Unemployment Extension versus Bush Tax Cuts

Can the Republican position on tax cuts be any more cynical? Compare their argument for extension with their refusal to extend unemployment insurance unless it is paid for. Here is Representative John Shadegg of Arizona speaking with Mike Barnicle on MSNBC (from Slate):

He's fine with unemployment benefits as long as they do not add to the deficit. Then Barnicle questioned the validity of the position, given that Shadegg supports giving a $700 billion tax break to the wealthiest Americans without paying for it. Barnicle also argued that unemployment insurance provides an "immediate benefit" to the economy, unlike tax cuts for the rich.

"No!" Shadegg said. "Unemployed people hire people? Really? I didn't know that." He continued: "The truth is the unemployed will spend as little of that money as they possibly can."

Any argument, no matter how stupid, is acceptable to make sure that the very rich get their tax cut.

Meanwhile, Diane Rogers makes the sensible wish:

So I make one open wish today, regardless of how politically-unrealistic I’m told this wish is: that policymakers could consider doing at least the “non-crazy” thing with the Bush tax cuts and stop proposing that any of them be permanently extended. Instead of frantically trying to “decouple” the high-end Bush tax cuts from the “middle-class” ones, we should be thinking about the best way to eventually “decouple” ourselves from all of them.

Unfortunately, I do not think our politics will allow this to happen. We suffer from a simple basic problem. Old people vote, young people do not. So the political system, responsive as it is, transfers wealth from the future to the present. It is not just budgets. Think about climate policy. We pollute now to maintain high consumption at the expense of the future climate. Politicians refuse to impose a carbon tax. Why? Because the beneficiaries of saving the earth, younger people, don't vote (I know that future generations cannot vote, but if young people voted at even half the rate of old people, we would have climate legislation).

I doubt we can fix any of our problems until young people vote.

Eichengreen on the Irish Bailout

Barry Eichengreen has an important, and terrifying, article on the Irish bailout.

The Irish “rescue package” finalized over the weekend is a disaster. You can say one thing for the European Commission, the ECB and the German government: they never miss an opportunity to make things worse.

The big problem is the unwillingness of anyone to force bondholders to take a haircut. But if the debt is not restructured, the problem is not solved, just postponed.

One can interpret the intransigence of the German government and its EU allies in two ways. First, they understand neither economics nor politics. As Tallyrand said of the Bourbons, “They have learned nothing, and they have forgotten nothing.”

Alternatively, policy makers in Germany – and in France and Britain – are scared to death over what Ireland restructuring its bank debt would do to their own banking systems. If so, the appropriate response is not to lend to Ireland – to pile yet more debt on the country’s existing debt – but to properly capitalize their own banking systems so that the latter can withstand the inevitable Irish restructuring.

And so it goes.

Political Preference and the Economy

How is the economy doing? According to recent research (see this article) your answer to this question may depend on your political party preferences. Not because economic benefits are doled out to people based on how they voted. Rather, that how people judge the state of the economy can be predicted by their political preferences:

"Partisan predispositions exerted a powerful impact on perceptions of 'objective' economic events," wrote Bartels, "not only in the extreme categories of 'strong' Democrats and Republicans but over the whole range of the party identification scale."

...These aren't idle bluffs. Gerber and Huber have also shown that retail spending is strongly correlated with whether there is alignment between partisanship and who holds the presidency. Democratic-leaning counties spend more after a Democrat is elected president and less after a Republican is (and vice versa for Republicans). Nor is partisan-tinged economic evaluation unique to Americans. Researchers studying British politics in the '90s found the same phenomenon.

It would be interesting to see if economists opinions shared this bias.

QEII and the Carry Trade

The Fed is engaged in a second round of quantitative easing. This seems necessary given the low probability of any future fiscal stimulus. But what if the increase in liquidity just further fuels the carry trade? Interest rates are so low that investors are borrowing dollars and investing in emerging market economies to earn higher rates. As Japan used to be the borrowing center for the carry trade, now it is us.

Of course, the carry trade is more profitable if the dollar depreciates relative to other currencies. If QEII is effective in generating some extra inflation, and if investors expect this, this will induce carry traders even further, unless nominal interest rise right away. The Fisher effect would predict an immediate rise in nominal interest rates to compensate for expected inflation. But we are not seeing that. But if investors expect future dollar depreciation even without a current interest rate response we get a super environment of the carry trade.

That may be why so many emerging market economies are mad. They are getting the brunt of the carry trade impact.

That Pledge Lasted Long

This pledge lasted a long time.

In a bigger shift from his campaign pledge to end earmarks, he tells me that they are a bad “symbol” of easy spending but that he will fight for Kentucky’s share of earmarks and federal pork, as long as it’s doled out transparently at the committee level and not parachuted in in the dead of night. “I will advocate for Kentucky’s interests,” he says.

For more, see here.

Should we applaud Senator Paul for realizing that his pledge was relatively stupid, and honestly indicating that he will renege? Earmarks do not add to spending, they just substitute legislator for administrator decisions on how to spend. Or should we castigate him for taking so little time to renege?

Hat tip to Marginal Revolution.

Who Balances their Budget?

This part of Rand Paul's acceptance speech caught my attention:

Putting a special emphasis on the word "respectfully," Paul told the crowd he would "respectfully" ask the U.S. Senate to deliberate on why the American people are unhappy with what's going on in Washington: "The American people want to know why we have to balance our budget and they don't?" Paul also said he would "respectfully" ask the Senate to deliberate this issue: "Do we wish to live free or be enslaved by debt?"

Am I missing something? Aren't we suffering from the collapse of a housing bubble brought on by people borrowing more than they could afford? Aren't we suffering from a foreclosure crisis now? Isn't foreclosure the result of homeowners defaulting on their debt? Since when do US households balance their budgets?

Is this the realism we have to look forward to? At least Jim Bunning pitched no-hitters in both leagues (one a perfect game) and was the only person to strike out Ted Williams three times in a game. You could cut that kind of guy slack for moronic comments.

Is Obama a Keynesian?

Everybody is linking to this great video questioning Obama's Keynesian "heritage" from the March for Sanity. Worth another view.