now — and wages are, indeed, falling. But even in Latvia labor costs
have fallen only 5.4 percent from their peak; so it will take years of
suffering to restore competitiveness.” There is another way. Drop the euro, move to a currency you can control and devalue like crazy.

2) Exports Must Rise. To bring down its deficit, Greece will have to
cut spending by nearly 10 percent of GDP, which is an incredible amount
of demand to take out of the economy. How do you replace lower domestic
demand? With higher foreign demand, also known as exports. A cheaper
currency means cheaper olives, which means more people who can afford more olives, which means more demand for olives.
A devalued drachma would increase sales of Greek products abroad.

And 3 Reasons Why It Will Hurt

1) No More EU Benefits. As the rules appear to be written, if Greece leaves the euro, it leaves the European Union. So what? Well, Greece receives structural transfers from the European Union because it’s a poorer country. That will change if Greece drops the currency. What’s more, Greece’s closest economic ties are with EU countries. If it leaves the EU, it leaves on unfavorable terms, and could lose trade preferences like low tariffs. (On the other hand, Lachman allows, it’s hard to know exactly how Greece would transition out. After all, there weren’t supposed to be EU bailouts in the original charter and now we’ve got a $1 trillion emergency bailout fund.)

2) No More Special Rates. Another huge advantage of the euro is that it allowed Greece to borrow at low interest rates (for a while, at least). Markets convinced themselves that Greece would integrate its fiscal policy with the other countries in the Union, and that the euro was impregnable, which allowed a typically troubled nation like Greece to borrow at near Germany’s interest rate levels. Following default and a currency devaluation, Greece won’t have that special treatment among international investors.

3) Bank Runs. Anybody who’s got a euro deposit that might be translated into drachmas should, and will, think seriously about transferring their money to Germany. After all, imagine that you deposit $100 in Thompson Bank. Then by some dictate, I convert your dollars to dereks, at 80% value. You will not like that! So preemptively, you’ll pull your money and put it into Indiviglio Bank or McArdle Bank. That’s basically what’s already happening in some banks in Greece.

Greece – European Union – European Central Bank – Paul Krugman – Germany

Greece’s debt crisis won’t stay in Greece. It’s quickly becoming Europe’s nightmare. Newspapers often refer to Greece’s inability to balance its own checkbook as a kind of “contagion effect” that could spread through the continent. How can a nation’s debt be like a disease?

First, let’s think about debt. A country’s debt — or “sovereign debt” — is the accumulation of past deficits. It equals the total sum of promises to pay back the bonds, or loans, it sells to investors in order to run the country. If the country pays back the bonds on time, hunky dory. If it cannot, the country is in default.

If debt is a promise, default is an acknowledgment that the country was lying, and the “contagion effect” is a paranoia that there are more liars. Here’s how it works: one country gets into trouble — usually with some combination of high deficits, high debt, and weak growth — and becomes at risk of defaulting, or breaking its promise to pay off the whole bond. So investors look around to identify more trouble, assuming that countries with similar problems will suffer similar fates. Think of it as a kind of fiscal discrimination, or profiling. It doesn’t matter if you’re at risk of default. It matters that you look like some other country that is guilty of gross financial recklessness.

Suddenly, these targets of fiscal profiling (Portugal, Italy, Ireland, and Spain… for now) face investor discrimination and lower demand for their debt. So they raise their interest rates to attract buyers. But those higher interest rates only make it harder to pay off their debt. The vicious cycle is self-fulfilling, like a “reverse-Tinker Bell effect”: if investors don’t believe in you, your financial credibility disappears.

How do you stop the contagion from spreading? Remember, contagion is a loss of trust. So its cure could be a guarantee. Here, another comparison is useful. In the Great Depression, when the banks looked unhealthy, depositors rushed to withdraw their money, depleting many banks’ cash reserves and leading to their failure. (That was a kind of contagion, too.) So to prevent future “bank runs” the federal government created the Federal Deposit Insurance Corporation to reassure Americans that their money was safe.

That’s exactly what the European Union is trying to do. It has created a trillion-dollar emergency fund to stand behind Greek debt in exchange for draconian requirements for Greece to raise taxes and cut spending. This will delay, but not dodge, a default in Greece. An austerity shock will shrink the Greek economy, depress income, hurt tax revenues and increase the country’s debt burden as a percentage of GDP (a key indicator for investors). The emergency fund might be big enough to solve an isolated Greek crisis, but it is not big enough to save Greece and inoculate the contagion that could spread to larger countries. In other words, the Eurozone is not strong enough to back up all of its weak member states’ endangered promises. As a result, Greece will almost certainly default on its debt and might face the possibility of dropping the euro.

Greece – United States – Federal Deposit Insurance Corporation – Great Depression – Gross domestic product

It’s hard to know whether the recession will push Americans — especially younger Americans — to the left or the right because generations coming of age during recessions tend to rely on government more but trust it less. We’re seeing this play out today. Automatic spending on jobless benefits, food stamps and Medicaid assistance is way up, but 80 percent of Americans don’t trust government. It’s hard to know which party benefits in the long-term, but easy to predict this doesn’t help incumbents in 2010.

What else can we expect from populations suffering extending joblessness? They tend to grow fond rogue leaders (calling Ms. Palin) and don’t necessarily love democracy:

We find that personal joblessness experience translates into negative
opinions about the effectiveness of democracy and it increases the
desire for a rouge leader. Evidence from people who live in European
countries suggests that being jobless for more than a year is the
source of discontent. We also find that well-educated and wealthier
individuals are less likely to indicate that democracies are
ineffective, regardless of joblessness. People’s beliefs about the
effectiveness of democracy as system of governance are also shaped by
the unemployment rate in countries with low levels of democracy. The
results suggest that periods of high unemployment and joblessness could
hinder the development of democracy or threaten its existence.

Conservatives have ideas, and it’s silly for liberals and moderates to claim they don’t. So let’s take a look at this article on some “innovative and controversial” ideas in the conservative movement.

First: taxes and babies. Robert Stein argues that the tax system is unfair to parents. “Once a country adopts an old-age pension system, it creates an
implicit bias against raising children,” Stein says. “Once a country gives everybody
access to everyone else’s kids’ money, it undermines the natural
economic incentive to raise kids.” To remedy the problem, Stein would quadruple the child-tax credit from $1,000 to $4,000, and make up the money by moving upper-middle income tax payers into a higher tax bracket.

Is it good policy to encourage families to save up to $12,000 a year by having three kids? I don’t know. But it’s a little weird to me that we’re talking about increasing the money rewards for American-born babies while also talking about spending billions to plug up the borders in the South; and profiling Mexicans in Arizona; and watching brilliant college grads leave the country after their visas expire. Countries with old-age pension systems need large tax bases. If we are legitimately worried about too few people paying for our expensive retirement plans, we should consider that immigrants are people, who work for money, whom we can tax.

Second, there’s this idea for the government to promote marriage by building advertorial billboards and punishing folks who want to divorce a spouse against his/her will:

[UVA Prof. Bradford Wilcox] proposes federal funding for public-service announcements and
other social marketing to promote marriage, modeled on anti-smoking
campaigns.

And to discourage divorce, he says, states should change marriage
laws so spouses who are being divorced against their will and have not
engaged in abuse or adultery would be given preferential treatment by
family courts in determining alimony, child support and custody of
children.

This is a little confusing. There’s a debate about whether married couples face a tax penalty (which can happen when two people of similar wages get hitched) or a tax benefit (couples with disparate incomes often see a tax break). So the tax system might provide uneven incentives to marry. But why promote marriage above cohabitation in the first place? Why promote it with billboard ads? Why encourage spouses to remain in unhappy marriages by tipping the scales against them in court? And if marriage really is “a kind of economic cooperation, a form of social insurance,” as Wilcox argues, why deny it to gay couples?

What’s bothersome is not merely the specter of government-sponsored marriage billboards. It’s strange that conservatives would spend considerable energy pushing couples to marry and reproduce when the evidence suggests that late marriages often last longer and allow both partners’ work skills to reach maturity. Jon Rauch wrote a fascinating column on the topic of red and blue families that looked at how marriage ages, childbearing rates and political ideologies meshed with culture in the 21st century. Read the whole thing. But these were striking paragraphs:

[For blue state families] early family formation is often a
calamity. It short-circuits skill acquisition by knocking one or both
parents out of school. It carries a high penalty for immature marital
judgment in the form of likely divorce. It leaves many young mothers,
now bearing both the children and the cultural responsibility for
pregnancy, without the option of ever marrying at all.

New norms arise for this environment, norms geared to prevent
premature family formation. The new paradigm prizes responsible
childbearing and child-rearing far above the traditional linkage of
sex, marriage, and procreation. Instead of emphasizing abstinence until
marriage, it enjoins: Don’t form a family until after you have finished your education and are equipped for responsibility.

Surely, cheering couples onto the alter isn’t the federal government’s job.

The New York Times’ David Carr has an interesting column on how the Internet changes headline writing. A century ago, headlines meandered down the page like a “wedding cake,” Carr writes. Some magazines like the New Yorker and New Republic still hold fast to two-word punches. But the trend online is toward short, keyword-heavy descriptors that trade cleverness for clarity.

This makes sense. Twenty years ago, if I bought a magazine, its editors could afford to write witty and indirect headlines that offered more of a mood than a complete picture, because after all, I bought the magazine. Nobody owns our time, online. Selecting an article to read on the Internet is like running through a bazaar while the merchants shout their wares. For online headline writers, the wares are the news, and they don’t waste time selling through witty indirection.* What’s more, since many readers get their news through search engines, putting key words in the headline maximizes the chance that Google’s robots will identify your story and place it toward the top of a relevant search page.

Carr writes that, “Google’s crawlers and aggregators like Digg quit paying attention after
60 characters or so, long before readers might.”  But Digg and Google aren’t providing aggregation services for robots or aliens. They’re keeping things short because on the Web, because human audiences ruthlessly scan lots of content in little time, and short, descriptive headlines do better than long-winded “wedding cake” titles that amount to short paragraphs.

“People who worry that Web headlines dumb down public discourse are probably right,” Carr says. Really? I like wit and puns and alliteration as much as the next guy. But knowing headlines are often about making the reader see the copy editor’s wit. Descriptive headlines are about making the reader see the story’s purpose. The “public discourse” is a fort under multi-variable assault from cable news and hysterical media entertainers and all the old villainous culprits. One hopes it can at least withstand a battery of prominent keywords.

_________
* Incidentally one reason why I write many headlines in the form of questions is that it’s a way to touch the heart of the story without resorting to boring newsy statements. For example, if the story is that Democrats and Republicans have reached an agreement on leverage limits in financial regulation, rather than stretch for cleverness with something like “Dems and GOP, Together, Sing ‘Take It To the Limit’” it’s more valuable for readers to see a headline that acts as a kind of lede or prompt: “Will the Bipartisan Deal on Leverage Limits Work?” That headline tells you (1) the news that there is a bipartisan deal on leverage limits and (2) that this is an analytical story that will evaluate the news. It’s more literal, of course, and less whimsical and maybe even more boring. But it’s also arguably more useful for the Web’s speedy readers.

Google – New York Times – Web search engine – New Yorker – New Republic

With the Tea Parties on Main Street and pitchforks on Wall Street, it seems to be a populist moment. But if you look at US policy, Washington appears to be moving toward more consolidation and centralization.

That’s Ross Douthat’s argument in this elegant and thought-provoking op-ed for the New York Times. The broader theory is right on: governments often respond to crises by giving themselves more power. For example, the Great Depression was a bank run epidemic followed by economic collapse and widespread poverty. Respectively, those emergencies gave FDR grounds to create the FDIC, the alphabet soup agencies, and Social Security.

It’s the same in 2010. The Great Recession nearly brought down the financial sector and hurt home sales, and those emergencies gave Bush/Obama grounds to create TARP, pursue financial regulation and provide significant support for housing through credits and Federal Reserve relief efforts.

But Douthat also claims that these fixes make us more vulnerable to future crises:

The C.I.A. and F.B.I. didn’t stop 9/11, so now we have the Department
of Homeland Security. Decades of government subsidies for homebuyers
helped create the housing crash, so now the government is subsidizing
the auto industry, the green-energy industry, the health care sector
…

Maybe the problem with the bold sentence is merely parallelism, but is Douthat really suggesting that cap-and-trade, green energy subsidies and health care reform are responses to the housing crash the same way DHS was a response to 9/11? That can’t be right. Elected Democrats would probably pursued those policies with 5% unemployment. What’s more, our energy industry and health care sector are already heavily subsidized for reasons that have less to do with the crisis-consolidation cycle, and more to do with people liking cheap gas and affordable health care. He goes on:

But their fixes tend to make the system even more complex and
centralized, and more vulnerable to the next national-security
surprise, the next natural disaster, the next economic crisis.

This sentence is where the trouble creeps in. Are we more vulnerable to national-security attacks in May, 2010, than in August, 2001, because of the Department of Homeland Security? That’s a pretty controversial claim, if he’s making it. Is the next natural disaster more likely with greater government control over energy policy and regulations? The BP oil spill was partially permitted by lax regulation under the Bush administration rather than centralized government.

In the last economic crisis, I won’t pretend that the government’s role in federal housing policy didn’t implicitly permit the housing bubble, encourage massive leverage at Fannie/Freddie and foster an era of too-cheap credit. But how is the growing centralization of government making the economic system more vulnerable to economic crises over time? The boom-bust cycle of the more decentralized 1800s and early 1900s was significantly more volatile than the relative moderation of the last 30 years. In fact the shadow banking industry, ground-zero of the financial crisis, enjoyed a heyday of de-regulation in the decade before its catastrophe.

To sum up, Douthat is right about noting the crisis-consolidation cycle. But I’m interested in reading more about why he thinks consolidation inherently makes us more vulnerable to the crises it’s designed to mitigate.

Great Depression – New York Times – Health care – United State – National security

(more…)

When experts look at how healthy a country’s finances are, they tend to look at what’s called the public debt-to-GDP ratio rather than the size of one year’s deficit. The IMF, and many others, tend to define “healthy” as anything below a 60% debt-to-GDP ratio.

From an academic standpoint, it’s an appropriate measurement of debt
burden because it accounts for total, not just recent, debt
accumulation, and it weighs that burden against the size of the
country’s economy. From a political standpoint, it’s not a very visceral statistic. Nobody’s going to slap bumperstickers on their cars that say “Recalibrate that Ratio” or “59 or Bust!” So the easier message is “Balance the Budget.”

Robert Samuelson makes a similar point in his column today. But then he writes this:

To stabilize debt to
GDP, you have to aim much lower than the target in good times, meaning
that you should balance the budget (or run modest surpluses) after the
economy has recovered from recessions.

Interestingly, Europe’s experience discredits debt-to-GDP targets.
The 16 countries using the euro were supposed to adhere to a debt
target of 60 percent of GDP. Before the financial crisis, the target
was widely breached. From 2003 to 2007, Germany’s debt averaged 66
percent of GDP, France’s 64 percent and Italy’s 105 percent of GDP.
Once the crisis hit, debt-to-GDP ratios jumped; by 2009, they were 73
percent for Germany, 78 percent for France and 116 percent for Italy.

If most of the countries who are in trouble today blew past the 60 percent target, that impugns the countries rather than the target, right? In fact, it might even be an argument for the target as a valuable indicator of financial health.

Think of it this way: say I’m a teacher and I say students have to get to class 10 minutes early to help them concentrate and do well on the final exam. Most of the class flaunts that rule and half the students fail the final. Does my classroom’s experience “discredit” the 10-minutes-early rule? Not really. It means my students were recalcitrant and I did a poor job enforcing. It might even suggest the rule should be employed more strictly next semester. But that’s not a reason to give it up.

While Samuelson is absolutely right that (1) “balance the budget” is a clearer (if unrealistic) political frame than “stabilize the debt ratio” and (2) we should aim lower than the target in good economic times, it’s not fair to argue that Europe’s experience disputes the debt/GDP statistic.

Germany – International Monetary Fund – France – Italy – Government debt

Within the debate about the deficit, there is another debate about timing. If public debt does trigger a financial crisis, it won’t be tomorrow. It won’t be next year. It probably won’t be in five years. So what is everybody doing running around screaming about the fierce urgency of VAT?

Here’s Bruce Bartlett’s answer:

What I expect is that when there is the inevitable flare-up in
financial markets as bond prices crash, the dollar takes an unexpected
dip, the price of oil shoots up or whatever that Congress and the White
House will solemnly vow to cut the deficit because it will be the one
thing that everyone will be able to agree upon that might help and at
least won’t hurt. Everyone will go out to Andrews Air Force Base and
after weeks of intense negotiations announce that a deal has been
struck to deal with the crisis.

Republicans will inevitably agree
to some modest tax increases, Democrats will agree to trim Medicare and
Medicaid, and both sides will promise that discretionary spending will
be slashed.

A VAT could take a decade to set up and index until you’re locked in at a long-term rate of 8 or 10 percent. But America’s not very good at dealing with slow-moving crises, even with slow-moving solutions. We’re much better at waiting until a crisis happens, acting quickly, and then putting together commissions to find out why nobody saw it coming.