Economy Experts

A BRAC For The Budget

Mon, 02 Nov 2009 13:30:00 GMT

The New York Times reports that a group of 10 senators (none of them Republican) has called for creation of a bipartisan commission on the budget, akin to the Base Realignment and Closure Commission, that would come up with a long-term plan to reduce budget deficits, including a solution to the impending funding shortfalls for Medicare and Social Security. House Speaker Nancy Pelosi, D-Calif., is opposed, and no prominent Republicans have endorsed the idea. Is there any hope for this idea, could it work, and what other approach might be more effective? Without a credible plan to reduce deficits, how soon would it affect economic growth?

James K. Galbraith responded to A BRAC For The Budget on November 6, 2009 06:37 PM

Mon, 02 Nov 2009 13:30:00 GMT

Of all the utterly half-baked ideas. We have here ten King Canutes, who think that a commission can achieve what the laws of economic accounting, under the circumstances facing the United States, plainly forbid. Let's go through the exercise. 1. We know that Y = C + I + G + X - M. This is an accounting statement. It says that total national income is the sum of consumption, investment, government spending and net exports. It's in every textbook, often on the first page. From this is follows that: 2. [S-I] = [G-T] + [X-M] . This...

James R. Horney responded to A BRAC For The Budget on November 3, 2009 10:11 AM

Mon, 02 Nov 2009 13:30:00 GMT

Normal 0 false false false MicrosoftInternetExplorer4 /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin:0in; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} Commission No Silver Bullet, Actually Could Set Back Deficit Reduction Effort No bipartisan commission on deficit reduction can magically eliminate the deep divisions that exist today among lawmakers over budget issues. And, while creating a commission in the face of such divisions may seem harmless, it could actually set back the cause of deficit reduction. To be sure, commissions have sometimes proven useful when a bipartisan...

Isabel Sawhill responded to A BRAC For The Budget on November 2, 2009 04:55 PM

Mon, 02 Nov 2009 13:30:00 GMT

I applaud the 10 Senators who are calling for a bipartisan commission on the budget. Too bad there are no Republicans in the group so far but perhaps that will change. And too bad some other Democrats, such as Pelosi, are also opposed. In both cases, they are ducking their responsibilities unless they come up with specific proposals to reduce long-term projected deficits – which is not happening and is not likely to happen any time soon. In the meantime, we are courting all kinds of trouble from slower growth, to an economic crisis, along with reduced flexibility to...

Charles Calomiris responded to A BRAC For The Budget on November 2, 2009 08:51 AM

Mon, 02 Nov 2009 13:30:00 GMT

Whether this is a good idea depends on who is pushing for it and why. I served on a Congressional commission (the Meltzer Commission in 1999-2000, on the reform of the IMF, World Bank and other multilateral financial and trade agencies), and I would say that it was one of the more effective commissions in recent years, but that isn't saying much. The work of such a group only has influence if the dominant party wants to (1) appoint real experts, and (2) follow their recommendations. Otherwise, the wisdom of a commission fades quickly no matter how good its analysis....

Limiting Compensation

Mon, 26 Oct 2009 12:00:46 GMT

What do you think of the Treasury and Federal Reserve actions to limit compensation for executives at large financial companies? The Treasury action would reduce compensation by 90 percent for the highest-paid 25 executives at each of the seven companies that received federal bailout aid, and soon extend this to the top 100 executives. The Fed plans to review compensation as part of its supervision of large banks (a duty it would lose according to Senate reform proposals.) Among other questions, the securities industry is wondering whether the new Fed rules would cover executives for bank-owned subsidiaries.

Is the Treasury plan mostly politics? A powerful incentive to pay back TARP funds and avoid the risk of future bailouts? Will it be possible to attract competent management at those companies? Can the Fed be trusted to curb compensation when it never recognized that as a problem before?

Grover Norquist responded to Limiting Compensation on October 26, 2009 11:47 AM

Mon, 26 Oct 2009 12:00:46 GMT

Wage and price controls are not a new idea. They are a very old idea with a consistent history of creating more problems than they solve. There has always been a stain of thinking among those men and women who consider themselves wiser than the market to believe that they know the value of a product or service. The only real value is what men and women freely choose to pay in a free market. Everything else is a power play by special interests and the government bureaucrats that serve them. The men and women who lost billions...

Charles Calomiris responded to Limiting Compensation on October 26, 2009 10:22 AM

Mon, 26 Oct 2009 12:00:46 GMT

The policies raise separate issues in my mind. One is horrible economic policy that demeans our democracy; the other is a reasonable and perhaps long-overdue step. The White House action to limit the amount of pay at the seven firms receiving government assistance, and to reverse pay decisions made only a few weeks ago, is transparently political, and that is the only thing transparent about it. The political objectives are to increase the President's popularity (everyone hates Wall Street these days) and to send Wall Street a message: "stop opposing 'change'". This policy will hobble the ability of these seven...

Douglas Elliott responded to Limiting Compensation on October 26, 2009 08:04 AM

Mon, 26 Oct 2009 12:00:46 GMT

“The government just announced two sets of actions to constrain the compensation that banks pay to their top executives. First, Kenneth Feinberg, the administration’s “special master” for compensation at the handful of companies that were most thoroughly bailed out by taxpayers, just announced the agreed compensation levels for the top 25 executives at each of those firms. Compensation levels were halved compared to the banks’ requests and a very high percentage was redirected into company stock instead of cash. Second, the Federal Reserve (Fed) announced draft guidelines to avoid compensation practices that might encourage banks to take excessive risks....

John Maggs responded to Limiting Compensation on October 26, 2009 08:02 AM

Mon, 26 Oct 2009 12:00:46 GMT

Scott Talbott, the top lobbyist for the Financial Services Roundtable has this assessment of the new compensation rules: “The Treasury executive compensation proposal focuses on compensation for top executives at 7 institutions that have accepted exceptional assistance from the federal government. For any institution that accepts taxpayer dollars, reasonable restrictions are part of the territory. It should be noted that Congress has imposed restrictions on TARP companies by limiting tax deductions and prohibiting any incentive compensation. The Treasury proposal correctly focus on reducing excessive risk-taking and eliminating those compensation programs that focus on the short-term, rather on the long-term risk...

TBTF: What Should Be Done About Bank Size?

Mon, 19 Oct 2009 11:41:27 GMT

Debate is heating up over whether the Obama plan for financial regulation goes far enough to curb institutions that become "too big to fail." Simon Johnson and Charles Calomiris discussed the issue here on NPR, and more attention came after Alan Greenspan made a strong statement on behalf of doing more to limit the size of financial institutions. What should be done through regulation, and is any regulation of "systemic risk" inevitably going to designate some banks as TBTF?

Martin Baily responded to TBTF: What Should Be Done About Bank Size? on October 19, 2009 04:32 PM

Mon, 19 Oct 2009 11:41:27 GMT

It is not a good idea to try and limit the size of US banks or other financial institutions, which are in many cases smaller than foreign owned banks. Size limits would encourage the industry to move offshore and would probably encourage institutions to make their portfolios more risky—if they have to cut out some of their assets they will cut out the ones making lower returns. New York is a financial hub for the world economy and needs large banks to sustain its position. Financial services have been one of our most successful export industries and we should not...

Charles Calomiris responded to TBTF: What Should Be Done About Bank Size? on October 19, 2009 09:52 AM

Mon, 19 Oct 2009 11:41:27 GMT

There are means other than draconian limits on size to credibly prevent government bailouts of large institutions. And there are large social gains from retaining large, complex, global financial institutions. As I argue more at length elsewhere, it is worth preserving large financial institutions four reasons. First and foremost, financial institutions need to be large to operate with global scope because their clients are large and global. Small, local banks simply could not provide global corporations the same physical capabilities for trade finance, foreign exchange contracting, and global capital access that large global financial institutions can. Second, there are production economies of scope that offer benefits...

Robert Litan responded to TBTF: What Should Be Done About Bank Size? on October 19, 2009 07:43 AM

Mon, 19 Oct 2009 11:41:27 GMT

Clearly, we have one big “too big to fail” problem, and thus it is tempting to go beyond the antitrust laws and begin breaking up the largest financial institutions to sizes a bit smaller than the TBTF threshold. While I have more confidence in defining where that threshold may be for purposes of stronger systemic oversight, I am less confidence in our collective ability to define that threshold purposes for actually breaking up existing enterprises. We don’t fully know, despite countless regressions, where economies of scale ends and diseconomies of size begin More importantly, the act of breaking up existing...

Alan Meltzer responded to TBTF: What Should Be Done About Bank Size? on October 19, 2009 07:42 AM

Mon, 19 Oct 2009 11:41:27 GMT

Yes. In Congressional testimony and elsewhere I proposed that the Congress should limit too big to fail, leaving the choice of size to the bank. The rule should require banks above moderate size to increase capital more than in proportion to their increase in asset size. That would shift risk from taxpayers to bank owners. As part of this change, Congress and the Federal Reserve should agree on a lender of last resort rule to encourage counterparties of failed banks to hold collateral that the Fed will accept for discounts....

Tax Cuts For Hiring

Tue, 13 Oct 2009 12:30:00 GMT

The New York Times has sparked interest in the idea of a tax credit for job creation, an idea in recent Democratic presidential campaigns (John Kerry and Barack Obama both proposed it) and one that apparently now has some Republican support. According to one version, it might work as a refundable tax credit, with subsidies to money-losing firms or nonprofits. Greg Mankiw summarizes the problem of winnowing out jobs that would have been created anyway. Can this be done efficiently, and should it be done now (or six to eight months from now, the minimum for when it might be enacted)? Are there better tax incentives to spur hiring?

Gary Burtless responded to Tax Cuts For Hiring on October 16, 2009 03:29 PM

Tue, 13 Oct 2009 12:30:00 GMT

A tax cut aimed at spurring job growth is an old and attractive idea. Unfortunately, it is not one that has a conspicuous record of success. The idea seems particularly compelling when unemployment is high and expected to remain high for a long time. The challenge is to craft a tax incentive that encourages employers to add to their payrolls while doing so at an affordable price and without creating unwanted side effects. My reading of the historical evidence is not encouraging. We are a long way from devising a reasonably priced plan with a good chance of success. The closest analogy to the...

Len Burman responded to Tax Cuts For Hiring on October 14, 2009 04:17 PM

Tue, 13 Oct 2009 12:30:00 GMT

With unemployment cresting 10 percent, it is natural to think of ways to boost hiring. Unfortunately, experience with incremental tax subsidies has been disappointing. Evidence from the targeted jobs tax credit of the 1970s suggests that most of the money subsidized hiring that would have happened anyway. While some economists think that a better designed subsidy could work well this time, many are skeptical. The 1970s credit was very complicated because policymakers couldn't resist putting numerous rules and restrictions on it. But politicians are certainly no less likely to do that now. (See Howard Gleckman’s excellent post on this subject...

What About Savings?

Mon, 05 Oct 2009 12:30:00 GMT

There has been widespread speculation that the credit crisis and the recession would lead to a long-term shift in household saving. And saving did rise from the very low levels before 2008 and increased more or less steadily through this spring. But as the "green shoots" improvement in the economy took hold, saving has been dropping, and fell to 3 percent in August. Will this continue, and is it an unequivocal good thing? Low saving was alternately credited during the boom and blamed during the bubble. Will saving need to rise to very high levels, as many economists have argued, to erase deficits, and what are the implications for growth if it does (or interest rates, if it doesn't)?

Desmond Lachman responded to What About Savings? on October 5, 2009 01:56 PM

Mon, 05 Oct 2009 12:30:00 GMT

Last year’s Great Panic abruptly reminded US baby-boomers how ill- prepared they are for retirement. Following that Panic, there would now seem to be a number of compelling reasons to expect the US saving rate to steadily increase over the next few years from its presently low level by historic standards. The most compelling of these reasons is that US household balance sheets have been seriously impaired by years of unusually low saving rates and by the ravages of the financial crisis. In this context, one has to be struck by the fact that US household debt...

Charles Calomiris responded to What About Savings? on October 5, 2009 10:26 AM

Mon, 05 Oct 2009 12:30:00 GMT

I think there is a good case to be made for a protracted period of above-average savings from disposable income. As I pointed out the last time we discussed this topic, savings behavior is a forward-looking decision about building (or rebuilding) wealth. Therefore, it will depend crucially on employment, income growth, and asset prices. If the economy grows slowly coming out of the recession, and job growth is delayed, and asset prices remain flat, savings out of disposable income will remain high as workers protect themselves from the unknown and try to rebuild their retirement wealth through savings from disposable income....