Nightly Business Report

Shrinking the budget down to size [July 26]
TARP risks [May 24]
In what direction is the economy headed? [Mar 15]
The future of the Federal Reserve [Jan 28]

Let's make a deal [Jan 22]
Worrying about offshoring [June 18]

Economic issues in the election [Dec]
The awkward stage [ Nov 6]
Buffet and Gates won’t mind [Sept 18]
The pauses that refreshes? [Aug 14]
A good idea whose time has come? [July 17]
Remember Horton the elephant [June 5]
Economic co-dependency [May 1]
A good start [Feb 27]
Thank you, Mr. Greenspan [Jan 30]

Congress, we have a problem [Dec 19]
The end of an era [Nov 28]
The Cheney doctrine [Oct 10]
Good news on the budget? [July 25]
Is there a housing bubble? [June 20]
Don Quixote Economics [May 23]
March 2005 [March 2005]
To choose or not to choose [Jan 10]

A bond is a bond is a bond [Dec 20]
Privatizing Social Security [Nov 29]
Economics and the election [Oct 18]
Economic girlie-men [Sept 14]
The bloom is off the boom [Aug 16]
What’s good for business? [July 26]
Time to raise the minimum wage [June 7]
What did he say? [May 10]
On halving the budget deficit [Apr 22]
Should I worry about the dollar? [Jan 5]

Down on the farm [Nov 3]
In defense of Alan Greenspan [Sept 8]
The bond market bubble [July 7]
The moment of truth [May 12]
The fog of war [Mar 11]
Democratic economics [Jan 13]

The bright side [Dec 9]
A Miscast Hero [Nov 4]
There Oughta’ Be a Law [Oct 14]
War and recession [Sept 23]
August 5 [Aug 5]
July 15 [July 15]
Please get serious [June 17]
Say It Again, Alan [May 20]
Getting to know you [Mar 18]
Tax Cut Confusion [Feb 25]

Depression in a Recession [Dec 17]
September 11th changed everything [Nov 5]
Criteria for economic stimulus [Oct 22]
Don’t cook the books [Sept 10]
Faith-Based Economic Policy [Aug 27]
Are We There Yet? [July 16]

July 2010 "Shrinking the budget down to size"
Subtle, counterintuitive messages don't work well in public debates, which is too bad, because the right policy for the Federal budget deficit today is both subtle and counterintuitive.

Let's start with the easy part. The deficit is too large, just as everyone says, but what, exactly, does that mean? There are two correct answers.

First, today's Federal deficit is so huge--over $1.5 trillion in the current fiscal year--that we can't keep it up very long, but, here's the first subtlety. We can keep it up for a while. After all, the Treasury is having no trouble borrowing vast sums at very low interest rates today.

The second and more important correct answer is that the budget is on an unsustainable long-run path--meaning that current trends cannot continue indefinitely. Eventually, taxes must be raised and the spending curve must be deflected downward, not one, but both.

But the second subtlety is that this is the wrong time to do either. With the economy so weak, we don't want the government to cut back any time soon.

Now for the counterintuitive part: the right fiscal policy would increase the deficit today, but then reduce it sharply and steadily in the future. Unfortunately, selling that message politically is like convincing people that the best way to travel south is to start off walking north.

So we get what we have: an unenlightened public debate. As I said, it's too bad.

May 2010 "TARP risks"
Amidst all the tea parties and assorted screaming from left and right, here's a thought you may not have heard. The TARP—that's the Troubled Asset Relief Program—was a huge success.

Wait a minute. Didn't we spend $700 billion of hard-earned taxpayer money saving bankers who don't deserve it? Of all the things the Obama administration has done, wasn't TARP the worst? The answer is no, on both counts. First, TARP was actually a Bush administration initiative, inherited by Obama. Second, only about $300 billion ever went to banks. Most important, TARP did not spend taxpayer money. It lent it, mostly in the form of preferred stock. And most of that has been paid back with interest plus capital gains on the stock. The latest estimate is that TARP will eventually lose only $117 billion and that estimate keeps falling.

OK, but $117 billion is still a lot of money, right? Yes, but let's remember what was at stake. When Treasury Secretary Paulson and Fed Chairman Bernanke asked Congress for the money, our financial system was teetering on the brink. If it fell, the recession would have been much worse.

With a $14 trillion economy, it made good sense to put $700 billion at risk, not to spend it, in order to tilt the odds in our favor. And now, with the dust settling, the net cost looks likely to be under $100 billion.

That sounds like a success story to me.

March 2010 "In what direction is the economy headed?"
Everywhere I go these days, people ask me where the U.S. economy is heading. The only honest answer is to echo Mark Twain's quip: "I was glad to be able to answer promptly, and I did. I said I didn't know."

But I do know what it depends on: the consumer. During the fourth quarter growth spurt, investment, especially inventories, carried the day. But that can't persist. To keep the economy growing well in 2010 and beyond, American consumers—who account for over 70% of GDP—must pull their weight.

The pessimists don't think they will. Americans, they argue, have been traumatized by recent events, are less wealthy than they were, are worried about jobs, and are therefore afraid to spend. I wonder about that last part.

Here's what the data show. Americans saved 1.7% of their after-tax incomes in 2007, 2.7% in 2008, and 4.3% in 2009. That looks like an upward trend. But such a modest shift toward saving is a pretty small reaction to the most frightening economic events since the 1930s. And the quarterly pattern during 2009 shows no upward trend whatsoever.

My guess—and yes, Mark Twain, it's just a guess—is that the saving rate will stabilize somewhere near its current level, which will be good enough to keep the economy growing at a healthy pace. It's also my hope. For if Americans suddenly turn thrifty, we are all in trouble. To paraphrase St. Augustine, Lord, make us frugal, but not yet.

January 2010 "The future of the Federal Reserve"
Do you ever get the feeling that this country is over-lawyered? Well, here's another example.

Ron Paul, the libertarian congressman who wants to abolish the Federal Reserve, has long promoted a first step in that direction. The so-called Paul bill would subject the Fed's monetary policy decisions to GAO audits. Like most economists, I find the idea, well, appalling.

But I breathed a sigh of relief when a modified version was appended to the House's financial reform bill late last year. The Paul-Grayson amendment added what I thought was an important clause. Let me read it to you.

"Nothing in this subsection shall be construed as interference in or dictation of monetary policy to the Federal Reserve System by the Congress or the GAO."

That sounds like a strong affirmation of the Fed's independence, right? I certainly read it that way and so did my students. Then I talked to a lawyer.

So put on your lawyers glasses and read it again Nothing in this subsection shall be construed as interference and so on.

Read literally, the sentence does not instruct Congress to keep its nose out of monetary policy. Instead, it asserts that the proposed law does not interfere with monetary policy even if you think it does. Orwell's big brother would have been proud. He gave us war is peace, freedom is slavery. Now the House thought police give us interference is not interference.

Ladies and gentlemen of the House, could we please fix this?

June 2007 "Worrying about offshoring"
My writings about offshoring have garnered so much publicity of late that people are asking me who my PR agent is. Actually, I don't have one. It's easy to draw attention to this issue because so many people are worrying about it.

In fact, people may be worrying too much because the offshoring of service jobs, which is the new wrinkle, is not yet a major phenomenon. That said, it appears to be growing very fast—both in scale and scope.

At least, we think so. In truth, we don't really know, because we have no comprehensive data on offshoring—which is the first problem that needs to be solved. It is hard to deal intelligently with any phenomenon until you measure it.

I myself am convinced that the potential for service offshoring is huge. My research estimates that between 22 and 29% of American jobs could be offshorable within a decade or two. But how many of these jobs actually will move offshore is unknowable.

Should we try to stop offshoring? My answer is no. Service offshoring is just the latest form of international trade, and trade has clear benefits. Furthermore, it's pretty hard to stop electrons at national borders.

Instead, American policymakers should focus on cushioning the blow for displaced workers. Yes, we have such programs now. But when you look at their puny scale and stingy benefits, it's hard to resist the conclusion that we have never taken the problem seriously.

It's about time we did.

January 2007 "Let’s make a deal"
In a recent speech that got too little attention, Congressman Barney Frank, the new chairman of the House Banking Committee, proposed what he called a "grand bargain" between business and labor.

Well, it's really a grand bargain between Congressional Republicans and Congressional Democrats. But never mind. The important thing is that it makes a lot of sense.

Mr. Frank's idea is simple, but bold. There are a number of economic policies that labor wants badly, but are anathema to business—like universal health insurance, a friendlier climate for unions, and fewer trade agreements.

On the other hand, there is a different set of policies—including less regulation, a sensible immigration policy, and more trade agreements—that business wants badly, but that labor finds abhorrent.

In the current political status quo, Democrats dig in to block business's priorities and Republicans dig in to block labor's. But the country would be better off if, somehow, we could give both business and labor more of what they want.

Hence Frank's idea, and it's a good one. As Monte Hall used to say: Let's make a deal.

Mr. Frank says he will support some deregulation, a rational immigration policy, and more trade agreements, if the trade agreements have reasonable labor and environmental safeguards, and if Republicans will support universal health care and stop making it so hard for unions to organize.

That all sounds good to me. Now if only Congress would just take Monte Hall's advice.

December 2006 "Economic issues in the election"
Tomorrow, America votes—or, to be more accurate, a minority of America votes. It appears that the decisive issues in this election will be the Iraq War and the various scandals that have swirled around the Republican-dominated Congress.

But there are also some economic issues. Let me mention three.

First, the Democrats want to raise the minimum wage while the Republicans do not. If the Dems win control of Congress, they will pass a minimum wage increase and dare President Bush to veto it. My guess is that a politically-weakened president would not.

Second, Congressional Democrats have pledged to restore pay-as-you-go budgeting, an important disciplinary device that started, ironically, under the first President Bush but was abolished under the second.

Under PAYGO, any proposed tax cut or expenditure increase must be accompanied by a way to pay for it. President Bush the second has opposed PAYGO because it would make his unaffordable tax cuts…well, unaffordable.

In my view, the PAYGO rule is the single most important step that could be taken toward restoring fiscal sanity. And it is only a matter of Congressional rules, not of law. So a Democratically-controlled Congress could take the step without the president's approval.

Third, a Democratic Congress would seek to amend the Medicare drug benefit to, among other things, enable the government to negotiate lower drug prices with pharmaceutical companies.

Who could be against that?—except a drug company, and perhaps the sitting president of the United States.

November 6, 2006 "The awkward stage"
In terms of communications, and perhaps also in terms of policymaking, the Federal Reserve is now in what parents of teenagers know as "the awkward stage." Here's what I mean.

Under its new chairman, Ben Bernanke, the Fed is almost certain to adopt some variant of inflation targeting. In the meantime, it is practicing what economists call "inflation forecast targeting"—which means using monetary policy to steer your inflation forecast into the target range.

It first became clear that the Fed was practicing inflation forecast targeting when it paused on August 8th, even though recent inflation readings were too high. It rationalized the pause by saying that "inflation pressures seem likely to moderate over time."

In other words, the Fed stopped raising rates because it believed that inflation would fall back into its "comfort zone" of 1-2% without any further tightening. To wit, it acted on a forecast.

What's awkward about inflation forecast targeting at the Fed right now is that the FOMC refuses to announce either its forecast or its target. So how can outside observers appraise, or even understand, its decisions?

Vice Chairman Donald Kohn heads a committee charged with making recommendations about this and other communication issues. My advice to Mr. Kohn is simple: Just like teenage-hood, the best way to deal with the awkward stage is to get through it as quickly as possible. There is nothing difficult about announcing both the Fed's forecast and its target. Just do it. Soon.

September 18, 2006 "Buffet and Gates won’t mind"
I read in the papers that the Republicans, fearing severe losses in the upcoming Congressional elections, are giving up much of their domestic agenda to focus, once again, on that hardy perennial: tax cuts.

Specifically, the latest idea is to make permanent two tax provisions that are scheduled to expire in 2011: the $1000 child credit and the marriage penalty relief.

Frankly, I don’t know whether to laugh or cry. On the one hand, it’s nice to see tax relief targeted to people who don’t live in the economic stratosphere.
But on the other hand, the federal budget is not exactly flush. Has anyone in the Republican leadership thought about how we’re going to pay the bills?

So here’s a novel idea. Unlike all the previous Bush tax cuts, let’s take something out of the budget to cover the costs of this one. Better yet, let’s take out more money than the tax cut costs—thus making some net contribution to reducing the deficit.

But how? One obvious way to make room for middle-class tax cuts would be to scale back the President’s cherished upper-class tax cuts. My favorite candidate for oblivion is estate tax repeal.

According to recent estimates, repealing the estate tax would cost $334 billion over 5 years, while the two middle class tax cuts would cost just $218 billion. So retaining the estate tax would leave us $116 billion ahead.

Warren Buffet and Bill Gates would lose billions, but they won’t mind.

August 14, 2006 "The pauses that refreshes?"
At last.

After increasing the Federal funds rate by 25 basis points at 17 meetings in a row, the Fed decided to take a breather last week and left rates unchanged. The markets are calling it a “pause.”

Which raises two questions. First, why pause now, with inflation so high? Second, will the pause become a stop?

Let’s start with the why. According to their statement, the main reason is that the Fed believes inflation is destined to fall even in the absence of further monetary tightening.

I find both good news and bad news in that rationale. The good news is that the Fed is looking ahead, acting on a forecast--rather than just opening the window, taking the economy’s temperature, and deciding what to do.

The bad news is that inflation forecasts are not very accurate. And the other bad news is that, if the Fed expects a weak economy to drag inflation down appreciably, it must be a bit pessimistic about the outlook for growth.

Second question: Will the pause become a stop, or will it prove to be the pause that refreshes—refreshes the Fed’s enthusiasm for raising rates, that is? I don’t know at this point, and neither does Ben Bernanke.

Mostly, the answer depends on whether the Fed becomes more or less confident in its forecast of falling inflation as the weeks and months go by.

So watch the incoming inflation numbers carefully. The money you save may be your own.

July 17, 2006 "A good idea whose time has come?"
Here’s something to think about while you watch Al Gore’s engaging documentary, An Inconvenient Truth. There is a low-cost, pro-market way to reduce carbon emissions by as much as we want. The idea is called “cap and trade,” and here’s how it works.

Congress sets company-by-company ceilings on permissible carbon emissions. Polluting firms may emit more, but they must buy permits to do so. And firms that emit less than their allotments can reap rewards by selling their excess permits. Trading permits on a free market determines their price.

Notice the essential beauty of the idea. The cap gives the government certainty about how much CO2 will be emitted nationwide—because it gets to decide how many permits to issue.

Trading gives us economic efficiency—because the market gets to decide which firms will reduce their emissions, by what amounts. As usual, the profit motive can be relied upon to get the job cheaply.

Sound like pie in the sky? It’s not.

Cap and trade has already worked beautifully to curb acid rain at lower cost than most people thought possible. Permits to emit sulphur dioxide have been trading on the Chicago Board of Trade since the 1990s.

Three years ago, Senators McCain and Lieberman introduced legislation to treat carbon dioxide the same way. It has gotten nowhere to date. But both environmentalists and several corporations are now on board.

So maybe, just maybe, cap and trade is a good idea whose time has finally come.

June 5, 2006 "Remember Horton the elephant"
About a month ago, an off-the-cuff remark by Chairman Ben Bernanke set off a major flap over Federal Reserve communications. Bernanke told a reporter that his April 27th Congressional testimony had been misunderstood. But he later apologized for his “lapse of judgment” in saying so.

Critics complained that the allegedly-transparent Bernanke was just as confusing as his predecessor, Alan Greenspan. But this complaint, like the market’s reaction to the testimony, missed the point. Bernanke was speaking clearly. It’s just that the markets were not hearing him.

The problem, I believe, is that traders are used to hearing the unique dialect known as Greenspeak, which must be deciphered like hieroglyphics. With Bernanke in command, the markets need a new Rosetta stone.

So let me provide it, with help from Dr. Suess. Remember Horton, the elephant who hatched the egg? He meant what he said, and he said what he meant. So does Bernanke.

For example, here’s what he said in that now-famous testimony: “… at some point in the future, the Committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook.”

And that’s just what he meant. Did you hear an implied promise to pause in June? Somehow, many traders did.

I’m afraid we’re now in an awkward adjustment period, as the markets learn that the new Fed chairman speaks English, not Greenspeak. It will help the adjustment go faster if we all remember Horton.

May 1, 2006 "Economic co-dependency"
Chinese President Hu Jintao’s recent visit to the White House reminds us of the unhealthy co-dependence that has developed between our two countries. In a nutshell, they need us to buy their goods, and we need them to buy our bonds.

Everywhere I go these days, Americans ask whether they should worry about our mounting indebtedness to China. Are we relying on the kindness of strangers?

My answer is no.

Why? Because the Chinese are not buying all this American debt as a favor to us. Rightly or wrongly, they have concluded that doing so is in their own best interest.

Why is that? Because buying dollar assets is how they hold down the value of the yuan—which helps them sell more goods on world markets.
• Which, in turn, is critical to sustaining Chinese economic growth.
• Which, in turn, is critical to propping up a political regime that derives its legitimacy from delivering rapid economic growth.

And one thing the Chinese leadership cares about mightily is keeping itself in power.

Come to think of it, this co-dependence also helps sustain our political regime. The real worry is what happens if China stops buying our bonds. Without Chinese purchases, U.S. interest rates would be higher than they are—and President Bush would be under more pressure to do something about the federal budget deficit.

So, ironically, China’s bond purchases are helping to prop up both China’s repressive political regime and America’s unsustainable fiscal regime.

A neat trick.

February 27, 2006 "A good start"
Last month, I praised Alan Greenspan for his remarkable 18-1/2 year run as chairman of the Federal Reserve. Now we have a new Fed chairman, Ben Bernanke.

While on the job for just a month, his first Congressional testimony has already accomplished three important things. And two of them stand in sharp contrast with the Greenspan era.

First, Bernanke’s short, direct answers—delivered in plain English!—were notable, and drew praise from a number of Congressmen and Senators.

Adopting English as its official language will make the Fed more transparent by making it more intelligible. During Greenspan’s long tenure, the financial markets developed a talent for ferreting out the meaning of his Delphic utterances. But 99.9% of Americans had no idea what he was talking about. Since they, too, have a right to know what their central bank is up to, English is welcome.

Second, when the politicians tried to draw Bernanke out on issues beyond the Fed’s purview, he frequently declined to take the bait. Greenspan, of course, was all too willing to opine on almost any issue, no matter how political.

The Bernanke approach is wiser, I believe. Central banks need to stay out of the political thicket, and one good way to do that is to duck political questions.

I said that Bernanke accomplished three things. The third was to make it clear that monetary policy under Bernanke will closely resemble monetary policy under Greenspan. As well it should. Why quarrel with success?

January 30, 2006 "Thank you, Mr. Greenspan"
As many viewers of this program know, tomorrow is a momentous day in the history of the Federal Reserve.

Not because the Fed will announce that it is raising interest rates by another 25 basis points. That’s been baked in the cake for months.

And not even because of the Fed’s eagerly-awaited statement, which may signal that it is finished raising rates for now—or, more likely, that it has just one more rate hike to go.

No, the big story is that tomorrow is Alan Greenspan’s last day on the job. After a remarkable 18 1/2 year run, the Fed chairman is finally hanging up his spurs and riding off into the sunset.

It’s truly the end of an era. Greenspan, of course, is already a legend. Even veteran traders working in the financial markets for up to 18 years have known life under only one Fed chairman. They’ll have some major adjustments to make, as will the financial media.

Ironically, Greenspan leaves office with a reputation as a dedicated inflation fighter. In truth, inflation is down only slightly from where Paul Volcker left it in 1987.

Greenspan’s real accomplishment has been to virtually banish recessions from the land. During his long tenure, we’ve had just one mild recession, in 1990-1991, and an almost invisible one in 2001. That’s it—which stands in marked contrast to any other 18-year period in our history.

For that I say: Thank you, Mr. Greenspan, for a job well done.

December 19, 2005 "Congress, we have a problem"
If you’ve paid only sporadic attention to the haggling over the federal budget in recent weeks, you may have come away with the impression that Congress was engaged in a serious struggle over reducing the deficit. Well, not exactly.

It is true that Congress is struggling to reach an agreement. But it’s not serious, and it’s not over reducing the deficit. In fact, the whole budget debate has taken on a startling aura of unreality.

Remember that infamous “bridge to nowhere” in Alaska? Yes, it was cancelled with great fanfare. But was that a victory for fiscal sanity? Not exactly. The money was simply allocated to other, unspecified projects in Alaska. It didn’t save taxpayers a dime.

Digging deeper, many of the proposed economy measures are one-shot items or gimmicks that will improve the budget next year—which is not very important, while doing nothing for the long-run budget picture—which is where the real problem lies.

Most troubling of all, when you get down into the budgetary weeds, you learn that the tax cuts passed by the House this month are almost twice as large as the expenditure cuts it passed. Let me repeat that: Despite the huge budget deficit, the House actually voted to cut taxes by twice as much as it cuts spending. What are these people thinking?

This is a democracy. So maybe it’s time for the people to send their elected representatives a message. Earth to Congress: We have a problem.

November 28, 2005 "The end of an era"
Sherlock Holmes might have called it the case of the dog that didn’t bark.

About a month ago, Ben Bernanke, a former Princeton professor, was nominated to be Chairman of the Federal Reserve Board. Two weeks ago, Bernanke had his Senate confirmation hearing and vote. Neither event was treated as a Big Story, either by the media or by the financial markets.

This is at once surprising and highly complimentary to Bernanke. After all, Alan Greenspan has been chairman of the Fed for over 18 years. During that time, he has achieved almost mythical status in the financial markets and has become a kind of national guru on all things economic. There was reason to be worried that the markets might be jittery over losing their security blanket.

But apparently not. That’s a strong vote of confidence in Bernanke, who is a superb choice for the job.

What changes should we expect under Bernanke’s leadership? I start with another non-barking dog: Do not expect much change in monetary policy decisions. Like all of us, Bernanke admires the Greenspan record. He is also way too smart to abandon a successful strategy.

But talking about monetary policy will change. To this day, Greenspan steadfastly refuses to speak English. He’s made the markets learn to understand Greenspanspeak instead.

Bernanke will be quite different. He is plainspoken, has an amazingly clear and logical mind, and believes deeply in transparency. Get ready for explanations of policy decisions that you can actually understand.

October 10, 2005 “The Cheney Doctrine”
Sometimes a lesson can be learned too well. It took economists decades to persuade politicians and the public that the federal budget should not necessarily be balanced every year.

There are times when it makes sense to run a deficit, as for example during a recession. And there are times when it makes sense to run a surplus, as for example when huge Social Security and health care expenses loom in the future.

But the notion that government expenditures and revenues need not match year by year does not imply that there should be no relation whatsoever between the two.

According to Dick Cheney, Ronald Reagan taught us that deficits don’t matter. Did he? If so, why did he approve a huge tax increase just one year after the massive tax cuts of 1981?

It is President Bush, not President Reagan, who has adhered to the Cheney Doctrine. Unlike Reagan, Bush followed his mammoth 2001 tax cuts with another large tax cut in 2003 and several smaller ones, too.

He also added an expensive new drug benefit to Medicare without even suggesting a way to pay for it.

Likewise, the Iraq War has been financed by adding the bill to the deficit. And it now appears that Hurricanes Katrina and Rita will be dealt with in the same way.

See a pattern here? Apparently, this administration needs to be reminded of a simple principle of sound finance: that you need to pay at least some of your bills.

July 25, 2005 “Good news on the budget?”
Amidst all the Karl Rove hullabaloo, you may have missed it. But the White House issued some good news on the budget earlier this month. It now believes the deficit for the current fiscal year will be only $333 billion.

The president offered this as evidence that his economic policies are working. And it’s true that the economy is doing pretty well right now. But let’s remember a few things.

First, the new, improved deficit forecast is still a third of a trillion dollars. Which would be the third largest deficit ever, behind only—you guessed it—the previous two Bush budgets.

Second, the good news comes from a surge in tax revenue, much of which can be traced to non-recurring events— such as bulging corporate profits, the end of a temporary tax break, and taxes on bonuses and capital gains earned in 2004.

Third, and most important, the real problem is not today’s deficit. Demographics make that easy. Since only the thin birth cohorts of the Depression years have been reaching age 65, recent years have been a kind of budgetary nirvana. We should have been running surpluses.

But after nirvana comes budgetary hell. The big Baby Boom cohorts start turning 65 just six years from now. And they will keep on coming, in greater and greater numbers, for years.

The federal government should be preparing for this demographic onslaught now. But, sadly, it is not. Truth be told, the long-run budget picture is a mess.

June 20, 2005 “Is there a housing bubble?”
The financial question of the month seems to be: Are we now in a dangerous house price bubble? I have a straightforward answer: no. But I better explain what I mean. Or rather, what I don’t mean.

First, I am denying only the existence of a national housing bubble. Local house price bubbles blow up and burst all the time. But unlike stocks, homes are not traded frequently or easily across geographical space. So condo prices in midtown Manhattan are not tightly linked to house prices in Midland, Texas.

Second, I don’t mean that recent double-digit price increases for houses will continue. Such rapid price appreciation, at a time when overall inflation is low, is not what history teaches us to expect.

So it’s reasonable to expect house prices to slow down—just not to fall. Freddie Mac maintains a nationalaverage house price index that goes back to 1970. In all that time, there has never been a single year of declining house prices.

Maybe we’re on the verge of the worst housing market since the 1930s. But I wouldn’t bet on it.

Finally, let’s not forget that the fundamentals for housing have been quite strong of late. With incomes growing nicely, mortgage rates low, and the stock market stuck in the mud, it’s not surprising that house prices have done well. The question is how well.

So sell your house if you want to move, not because you’re afraid its value is about to collapse.

May 23, 2005 “Don Quixote Economics”
Since I hold no official position, I’m allowed to tilt at windmills now and then. So here goes:

Over the next few months, Congress will be considering the President’s budget proposal, one big component of which is to make all the tax cuts permanent. So it’s not too late for members of Congress to have a sudden attack of fiscal sanity—and reject the idea.

Now, I don’t think for a minute that Congress will actually do that. The Republicans have the votes, and Congress has been binging since 2001.

But let’s consider a few facts.

First, President Bush originally justified his huge tax cuts by arguing that the government should cap the gusher of tax revenue that was then flooding the Treasury. Well, guess what? The budget surplus is long gone, and the revenue well has run dry. In case you haven’t noticed, the government is now scrounging for money.

Second, the magnitudes are staggering. The additional cost of extending the tax cuts just through 2015 would be over $2 trillion, raising the total 15-year cost to over $5 trillion.

And did you know that, over the 75-year time horizon that is used to judge Social Security’s solvency, the Bush tax cuts amount to at least three times as much as the entire Social Security deficit?

Wouldn’t it be nice if Congress somehow came to its senses and stopped this fiscal train wreck before it happens? Where is Don Quixote when we need him?

March 2005
When the debate over Social Security reform began, advocates of privatization offered three main arguments in favor of their position.

The first was the virtues of choice. Let people control their own money, it was argued, and they will invest it more wisely than the government. While choice is nice in the abstract, it entails higher costs. So, not surprisingly, as the administration revealed the details of its plan, it turned out that choice was quite limited.

The second argument was the need to boost national saving, which can indeed be accomplished by pre-funding Social Security. But the President’s proposal is not for pre-funding. It’s for borrowing trillions of dollars to finance the so-called transition costs. By the administration’s own admission, the plan would not raise national saving at all.

The third argument was that privatization would improve Social Security’s finances. But even the President has stopped making this claim, which is simple untrue.

So the administration has by now admitted that its plan will not accomplish any of these three objectives. Why then, you might ask, are they still pushing for privatization? I fear the answer is the same as it’s been since Barry Goldwater first advocated privatizing Social Security in the 1960s: Privatization would undermine both the political and economic foundations of America’s most successful social program. I count that as a (big) negative, not as a positive.

January 10, 2005 “To choose or not to choose”
Recent press reports suggest that President Bush may enunciate only broad principles for Social Security privatization, rather than a detailed plan. One of those principles will presumably be individual choice.

Choice is generally a good thing. But in the context of Social Security, it’s important to keep in mind that more choice implies greater cost.

The current system offers virtually no choice. Everyone is enrolled automatically in the same plan. Largely for this reason, the system is also incredibly cheap to run.

Now think about adding individual choices over investment decisions, over survivor benefits, over whether or not wealth is bequeathable, and so on. Each element of choice adds to the costs of running the system—and therefore lowers investment returns.

For example: A typical American earns about $1,000 a week. If he or she puts 2% of that into a private account, that’s $20 a week. If the $20 is divided among four mutual funds, that’s $5 into each. Just imagine the costs of handling tens of millions of tiny transactions like that.

But the most profound choice is whether participation in the new private accounts will be voluntary or mandatory. Suppose it’s voluntary. Since regular Social Security offers the rich a worse deal than the poor, richer people are likely to opt into private accounts while poorer people stay in the current system. As that happens, the system will unravel.

Not to be too cynical, that may be just what the privatizers want.

October 18, 2004 “Economics and the election”
The election now looks like a virtual dead heat. Polls show the electorate favoring President Bush on terrorism, but favoring Senator Kerry on virtually every economic issue.

Elections usually turn on pocketbook issues. But not always. And this election may yet turn on something else: the Iraq War, the absurd Nader candidacy, or even the whimsy of the Supreme Court.

On the other hand, it might revert to type and become a referendum on President Bush’s economic record. If so, Senator Kerry should win.

You probably know that the Bush presidency will be the first since Hoover’s to end with a net loss of jobs. You have probably also heard President Bush brag about 1.9 million net jobs created over the last 13 months.

Both claims are true. But did you know that President Bush’s best year of job creation is worse than President Clinton’s worst?

Was the dismal jobs performance entirely the president’s fault? Of course not. But economic policies do matter at the margin. And the Bush tax cuts seem perversely designed to lose the most possible revenue while creating the fewest jobs. They were weapons of mass budget destruction.

Mr. Bush wants to blame both the huge deficit and the dismal jobs record on 9/11. But the story won’t wash. 9/11 happened three years ago. It did not cause a recession. And its budgetary impact is dwarfed by the tax cuts.

Those are facts that voters in this referendum should know.

September 14, 2004 “Economic girlie-men”
On Day One of the Republican convention, California’s Governator admonished us not to be “economic girlie-men.” Apart from the homophobic slur, I’m not sure what that means.

I guess girlie-men are appalled that the payroll data show over 1.6 million fewer private-sector jobs since President Bush took office, even though the adult population is almost 10 million larger. If so, let me come out of the closet right now: I do worry about the shortage of jobs.

We economic girlie-men also think it’s terrible that real wages are declining while worker productivity and corporate profits soar. And that health-insurance premiums have leaped 49 percent in 3 years, while the ranks of the uninsured have grown by over 5 million.

I suppose economic manly-men are those, like President Bush, who claim that (and I quote) “the economy is strong and getting stronger.” Well, the plain fact is that the US economy is not looking very macho these days. For example, both GDP growth and employment growth were decidedly sub-par last quarter.

Another manly-man may be Commerce Secretary Evans, who calls this “the best economy in our lifetime.” Whose lifetime is that? I remember a much better economy under Bill Clinton just four years ago—with, by the way, policies that are virtually the opposite of President Bush’s.

So could it be that manly-men hide behind the skirts of misleading slogans, while girlie-men face up to the facts? If so, count me among the economic girlie-men.

August 16, 2004 “The bloom is off the boom”
President Bush has been barnstorming the country of late claiming that, and I quote, “We have a strong economy, and it’s getting stronger.” Unfortunately, the data don’t agree.

You probably noticed the dismal employment report issued by the Labor Department on August 6th: just 32 thousand jobs were created in the month of July.

What’s worse, the July number continues a downward trend: 324 thousand in April, 208 thousand in May, just 78 thousand in June, and now 32 thousand in July.

I would certainly not extrapolate that trend into the future. The pace of job creation will probably pick up. But what worries me is that the sagging payroll numbers are eerily consistent with other weak reports—such as on consumer spending.

What’s gone wrong? The leading culprit is surely the rising price of oil.

Early last year, it was reasonable to hope that a successful war in Iraq might bring oil prices down. But that hope, like so many others about Iraq, has been dashed. Instead, the price of oil has risen about 70% since the end of major combat operations in May of last year.

History teaches us that sharp increases in oil prices generally lead to slower economic growth, even to recessions. So the story, unfortunately, coheres: Rising oil prices slow down spending, and that slows down job creation.

No, I don’t think we’re headed back into recession. But it must be admitted that the probability of such a dire outcome is no longer zero.

December 20, 2004 “A bond is a bond is a bond”
Have you heard the one about the government bonds that weren’t? It’s the latest bad joke coming out of Washington. And if you haven’t heard it yet, you should—or else America might fall prey to the biggest accounting scam in history.

As you may know, the President wants to partially privatize Social Security. Privatization may or may not be a good idea. That’s a subject for another day. But regardless of how you feel about it, privatization will cost money up front. Lots of it.

Where will the money come from? The choices are the usual ones: less spending, more taxes, or more borrowing—that is, adding the bill to the already-bloated budget deficit. And guess what? Many Republicans seem to favor the borrowing option.

I don’t think that’s very good policy. But let it pass, because now comes the punch line. While the government is borrowing all this money—and I mean trillions of dollars, over decades —the administration wants everyone to pretend that the borrowing is not borrowing.

Yes, you heard that right. Here’s their argument.

The government already has an obligation to pick up the Social Security tab eventually . So turning this implicit debt into explicit debt, and then selling it on the bond market, is a non-event. So let’s not count the new debt as debt, even as we sell massive amounts of it.

If that sounds like a scam to you, it should. Let your Congressman know, or else the joke may be on us.

November 29, 2004 “Privatizing Social Security”
It’s quite appropriate to have a national debate on Social Security now. And it appears that this debate may start soon—because the President wants to partially privatize the system.

It’s not a crazy idea. After all, Social Security is a retirement program, and lots of retirement plans are run privately. So why not privatize Social Security?

There are many reasons. But I want to raise one issue that seems to have been virtually ignored so far.

Simply put, Social Security is a redistributive program: Low-wage earners receive higher rates of return on their Social Security contributions than do high-wage earners.

In large measure, this feature just makes up for the fact that poorer people die younger, making annuities less valuable to them. To compensate, money “deposited” into a Social Security “account” must earn more if you make $20,000 a year than if you make $100,000.

My point is that no private plan works like that—or can. Think about your IRA or 401(k), for example. The returns per dollar invested do not depend on your income. Rather, every dollar earns exactly the same return.

Which must be so with a private company. If a socially-conscious mutual fund tried to pay lower returns to richer people, the rich would simply take their money elsewhere.

So there really is something different—something social —about Social Security. It may be the most effective redistributive program our country has. And that’s not something you can privatize.

July 26, 2004 “What’s good for business?”
With the opening of the Democratic convention today, the political season kicks into high gear. As a Kerry partisan, I am frequently asked whether business should fear a Kerry presidency. My answer is simple: No!

This is déjà vu all over again. Twelve years ago, many business people were worried about Bill Clinton. But his two terms gave us the best economy in a generation. More than 22 million new jobs were created. Profits soared. And the stock market boomed as never before.

If you thought Clinton was bad for business, you probably should worry about John Kerry—for the two men think a lot alike on economic policy.

But then again, if you thought the Clinton years were bad for business, you probably shouldn’t be running a business.

Looking back into history, the record shows that the economy performs better when Democrats are in the White House. GDP growth is faster. Profits are higher. And the stock market does better.

Here’s a question for you: We’ve had only two recessions in the last twenty years. Who was president during those two recessions? If you answered “George Bush” you were right—twice.

But it’s not just the Bush family. Of the nine recessions since 1950, eight came under Republican presidents.

These nine recessions covered a total of 92 months. And an amazing 84 of them came with Republicans in the White House.

It’s enough to make you wonder why so many business people stick with the GOP.

June 7, 2004 “Time to raise the minimum wage”
You probably haven’t thought about the minimum wage lately. You may not even know anyone who earns the minimum wage. And if you do, they are probably kids.

Well, the federal minimum wage is now $5.15 an hour. That means about $41 for an 8-hour day. Or about $10,000 for a full year of work.

Who can raise a family on $10,000 a year? Do we really want any working American to be paid so little?

The federal minimum wage was last changed in 1997. Try to imagine not getting a raise for 7 years!

While inflation has been low during this time, the purchasing power of the minimum wage has still fallen by a sixth. In fact, the real value of the minimum wage is now close to its lowest level in 50 years.

Isn’t it about time we raised it?

An increase to $6 an hour right away, and then to $7 an hour a year later, would give a badly-needed raise to over 7 million American workers. And by the way, two-thirds of them are adults.

So why not do it?

Years ago, economists would have objected that such an increase would throw many low-wage people out of work. But convincing research over the last 15 years has shown those traditional fears to be overblown.

So here’s my suggestion. Metaphorically speaking, let’s give 7 million working people who haven’t had a raise in 7 years an increase to $7 an hour.

May 10, 2004 “What did he say?”
Well, the oracle has now spoken. No, not Warren Buffet—although he spoke, too. I refer to Alan Greenspan’s Delphic statement at the end of last week’s Federal Reserve meeting.

Greenspan indicated that the Fed has now run out of patience and will soon be raising interest rates. Or did he?

Here’s what the oracle actually said: “At this juncture,… the Committee believes that policy accommodation can be removed at a pace that is likely to be measured.” Let’s translate that into English.

“Removing policy accommodation” is standard Fed-speak for raising interest rates. And “at this juncture” presumably means right now.

Yikes. So Greenspan has just declared that he’s ready to start raising rates. Lock in that mortgage rate now.

But, of course, he could have raised rates last week—and didn’t. So his patience has not completely run out.

In fact, the “measured pace” referred to in Greenspan’s statement places him squarely in the school of thought that says the Fed should start raising rates soon, but should move them up slowly.

Or does it? That’s where the word “likely” comes in.

What’s true “at this juncture” may not be true at the next. And Greenspan never ties his own hands. Indeed, one of his great strengths as Fed chairman has been his ability to adapt to changing circumstances.

So where does this leave interest-rate forecasters? Confused, I suppose. Watch the incoming data very carefully between now and the Fed’s next meeting. Greenspan surely will.

April 22, 2004 “On halving the budget deficit”
Both President Bush and Senator Kerry have pledged to halve the budget deficit within four or five years. The two promises sound alike, but one of them is more believable than the other.

The main reason is a seemingly obscure difference: the budget enforcement rules that Kerry favors but Bush opposes.

To understand the issue, we need to go back in history a bit—ironically, to the landmark 1990 budget agreement under President Bush the first.

That agreement created two rules. One placed a cap on each year’s discretionary spending. The other was the so-called “pay-as-you-go” rule that required Congress to provide a way to pay for any proposed tax cut or increase in entitlement spending.

Those rules turned out to be remarkably effective. In conjunction with the sharp change in budget policy under President Clinton, and the booming economy, they helped turn a huge and growing deficit into a large surplus.

But then, tragically, the budget rules were eliminated under President Bush the second. What a mistake! It allowed Congress to avoid any serious discussion of how to pay for the 2001 tax cut, or the 2003 tax cut, or the new prescription drug benefit for Medicare. You get the point.

So there is a difference. Senator Kerry would enforce his budget promise by bringing back the highly-successful pay-as-you-go rule. President Bush would not. He just wants us to trust his new-found budgetary probity. Which version do you find more credible?

January 5, 2004 “Should I worry about the dollar?”
Everywhere I go these days, people ask me two questions: Will the dollar keep falling? Should I be worried about it?

The first question is easy to answer: Nobody knows! Volumes of economic research show that changes in exchange rates are basically unpredictable.

That said, I have long believed the dollar would fall—and I still do.

Why? Because the U.S. is importing vastly more than we are exporting, foreigners must take our IOUs—roughly $2 billion more of them every business day. As foreign investors gradually conclude they have enough, the dollar will fall. But no one can predict the timing.

The second question is harder. My short answer is that you shouldn’t worry much unless you are a foreign currency speculator.

Some people fret that the dollar will drag down the U.S. stock and bond markets. But history suggests otherwise. Over the last 6-to-9 months, for example, the dollar tanked but the stock market soared.

For a much more dramatic episode, look back at the years from 1985 to 1988. The dollar fell by a huge amount, for more than 3 years. And while we had a pretty bad month in October 1987, both the stock market and the bond market did just fine over the period as a whole. More important, the economy grew steadily.

My guess is that we are now in the early stages of a similar episode. If so, you have more important things to worry about than the dollar.

November 3, 2003 “Down on the farm”
I’ve given up. Economists have been making the case for free trade for over 225 years now. But the message still hasn’t caught on.

In trade negotiations, when one country agrees to open its markets further, that’s called a “concession”. The “concession,” of course, is to allow your citizens to buy things at lower prices. Is that something to apologize for?

Recently, international trade negotiations broke down because rich countries were unwilling to open their markets to agricultural products from poor countries. As usual, a comparative handful of farmers—and perhaps more important, a few giant agribusiness companies—succeeded in forcing hundreds of millions of people to pay more for food than they should.

But as I said, I’ve given up trying to make the economic case for free trade. Maybe a moral argument will work better. Here it is: The fact is that exporting farm products and simple textiles are the two best hopes for many of the world’s poorest countries to advance economically. So, when we in the West erect barriers to imports of crops and textiles from the Third World, we condemn millions of unfortunate people to lives of misery—and, in some cases, even starvation.

For this reason, liberalizing trade in agriculture and textiles should rank high on the humanitarian agenda. I believe it may be the second most-important thing we can do for Africa—after finding a cure for AIDS. And, by the way, did I mention that it’s good economics, too?

September 8, 2003 “In defense of Alan Greenspan”
Someday, a cultural anthropologist will study the lives of bond traders—a curious tribe with their own primitive rituals and icons. Right now, the tribe is mad at Alan Greenspan.

That’s quite a turn of events, really. For it wasn’t long ago that these very same folks were worshipping Mr. Greenspan as if he were a god, imbuing him with magical powers to fix everything.

But then the bond market bubble burst, and members of the tribe lost lots of money. With those losses, they apparently also lost faith in Mr. Greenspan.

Well, I’ll be the first to admit that Alan Greenspan is not a great communicator. He and his colleagues apparently allowed bond traders to believe that the Fed was more worried about deflation than it actually was.

But the truth is that the Fed always viewed the risk of deflation as minor. It was the bond traders who got carried away, not the Fed. Just read what Fed officials actually said and wrote.

And let’s remember that the Fed’s main job is to manage the economy. In that regard, it’s worth recalling what Mr. Greenspan prophesied months ago: that the U.S. economy would snap back strongly after the war in Iraq. There were many doubters at the time. But his prophesy now seems to be coming true.

So let’s forget about the tribal god, and give some credit to the man. His elocution is not the greatest. But he’s one helluva good central banker.

July 7, 2003 “The bond market bubble”
Is there a bubble in the bond market? My guess is yes. But not everyone agrees with me. If they did, bond prices would tumble right away.

The anti-bubble crowd can explain today’s super-low long-term interest rates as follows. First, inflation has fallen, and lower inflation always brings about lower interest rates.

Second, real interest rates have declined because the economy has been so sluggish that the demand for credit has been weak.

Third, and related to the first two, the Federal Reserve has cut interest rates aggressively in an effort to stimulate the economy.

All this makes perfectly good sense. But does it mean there is no bubble?

Well, that depends on how long you think today’s unusual conditions are likely to last. Remember, a 10-year bond is supposed to reflect the market’s assessment of average conditions over the next 10 years.

If you believe:

But if you believe the economy will perk up, and that the Fed will reverse course and raise interest rates before too long, then current bond prices may look pretty bubbly to you.

They do to me, which is why I’m worried. But, apparently, not to most professional bond traders.

Oh well, that’s what makes markets.

May 12, 2003 “The moment of truth”
With the war in Iraq over, Americans are now focusing, once again, on the economy. Before the war, forecasters were divided into two camps—and they still are. But we’ll soon know who was right.

The optimistic camp, led by Alan Greenspan, held that uncertainty over the war was the main factor holding the U.S. economy back. It was doing so by:

The other, more pessimistic, camp saw uncertainty over the war as a smokescreen that obscured the economy’s underlying weaknesses. On this view, the real culprits were:

And none of these problems were alleviated by victory in Iraq.

If the Greenspan camp was right, the economy should now begin to revive, as companies start taking plans off the shelf and putting them into effect. This does not mean the economy should take off like a rocket. But it does foretell gradual improvement—starting more or less immediately.

But don’t be too impatient. The incoming data over the next few weeks will be mostly from the pre-war or wartime periods. It will be late June or July before we get a fix on whether Tommy Franks cured our economy. For now, we must all watch and wait.

March 11, 2003 “The fog of war”
Last week, the news media reported some unconfirmed estimates of the budgetary costs of a war in Iraq—$60-95 billion.

Those numbers may not be right. But never mind. The differences are rounding error.

A fascinating study by William Nordhaus of Yale offers a much more comprehensive view of the costs of the war. And it shows just how colossal the uncertainties are.

For openers, Nordhaus estimates that what might be called the “costs of rebuilding” could easily exceed the costs of prosecuting the war.

By rebuilding, I mean both literal rebuilding—such as repairing the damage done to non-military targets, and figurative rebuilding—such as the costs of stationing peacekeepers in Iraq for years to come.

But even those large costs could be dwarfed by the costs to our economy. Consider two scenarios.

If the war goes badly or drags on, oil prices will go higher. And rising oil prices often trigger recessions. For example, the recession that accompanied the last Gulf War cost about 10% of a year’s GDP. At current rates, that’s over a trillion dollars.

On the other hand, if the war is short and, from our perspective, sweet, it should drive oil prices down. That would give the economy a boost, and add hundreds of billions of dollars to GDP.

So the behavior of the economy makes the other uncertainties look puny. No wonder consumers and businesses are holding back, waiting to see what happens.

January 13, 2003 “Democratic economics”
With Christmas over, ‘tis the season for Democratic candidates to declare for the presidency. Hopefully, policies matter more than personalities. So what sort of economic program should a Democrat run on in 2004? Here are my suggestions.

Start with the Democrats’ current favorite: fiscal responsibility. Yes, by all means, draw a stark contrast between the budget discipline of the Clinton years and its utter breakdown under Bush.

But the Democratic standard bearer needs more than green eyeshades. He must explain why fiscal discipline is so important.

The main answer is simple: In the long run, we don’t have enough money to fund the retirement security and health care needs of all Americans. So we really can’t afford massive tax cuts.

To start with, Social Security needs to see its finances strengthened, not undermined by privatization. Medicare also needs to be put on firmer financial ground—and a real prescription drug benefit added.

In fact, shouldn’t Democrats be pushing for universal health insurance? We are the only industrialized society on earth that doesn’t have it.

Next, the Democratic candidate should promise to stop the environmental onslaught of the Bush years. While the goals of environmental policy should be starkly different, the best methods work through markets, not by command and control.

And last but not least, don’t Americans crave a simpler and fairer tax system? Tax simplification is neither a naturally Democratic issue nor a naturally Republican one. It’s up for grabs in 2004. Someone should grab it.

December 9, 2002 “The bright side”
The recent news about America’s leading financial institutions has been, shall we say, not so hot. Stories of ill-advised loans, preferential treatment, bogus analysts’ recommendations, and the like make a sorry tale.

But there is also a happier story. Think about this remarkable fact. Despite the turbulence of the past three years, not one large financial institution in the United States has failed.

The U.S. economy has weathered its first recession in a decade. The stock market has suffered a crash of staggering dimensions, with trillions of dollars of wealth vaporized. Personal bankruptcies have run high. And there have been several spectacular corporate implosions.

Yet not a single large bank or thrift has gone under. In fact, neither has a single large stock broker or investment bank.

It’s amazing, really. So what did we do right?

A good part of the credit surely goes to the strong capital positions that America’s banks took into this period. And that, in turn, resulted from both tougher government regulations and better business decisions.

Another part of the credit goes to the bank regulatory agencies, which kept an eagle eye out for budding problems.

And a large part goes to the banks themselves. Compared to their counterparts a decade ago, today’s banks are more diversified and have better risk management systems. They are thus better able to weather storms.

In brief, constructive engagement between government and business appears to have paid off in banking. Maybe there’s a lesson here.

November 4, 2002 “A Miscast Hero”
Harvey Pitt is another matter, but I don’t have a single bad word to utter about William Webster. He’s as fine a gentleman as the Republic has to offer.

But would you want him directing NASA?

Why ask such a silly question? Because the SEC just named Judge Webster to be the first head of the Accounting Oversight Board, the panel that is supposed to ride herd over the accounting industry.

Now, accounting is not rocket science. But it is an extremely technical discipline—with its own issues, methodology, and jargon. Much of which is Greek to an outsider. And nothing in Judge Webster’s impressive career has equipped him for this job.

To illustrate my point, try this one on for size:

Suppose a company wants to take assets or liabilities off its balance sheet by selling them to an SPE. That’s a Special Purpose Entity created explicitly for this purpose. Should the minimum share of the SPE that must be owned by an independent third party be set at 1%, 3%, 10%, or more?

While you may not have given much thought to this burning issue, it was central to the Enron shenanigans.

Ironically, the SEC recently proposed a definition of what it means to be a “financial expert” under the Sarbanes-Oxley Act. And it’s pretty clear that Judge Webster would not qualify.

So why did SEC Chairman Pitt chose him? I leave it to you to speculate about Mr. Pitt’s motives. I question his judgment.

October 14, 2002 “There Oughta’ Be a Law”
The Sarbanes-Oxley Act that passed in July was a good start toward fixing some of the problems that were revealed by the corporate scandals at companies like Enron and WorldCom. But it was just a start, and there’s much more to do.

One item is practically crying out for attention: pension security. When Enron, WorldCom, and others imploded, thousands of ordinary employees saw their pensions and 401(k)’s devastated, even though they had nothing to do with any of the shenanigans.

The Sarbanes-Oxley Act requires advance notice of so-called “blackout periods” during which participants in a 401(k) plan cannot sell their shares—and it prohibits executives from selling while ordinary employees are locked in.

Those are positive steps. But the more pervasive problem is that too many workers have too much of their personal wealth tied up in the stock of the company they work for.

The first three principles of investing are: diversify, diversify, diversify. But if you own a lot of stock in the company you work for, you have put yourself in an incredibly risky position. If the company fails, you may lose both your job and your savings.

As someone once said, there oughta’ be a law. After the Enron debacle, Senators Corzine and Boxer proposed limiting the fraction of a worker’s 401(k) plan that could be invested in any one stock to 20%.

It was a good idea, but it never got a serious airing. Now is a perfect time to bring it back.

September 23, 2002 “War and recession”
An interesting debate now rages over whether the United States should go to war with Iraq. The protagonists are political types and former generals, not economists. Which is appropriate, since a war with Iraq would not be fought for economic reasons.

Nonetheless, it is worth asking what war might mean for our economy.

Economists normally think of wars as affecting demand. A military campaign on foreign soil stimulates an economy by boosting government spending. Depending on the circumstances, that additional demand might be:

But a war in an oil-producing region is different. It probably affects supply more than demand. Iraq is not a major oil exporter these days. But a war there still has the potential to disrupt world oil supplies quite severely—if, for example, other nations are drawn into the conflict, or if transportation networks are disrupted.

Bitter experience teaches us that cutoffs in oil supplies, even threatened cutoffs, can lead to spikes in oil prices. That happened in 1973, in 1979, and again in 1990. And in each case, both inflation and recession soon followed.

No one is worried about inflation nowadays. But many people are worried that the United States might slip back into recession.

That is not, by itself, sufficient reason to back away from a fight, if one is warranted. But it’s something to think about.

August 5, 2002
Passage of the Sarbanes bill last week was a good start. But it marks the beginning of a lengthy process of corporate reform, not the end.

One of the villains of the piece, we have learned, is the practice of paying top executives mainly with stock options—an idea that sounded sensible, but backfired by creating perverse incentives.

First, options were designed to align the interests of managers and shareholders. But they don’t, because they give managers an exaggerated share of the upside, but no share of the downside.

Second, the failure to count option grants as business expenses creates a powerful incentive to use them to excess.

Third, overly-generous options can tempt executives to pump up the share price, even if for a short period, and then cash out.

Fortunately, a simple change can solve all three problems: Just replace options by outright grants of the company’s stock. Accounting rules can encourage that change by starting to expense options.

Obviously, the interests of managers and shareholders would be perfectly aligned if companies paid their executives in shares instead of options.

The main objection to expensing options—that it is hard to value them—would disappear if companies used shares instead.

And corporate boards could dull the incentive for short-termism by requiring that top executives hold the stock as long as they work for the company.

Using options to pay executives was a human invention that failed. This is a perfect time to fix it.

July 15, 2002
President Bush has now spoken out on the scandals that are casting a shadow over American business. I have no quarrel with what he said. But it did not go nearly far enough.

The President wants better business ethics and tougher law enforcement. That’s fine. But it doesn’t get to the heart of the matter—which is that some of our laws, regulations, and business practices create incentives for bad behavior. Until these incentives are fixed, law enforcement will be swimming upstream.

Auditing is a fine example of what I mean.

Corporations hire their own external auditors. Do they want the toughest watchdogs on the block?

Accountants often price auditing services as “loss leaders,” hoping to get more lucrative consulting contracts. Does that suggest the sharpest pencils?

The same accounting firm typically audits a company’s books for years and years. Does that suggest a truly independent, external review?

And the regulatory body assigned to police the accounting industry is dominated by the accounting firms themselves. Is that any way to run a police force?

To get the incentives right, auditing needs to become an independent business that stands on its own two feet.

Auditors need to be rotated periodically, to prevent the relationship from growing too cozy.

Management must have no influence whatsoever on the choice of auditor—not even indirectly.

And the nation needs a regulator with both teeth and independence. Let’s all remember that the “P” in CPA stands for “public,” not “private.”

June 17, 2002 “Please get serious”
Sometimes you don’t know whether to laugh or cry while watching the U.S. Congress at work.

You may have noticed that the federal budget is spinning out of control. Part of the deterioration was unavoidable. Revenues always sag when the economy weakens. Part of it is for very good reasons. September 11 th made it clear that we had to spend more money on national security and homeland defense, for example.

But other contributors to our newly-acquired budget problem are self-inflicted wounds. Like larding the anti-terrorism bill with pork, and the piggish escalation of farm subsidies.

About 10 days ago, the House of Representatives struck again. Surveying the fiscal landscape, it concluded that what the country needs now is permanent repeal of the federal estate tax. How’s that again?

One of the main arguments being made today is that the tax law passed only last year—which gradually phases out the estate tax by 2010, only to have it suddenly re-appear in 2011—is ridiculous.

It certainly is. But remember how we got this law.

In a prescient but shameless imitation of Arthur Andersen, Congress decided to cook the books to make the tax cut look less costly than it really was. Now that very piece of accounting chicanery is being used to argue for further tax cuts that will benefit only a few thousand of America’s richest families. And this at a time when the budget is bleeding.

Earth to Congress. Please get serious.

May 20, 2002 “Say It Again, Alan”
Alan Greenspan said something the other day that was widely ignored. Yes, you heard that right. The national oracle, whose every word is scrutinized for hidden meaning, said something—and hardly anyone noticed.

What he said is that the present cyclical recovery looks quite normal so far. Now that may not sound like news. Dog bites man, so to speak—[not the other way around.] But it is news when you juxtapose it against the many claims that the recovery will be weak, or jobless, or profitless.

Don’t believe the naysayers. Believe Alan Greenspan.

The following is my list, not Greenspan’s. But here are a few things that typically happen in the early stages of a recovery:

So what signs are we seeing now that are feeding the chorus of pessimism?

You get the picture. It’s early yet, but so far this recovery seems to be playing out according to Hoyle. Maybe Alan Greenspan should say it again—louder.

March 18, 2002 “Getting to know you”
I thought we knew at least two things about President Bush’s economic policy: He doesn’t like taxes, and he doesn’t like bailouts.

The 2001 tax cut was surely the president’s signature piece of legislation. And the administration steadfastly refused to bail out Argentina from its currency woes or California from its electricity problem—not to mention Enron.

It all seemed consistent—until the steel industry came along.

Make no mistake about it. The president has just ordered a bailout that is paid for by taxing every user of steel. Domestic producers will get to keep the taxes they collect, while foreign producers will turn theirs over to the government. That’s how a protective tariff works.

Is there an economic rationale for saying yes to steel, but no to Argentina and California? The case for a bailout is strongest when the need is temporary, and an important public purpose is being served.

Does steel qualify? Well, the industry has been getting protection for more than 30 years—and it still needs to restructure. That doesn’t seem temporary.

And while saving the jobs of steelworkers is laudable, we know that many more non-steel workers will lose their jobs because of the tariff. So where’s the public purpose?

The real case for bailing out steel is, of course, political. Neither Argentina nor California can put a swing state in the Republican column. But the steel bailout might.

For that, the president will tolerate both a tax hike and a bailout.

February 25, 2002 “Tax Cut Confusion”
A debate is simmering over tax cuts.

Many Democrats argue that the tax law passed last year was a mistake. It is hurting the economy by pushing up interest rates, they say. Some even advocate delaying the tax cuts that are scheduled for future years.

Republicans reply that the tax cut was beautifully timed to give the economy a boost just when it needed one. It would be crazy to raise taxes in a recession, they say.

Curiously, both positions are right. To see why, we need to draw a sharp distinction that has been ignored in this muddled debate—between a current tax cut and a future tax cut.

A current tax cut puts money in people’s pockets. If they are Americans, they will spend it.

But a promise to cut taxes in the future provides no additional cash. Instead, the bond market perceives that the long-run fiscal outlook has darkened, and reacts by putting up interest rates.

So while current tax cuts stimulate the economy, future tax cuts probably depress it. Which is why both parties are right.

The front end of the 10-year tax cut probably helped cushion the recession, just as Republicans say. But the back end is probably a drag on the economy right now, just as some Democrats say.

The distinction suggests a solution: Why not retain the past tax cuts, but delay or cancel the future ones?

It’s a good question for Congress to ponder.

December 17, 2001 “Depression in a Recession”
I don’t expect to elicit much sympathy by saying this, but these are depressing days to be an economist.

The United States, and indeed much of the world, is in recession—which is depressing enough. But on top of that, we have to endure daily reports from Washington on economic policy.

Start with fiscal stimulus. The need became crystal clear on September 12th—giving the President and Congress a real chance to step up to the plate.

They did. But they have yet to take the bat off their shoulders.

More than three months have now passed without a stimulus bill—proving, I suppose, that partisanship runs deeper than patriotism. Both parties share the blame. But the House Republican bill set new lows by trying to pawn off an egregious giveaway to corporations as stimulus.

Then there is trade policy. Yes, fast-track authority passed the House—by a single vote. Good news, I suppose. But the bill was crafted in such a partisan way that hardly any Democrats supported it.

And to get even that underwhelming level of support, President Bush had to offer shameless protection to, among others, the steel and textile industries.

The textile case, which switched the vote of one crucial South Carolina Congressman, is particularly sad, since it would renege on trade benefits promised to some of the poorest nations in the Caribbean.

We seem to be practicing the “ Vietnam principle” on trade policy—destroying free trade in order to save it.


November 5, 2001 “September 11th changed everything”
As a card-carrying economist, I never thought I’d find myself arguing that the United States should become self-sufficient in energy. But September 11 th changed everything.

We economists believe in the virtues of international trade. Since oil can be obtained much more cheaply in the Middle East than here, standard arguments show that is more efficient to import oil and export things we make better—like aircraft, computers, and wheat.

As straight economics, it makes no more sense to wean ourselves from imported oil than it does to wean ourselves from imported textiles or sneakers. But more than economics is involved here.

We knew this before the attacks. But recent events leave no doubt that our dependence on foreign oil weakens our geopolitical hand quite seriously.

Our alleged “friends” in Saudi Arabia are a case in point. They have been so uncooperative that we should be telling them to take a walk. But, of course, we need the oil.

And that’s where the economics comes rushing back. Energy independence for the United States would be very expensive—which is precisely why economists have long scoffed at the idea.

To make a serious dent in our appetite for imported oil, we may have to break several traditional taboos. Like relying more on nuclear energy. And levying much higher taxes on fossil fuels.

Ideas like those have been considered “un-American” up to now. But, as I said, September 11 th changed everything. Let the debate begin.

October 22, 2001 “Criteria for economic stimulus”
Three truths about the much-discussed economic stimulus package should be self-evident.

First, it should be nonpartisan, so it can be enacted quickly—else the help will arrive too late. That should eliminate the favorite hobby horses of both Democrats and Republicans.

Second, it must elicit new spending quickly—or, once again, the stimulus will come too late. That should eliminate a host of tax cuts and spending programs that, whatever their merits, are inherently slow-acting.

Third, it must be clearly temporary, so it doesn’t ruin the long-run budget picture. That should eliminate permanent tax cuts.

Unfortunately, many of the proposals that have been bandied about in Washington fail one or more of these tests. Some fail all three.

Here’s an idea that passes with flying colors: Let Congress reimburse 100% of the revenue lost by any state that agrees to cut its sales tax 1 or 2 percentage points for one year only.

This proposal is neither Democratic nor Republican. What state legislature, regardless of party, wouldn’t like to offer its constituents a tax cut that doesn’t cost it a dime?

Both legislatively and administratively, cutting the sales tax is about as simple as you can get—though Congress would probably add some special provisions for states with no sales tax.

The tax cut would go only to consumers who spend money, and it would start at the first jingle of a cash register.

In sum, it’s nonpartisan, fast, targeted, and temporary. What are we waiting for?

September 10, 2001 “Don’t cook the books”
President Bush’s Social Security Commission is in a bind. Everyone knows that fixing Social Security will require a large infusion of cash. But the tax cut has given all the money away. What to do?

Unfortunately, the Bush administration has established a precedent: Whenever money is short, fudge the accounting. Some people worry that the Social Security Commission may be pressured to do the same.

The Center on Budget and Policy Priorities has recently warned of three accounting gimmicks that have already been proposed—though not by the Commission.

The first is double counting. Suppose you credit some payroll tax receipts to the Social Security Trust Fund, but actually deposit the money in private accounts. In business, that gets you arrested. In government, Congress can make it happen by what is called “directed scoring.”

The second trick is cleverer. If the Trust Fund is short, it can borrow the rest. Of course, borrowing doesn’t get you out of debt. But here’s the catch. Social Security accounting is done on a 75-year period. So paying back a loan more than 75 years from now won’t count as an outlay. Sounds shameless. But it’s legal.

The third approach is dynamic scoring. The idea is to claim that privatization will produce more revenue by making the economy grow faster. If that reminds you of “supply-side economics” and the Laffer curve, it should.

Hopefully, the Commission will reject each of these three gimmicks. But, if you hear any of them being discussed, hold onto your wallet—and call your Congressman.

August 27, 2001 “Faith-Based Economic Policy”
I read in the papers that President Bush’s “faith-based” initiative is in trouble. Seems that people from both the church and the state remembered that there are good reasons to separate the two.

But don’t worry. The President is proceeding apace with several other faith-based policies.

Start with faith-based tax policy. Only blind faith in the God of False Accounting could have justified the tax bill that passed in May—which goes well beyond fuzzy math, into the realm of numerology. How else could anyone believe that the 10-year cost of the tax cut will be only $1.35 trillion? Or that the estate tax will die in 2010 only to rise from the grave a year later? Or that the entire tax cut will disappear like an apparition in 2011?

Then there’s faith-based environmental policy. The President scrapped the Kyoto agreement, but offered nothing in its place. So I guess we’re supposed to pray that the scientists have it wrong. He also told Californians to put their faith in the free market, even though the market was broken and far from free.

There’s a pattern here. I’m worried that faith-based Social Security reform might be next. That’s certainly the way the issue was handled in the campaign. The Bush team assured us that everything would be fine if we put our faith in the stock market.

Fortunately, the President’s Social Security Commission includes a number of sober-minded members who understand the hard realities. Let’s all pray that they aren’t pressured into keeping the faith.

July 16, 2001 “Are We There Yet?”
All of us who have raised children remember a scene like the following. You pack up the family car for a trip to, say, the beach—carefully remembering to bring lots of distractions for the kids. After driving for about a mile, one of them pipes up, “Are we there yet?”

Well, that’s the way the financial markets treat the Federal Reserve. After the Fed embarks on either an easing cycle or a tightening cycle, it takes only a few months before we start hearing that monetary policy is either working unusually slowly, or not working at all. Something has changed, we are told, to make this episode different from the past.

That’s the stage we’re in right now. The Fed started cutting interest rates just 6 months ago. The center of gravity of its 6 rate cuts to date is in March. Yet I’m constantly being asked why the monetary medicine is taking so long to work this time around. The answer is simple: It isn’t. History teaches us that the economy should not feel the major effects of the Fed’s rate cuts for several more months. At least so far, things are running close to form.

Now, I don’t mean to imply there is a mechanical regularity to the way Fed policy works. What we call “the lessons of history” are actually statistical averages. Sometimes rate cuts work faster than average, sometimes slower. But anyone who thinks monetary policy is already behind schedule has forgotten how long it takes to drive to the beach. We are not there yet.