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Friday, September 2, 2011

Inflation is Neither as Boring Nor as Simple as it Seems

One nice thing about Dean Baker's new book, The End of Loser Liberalism, is that it puts the Federal Reserve Bank and inflation under the microscope. This is important and valuable, because too many people wrongly take it for granted that inflation is always a bad thing. To give an example, one graduate level textbook in international political economy that I use (Ravenhill, ed., Global Political Economy) has a chapter discussing theories of how different actors form their preferences about free trade (for or against), exchange rates (fixed or floating, high or low), etc. Notably missing is any discussion of why different people might favor higher or lower rates of inflation. The chapter author simply presumes that inflation is bad.

Yet once upon a time, average middle class people understood the significance of international monetary arrangements and inflation on their lives. These were the people to whom William Jennings Bryan's famous 1896 “Cross of Gold” speech was addressed. Farmers understood that the gold standard was harmful to their interests because it forced low inflation and even deflationary policies that made their debt burden worse. They wanted the dollar backed by both gold and silver (“bimetallism”) in order to have a larger money supply and higher inflation.

The first modern work of which I am aware that discusses who wins and who loses from inflation is William Greider's Secrets of the Temple. (For a fairly recent interview with Greider, see here.) The first level of the story is the easiest. It's hard to see how hyperinflation benefits anyone (though the historical memory of Germany's hyperinflation gave us the Bundesbank with its constitutional mandate to control inflation with no reference to unemployment and ultimately gave us a European Central Bank blindly following deflationary policies). Extremely rapid increases in the price level are so destructive that they outweigh the second factor, which holds in normal times: inflation benefits debtors, who get to pay their debts with cheaper dollars; and it conversely harms creditors, who receive those cheaper dollars.

But who are the debtors and creditors? In general, of course, lenders are wealthier than borrowers. Broadly speaking, older people lend to younger people. Thus, moderate levels of inflation transfer wealth from richer to poorer and older to younger. They make it easier for the middle class to build up assets like home ownership, and more generally for the economy to expand to full employment.

As Greider argued and Baker agrees, the decision to target a particular inflation rate is a highly political one with Fed decisions making it generally more difficult to reach full employment or the bargaining power full employment would give to workers. While the Federal Reserve Board officially has a dual mandate to promote both employment and price stability (in contrast with most central banks which, Baker points out, are responsible for price stability alone), in practice it has done little to promote employment even in the current jobs crisis, whereas it has frequently moved to raise interest rates when unemployment rates were quite high. Baker, as did Greider before him, argues that it is crucial to bring the Fed under more democratic control. Baker concedes that institutional reform of the Fed is a long way off, but argues that in the meantime progressives need to step up public pressure on the Fed to do something about unemployment, comparable in volume to the non-reality-based screams from the Right that what little the Fed was doing would set off massive inflation.

What was news to me, though, is that the Fed refunds to the U.S. Treasury the interest it earns on its assets (primarily “government bonds and mortgage-backed securities”), to the tune of $80 billion in fiscal year 2010. Baker suggests that if, instead of selling these assets off as planned over the next 10 years, the Fed holds on to them, the Treasury will save about $600 billion in interest payments over the period. This is almost equal to the revenue that will be gained by letting the Bush tax cuts for the wealthiest 2% of Americans expire.

Baker's main point is quite sound: progressives need to pay a lot more attention to the Fed than they have, and they have to amplify the voices of the few economists who have called for the Fed to announce that it wants a higher rate of inflation than 2%. The stakes are too high, and the general lack of knowledge means that there is quite a bit of room for organizing to make progress if the information gap is closed.

Thursday, September 1, 2011

Link to liveblog and video of yesterday's talk in Raleigh

One of the sponsors of my talk yesterday, NC Policy Watch, put up a liveblog and video from the event. The volume is a little low, so you will need to crank it up on your computer after the 30-second ad at the beginning. You can find the presentation here.

Thanks to NC Policy Watch and the NC Budget and Tax Center for organizing this lively event.

Tuesday, August 30, 2011

Speaking in Raleigh on Wednesday

Wednesday I'll be speaking at noon in Raleigh, NC, as part of North Carolina Policy Watch's "Crucial Conversations" series. This talk will focus on my book, Investment Incentives and the Global Competition for Capital, and emphasizing policies needed to control subsidies for investment. I would say that there are three main ones:

Transparency: Taxpayers have to be able to see what governments are spending to attract investment. North Carolina right now is suffering from a problem with a proposed investment seeking incentives, but there is no disclosure of the company or the nature of the project.

Anti-piracy rules: States need to prevent cities, and the federal government needs to prevent states, from giving subsidies to move an existing facility from elsewhere. See earlier posts on "job piracy."

Restrictions on incentives by prosperous areas: Keeping deep pockets jurisdictions entirely out of the bidding for investment helps channel new investment to poorer areas and reduces what poorer areas have to pay. Very ambitious, but I think it is an important long-run goal.

I'll be back to regular posting by Thursday.

Monday, August 29, 2011

$11 million per job? Is that even possible?

The Las Vegas Review Journal reports that Sempra Energy received $55 million in federal tax credits and state incentives to build its 48-megawatt Copper Mountain Solar Facility in Boulder City, Nevada. This is the largest facility of its kind in the country. While construction of the project required 350 people, both sources say that only 5 permanent jobs were created. That would mean each job cost taxpayers $11 million! I've never heard of a cost per job that high in all the time I've been writing about subsidies. A couple of million per job for data centers, I've heard of that. But over $10 million per job? I'm flabbergasted.

I wonder if that is even possible. How do you run a 48MW power plant with 5 people? I understand that it just sits there collecting the desert sun during the daytime. Doesn't it need 24-hour security? Doesn't it need maintenance from time to time? Couldn't some of the 775,000 solar panels suffer damage sometime? Even a few more jobs would quickly lower the per-job cost.

Consider this a plea for help. The energy industry is not my specialty. So, if anyone knows more about solar plants, or Nevada, or especially this project, please let me know what a reasonable level of employment would be, either in the comments of by email. Thanks in advance.

Sunday, August 28, 2011

Is Rick Perry Trying to Make Himself Unelectable?

A couple of great catches this weekend from Think Progress. Rick Perry is campaigning in Iowa calling Social Security a “Ponzi scheme” and saying he “'hasn't backed off' anything in his book,” which is, after all, out less than a year. It's refreshing to see a politician overrule his handlers, but Perry is making it completely clear how far out of the mainstream he is on Social Security.

The fact is, even if we do nothing, after the Social Security Trust Fund is exhausted in 2036, Social Security payroll taxes at their current level will provide about 75% of projected benefits through 2085, according to the 2011 Trustees Report. Getting rid of the income cap on Social Security taxes, currently $106,800, would eliminate the currently projected shortfall, according to the Congressional Research Service (see Table 2 in report). Either way, that's not a Ponzi scheme.

Perry's position makes him highly vulnerable in the 2012 election. If he makes it to the general election, even though the economy will still be doing poorly come November, President Obama will be able to truthfully tell middle-class voters, “Governor Perry wants to get rid of your Social Security.” Since, according to a Pew poll conducted in June, 60% of Americans say it is more important to maintain Social Security and Medicare benefits than to cut the deficit, this argument would be quite harmful to Perry.

What's more, Perry's position is likely to be a liability in the Republican primaries. The same poll showed that a plurality of Republicans, 47% to 44%, favors keeping benefits as they are rather than reducing the deficit. It will be interesting to see if any of the other Republican candidates challenge him on this issue.

Of course, there are lots of polls out there, but I think it's a pretty robust finding that the middle class realizes that it benefits from Social Security. The position of Social Security as a third rail of American politics remains consistent, and Rick Perry will find that out in either the primaries or the general election.