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Ed Dolan

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  • Will Europe's Financial Crisis Finish the Euro and the EU? [View article]
    A good summary of the EU's troubles. One further issue needs to be considered--who exactly is being bailed out by all of these bailouts that are being discussed? It seems to me that it is not so much countries, national governments, or banks that are being bailed out as their creditors. The governments are suffering political losses as a result of forced austerity and loss of sovereignty, and the populations are suffering from lost income and jobs. Meanwhile, the guiding principle seems to be that creditors cannot be allowed to suffer any losses at all, whether they are holders of Greek or Irish bonds, or creditors of Irish banks (to whom the Irish government, unwisely in my view, extended blanket guarantees). The untenable idea that debt holders must never be allowed to take losses is perhaps the greatest threat to the euro at this point. Is Angela Merkel really the only one who understands this?
    Nov 17 10:18 AM | 15 Likes Like |Link to Comment
  • U.S. Employment-Population Ratio Hits New Low: Why It Matters for the Budget Debate [View article]
    Howard hits a key point with his example about Iranian oil subsidies--whenever the government creates a class of free riders, they take/use/buy too much of whatever it is, leaving someone else to pay. That's why tax reform is such an important part of any program of fiscal reform. Get rid of the loopholes for universities, unions, corporations, homeowners, charitable foundations, everyone; use the proceeds partly to pay down the debt and partly to lower marginal tax rates. How can you hate taxes and love tax loopholes? It is the loopholes that produce most of the bad effects--drive up marginal rates to kill incentives, distort behavior, and create class warfare between the taxpayers and the tax privileged.
    Aug 10 10:13 AM | 12 Likes Like |Link to Comment
  • India's Secret Weapon in its Economic Race With China: Demographics [View article]
    Tony P4--You're right about pollution, and it is a big problem for both India and China. However, I think you're wrong about natural resources. On average, resource-rich countries (Congo, Nigeria, Russia) have performed poorly while resource-poor countries (Hong Kong, Singapore, Taiwan, Japan) have performed well. There are some high-performing resource-rich countries (US, Canada, Brazil) but it is not typical. This is the so-called "curse of riches," subject of another post sometime.
    Nov 11 11:18 AM | 10 Likes Like |Link to Comment
  • John Hussman on the Fake Recovery [View article]
    There is a lot too this, especially the point that losses are not yet fully realized and the financial system is less solvent than it looks (or is allowed to look, by regulators). On top of that, there is one other thing that financial reform has not fixed: The moral hazard problem. Even if banks do manage to build up their capital, we have no guarantee that they will not again use it as a basis for taking on systemically unreasonable risks.

    With regard to QE2, it is right to be skeptical but not perhaps to be completely dismissive. There are a couple of untested transmission mechanisms that might be more effective that skeptics think. For example, we don't really know what QE2 will do to exchange rates; a big shock to the dollar might produce some results even if QE2 does little to affect nominal interest rates. Having looked at both sides of that one, I don't think we are going to know until it happens.
    Oct 19 05:57 AM | 9 Likes Like |Link to Comment
  • The CBO Bombshell [View article]
    I have problems with two parts of the argument here.

    (1) One problem is with Mulligan's contention that high marginal tax rates (as he has measured them) are a significant cause of increased part-time work. The hypothesis sounds plausible, but it does not match up well with the data. Higher marginal tax rates would mainly affect the voluntary component of part-time work, what the BLS calls part-time "for non-economic reasons" (currently about 3/4 of all part-time workers.) However, if you put Mulligan's chart side by side with trends in voluntary part-time work, you see that voluntary part-time work increases when Mulligan's measure of marginal tax rates increases, and vice versa. There is a very poor fit. You can see the two charts side-by-side in this post:

    (2) Rather than saying that the ACA "creates incentives for people to work less," shouldn't we be saying that it "removes incentives for people to work more?" That is to say, if people are now working, or working full-time rather than part-time, only because that is the only way they can get insurance to cover pre-existing conditions, etc, and if the ACA makes it possible for them to get insurance without the unwanted job or unwanted hours, isn't that a good thing? Most tax reform experts that I have read think that linking health insurance to work, as our tax system has done in the past, is a bad thing, not a good thing. If we wanted to "strengthen the economy" by getting people to work more hours than they want to, we could just repeal the 13th amendment.
    Feb 10 09:41 AM | 6 Likes Like |Link to Comment
  • India's Secret Weapon in its Economic Race With China: Demographics [View article]
    TonyP4 Your coconut theory is good. I would just vary it this way: Before long, someone comes along and builds a fence around the coconut tree. Now the focus of every clever and energetic person on the island is, "How to get control of the gate? When I get control of the gate, how big a kickback can I get for letting my friends come in?" Eventually, the most ruthless thug on the island gets control of the gate, and the rest of the sad story of the "curse of riches" unfolds.

    Not room here to get into the whole population issue. Google "Julian Simon." He has already covered it.
    Nov 11 02:49 PM | 6 Likes Like |Link to Comment
  • Why America Must Focus on Domestic Energy Solutions Instead of Imports [View article]
    I give a very strong thumbs-up to this article. What would I add? Only that the points Petersen makes do not apply to fiscal stimulus spending alone. The same points need to inform the other side of the fiscal policy equation, tax policy.

    Most realistic observers--no, change that, all realistic observers--are convinced that the United States cannot make the transition to long-run fiscal sustainability without some revenue increases. But for the moment, I am willing to set that argument aside, and look at tax policy on the assumption, arguendo, that total cyclically adjusted tax revenues will remain unchanged as a percent of GDP.

    From that starting point, what kind of tax policy makes sense? Again, all realistic observers agree that pro-growth tax reform should proceed in the direction of broadening the tax base and simultaneously reducing incentive-killing high marginal tax rates. Combine that with Petersen's point about encouraging a shift from oil to gas, and what do we get? We get a strong case for some form of carbon tax. An appropriate carbon tax is broad-based enough to raise a lot of revenue, thereby allowing reduction of marginal rates in whatever area offends you most, whether it is payroll, personal income, or corporate taxes. At the same time, since the carbon content per Btu of natural gas is significantly less than that of oil, a carbon tax tips the balance in favor of gas.
    Oct 26 05:23 AM | 6 Likes Like |Link to Comment
  • Why the Fed Can't Fix Unemployment [View article]
    Well, I'm not sure I quite agree with the causality implied by this post--the idea that raising interest rates would increase investment and therefore reduce unemployment. I always thought it was the other way around--rising investment leads to growth, lower unemployment, and higher rates.

    However, leaving that issue to one side, I agree that there is something to the view that a long period of low interest rates can cause structural damage to the economy, and slow the recovery of unemployment after a crisis. The Austrian view of the business cycle has always emphasized the tendency for capital to be drawn into the wrong sectors during a boom, and that does seem to fit with the 1990s boom (dot coms) and the 2000s boom (residential housing). I would add that there can be misplaced investment in human capital as well--too many people acquiring skills as construction workers who then take too long to find employment elsewhere after a crisis.

    BTW, Bernanke, according to his Friday speech, does not seem to believe in structural unemployment, unlike some of his Fed colleagues.
    Oct 20 05:43 AM | 6 Likes Like |Link to Comment
  • Three Big Dangers Facing China's Economy [View article]
    You frame your comments about the effects of a possible renminbi appreciation in the context of interviews with individual clients, but readers should know that econometric studies of trade elasticities point to the same conclusion. For example, in a recent post, Menzie Chin of Econbrowser concludes "It is likely that even if the US-China trade balance were to be affected [by real appreciation of the yuan], the overall US trade balance would likely be little affected, since that is driven by domestic saving-investment balances, and the value of the US dollar relative to a broad basket of currencies." (See Chin,

    Thank you, then, for this contribution to the debate. With all professional humility, I am the first to admit that one good anecdote is worth a bushel basket of econometric studies.
    Oct 19 05:25 AM | 6 Likes Like |Link to Comment
  • Why QE2 Is Both Unnecessary and Foolish: Part II [View article]
    This is a pretty good summary of arguments against QE2, but it should be no surprise if the Fed goes ahead despite having your numbers right there on the table in front of them. And they will have them--whatever else you say, the Fed staff preps the FOMC pretty well for these meetings. But your numbers won't make a big impression on the pro-QE faction, which seems likely to have a majority.

    (1) The pro-QE faction wants inflation to tick up a little, to 2 or 3 percent, so the signs of rising PPI, etc. are encouraging to them. (See my post on rebasing the other day ). Besides, they will have some numbers on the table that show lower inflation, and those will offset the ones you cite. For example, some at the Fed seem to be paying a lot of attention to the trimmed-mean CPI and median CPI, which are below 1% now.

    (2) There is good reason to believe that the pro-QE faction at the Fed wants the dollar to depreciate further, although they are prevented by diplomatic considerations from saying so. That is seen as a way of boosting the net export component of demand. So expect warnings about the dollar to be brushed aside.

    (3) The best argument against QE2 is the worry about asset and commodity price bubbles, which you rightly point to. However, this cuts no ice with the Bernanke faction, which as a matter of principle thinks that monetary policy should pay little or no attention to asset prices.

    In short, we can't be surprised if a majority of the Fed turns a blind eye to the arguments you advance.

    BTW, I note that Roubini is putting 20% odds on just a token QE2 at the coming meeting, if that gives you any comfort. And as a last resort, you might draw additional comfort from the fact that many economists think QE2 will be a complete damp squib, with little effect one way or another on the economy. We won't really know about that until it happens.
    Oct 27 11:16 AM | 5 Likes Like |Link to Comment
  • Latest Inflation Data Show Little Sign That Gasoline Prices Are Derailing The Recovery [View article]
    Nice! One line of type, and wrong twice! Good work!

    1. Trimmed mean inflation also subtracts out the prices that FALLmost (or rise least), for example, natural gas. No bias toward inflation or against it.

    2. If it is a lie, it is not Obama who is telling it. Sandra Piantino, President and CEO of the Cleveland Fed, has had her job since 2003, which makes her a Bush appointee, if my math is right.
    Apr 15 09:14 PM | 4 Likes Like |Link to Comment
  • Latest Inflation Data Show Little Sign That Gasoline Prices Are Derailing The Recovery [View article]
    "Those who live in ivory towers and pontificate about the "real" economy while being totally removed from it, should really experience how the 99% live. "

    Interesting thesis. Now university professors are in the 1%. Salaries must have gone up while I wasn't looking.
    Apr 15 10:32 AM | 4 Likes Like |Link to Comment
  • Year-End Review of Dollar: Very Weak [View article]
    Thanks for some good news to start off the year. All through 2010, I read one after another article on how much the U.S. economy was being damaged by an excessively weak yuan. As far as I can see, all the benefits that would flow from a stronger yuan (weaker dollar vs. yuan) would also flow from stronger currencies of any of our trading partners. On the whole, I see the weaker dollar as supporting the administration's goal of doubling exports--a goal that does not seem as impossible as it did when it was first announced. At the same time, a weaker dollar should cut imports, which will both support import-competing sectors of the U.S. economy and make room, at least in principle, for a reduction of the government's over-reliance on borrowing from abroad.

    CBP sees the situation as "grim" and "very unpleasant" because of possible inflationary consequences. Yes, other things being equal, a weaker dollar does tend to push up the prices of imported goods and any domestic goods that use imported inputs. But, at a time when inflation is running far below the Fed's 2% target, this is not a bad effect. It makes it significantly more likely that that QE2 will have its desired goal of raising inflationary expectations back to their target track, boosting aggregate demand, and reducing unemployment. As soon as this result materializes, the Fed can begin to exit from QE2 and bring markets back to normal.

    A couple of technical footnotes: (1) Thanks, CPB, for including inflation-adjusted exchange rate charts. You are right, it is the real, not the nominal rate that matters. (2) With regard to the 15% overvaluation of the euro based on PPP, did you adjust for Europe's VAT? If I understand correctly, the VAT shows up in the euro price level, but U.S. taxes do not. If that is what is going on, then would it not be the case that the dollar is just about at parity ex-vat?
    Jan 1 10:39 AM | 4 Likes Like |Link to Comment
  • What if Ireland Doesn’t Take the Bailout? [View article]
    Yes, yes, very good! Why are so few people telling the truth--that this is not a bailout of "Ireland" but a bailout of British and Continental banks, and of other unsecured creditors who supposedly knowingly put their money at risk in the craziness of the Irish property bubble?

    It is, to begin with, all horribly unjust. Sure, the Irish government made mistakes, but the creditors made big mistakes too. They aided and abetted the property bubble. Justice requires them to share the pain. If I were wielding the scissors, I'd aim for haircuts right down to the roots.

    Justice aside, has anyone thought about the moral hazard involved?

    And what kind of bailout is this, anyhow, with such punitive conditions? The supposed bailout, consisting of loans with interest rates at or above market rates, is following a lender-of-last resort model. Such a model, as Walter Bagehot recognized a century and a half ago, is suitable only for entities that are fundamentally solvent, but are suffering from liquidity problems. This isn't just a liquidity problem. It doesn't look to me like Ireland is or can be solvent unless and until it breaks its foolish pledge to guarantee all of the banks' unsecured creditors.
    Nov 29 10:25 AM | 4 Likes Like |Link to Comment
  • India's Secret Weapon in its Economic Race With China: Demographics [View article]
    Capt. Spaulding: Amen!
    Nov 11 03:18 PM | 4 Likes Like |Link to Comment