LONDON - marylebone & brick lane, 02/28/09

KIEV

After Paris Pr�t-�-Porter Fashion Week, where I'll be shooting an episode of The Facehunter Show, I'll be off to Kiev for the Ukrainian Fashion Week. First time in Ukraine, I'm very intrigued.

What is a deficit hawk to do?

I love the title of the Obama administration's budget document, "A New Era of Responsibility." But do the numbers back up the marketing? In particular, should deficit hawks rejoice in this new found responsibility in the nation's capital? Are we about to put federal government on a sounder fiscal footing, leaving a smaller debt to future generations?

Few economists would blame either the Bush or Obama administrations for running some degree of budget deficit during economic downturns. While we might argue about the size of the appropriate deficit, lower tax revenue and greater outlays on, say, unemployment insurance are a natural and appropriate response to recessions and their immediate aftermath. What is more telling is what happens to the budget picture during periods of economic normalcy.

With that perspective in mind, let's compare the previous and current administration.

During the period 2005 to 2007, the U.S. unemployment rate hovered in the ballpark of 5 percent. What was the budget balance? According to OMB historical documents, the budget deficit averaged just under 2 percent of GDP during those three years.

Now compare these results to the new Obama budget. For the moment, let's put aside concerns about the economic forecast on which the budget is based and take their figures at face value. According to the Obama administration numbers, the economy will reach normalcy of 5 percent unemployment in year 2014, and they project unemployment remaining at that level thereafter. (I infer they take 5 percent to be an estimate of the natural rate of unemployment, which seems reasonable.) What happens to the budget balance when we get to that long-run equilibrium? According to their numbers, under their proposed policies, the budget deficit will average a bit over 3 percent of GDP during that time.

The bottom line: If you are a deficit hawk who lamented the Bush budget deficits, the new administration's budget should not make you feel much better. President Obama will give us different fiscal priorities than President Bush did, but the borrowing and debt imposed on future generations will not be very different, at least if the numbers presented in the Obama administration's own budget document can be trusted.

Girl Your Marginal Benefits

Ever wondered what would happen if someone were to write a love song while sitting in an economics class? Click here to find out. The song is called "Girl Your Marginal Benefits."

Ten Facts about Kevin Murphy

The Chicago economist has a fan club.

food! a delicious self-torture sampler

{each photo links to its shop}

there. what did i tell you. not just food, DESSERT.
edible wedding favors, etc. can't bring myself to look any longer.

ohhhh. lemon cleanse, when will you end.

A Speech from the CEA Chair

Christy Romer defends the stimulus bill.

Thanks to Mark Thoma for the pointer.

#556: um.

why is february so short.

i need to step it up a notch. i've been dilly dallying, using invitation-threading as an excuse to be flighty with other stuff.

well that and i only have so many hours in a day.

this weekend's to do's:
1) check out the rehearsal lunch space
2) visit the jewelry district
3) attempt more paper flowers (this time, 2-ply)
4) finish up the invitations
5) get names/address list from my parents
6) practice patience when the parents don't give me the info
7) don't cry

wishing you a wonderful weekend. and i'm not that good with compliments (giving or receiving)...but you're beyond lovely.

xoxo,
tto

#555: plan b. ish.

i have my centerpieces. kind of.

but i'm getting distracted. by pretties like jessica's centerpieces. i've said multiple times up-down-sideways about not wanting candles in our wedding (too much trouble). but now i'm double thinking that whole thing.


via tying the knot.

see? simple. DIY-able. and very very pretty.

main cause of my centerpiece roaming eye is the paper flower trial last weekend that pretty much failed. i was able to buy an amazing amount of paper at an amazing price and i had hoped that it would work. because that would have been amazing.

but the paper's just not the right weight for the project. not so amazing.

hm. while i was typing this post, i just had a thought. how about adhering two pages together to make thicker paper and THEN attempting the flowers. eh. it might work, it might not. i'll try it tonight. it'll be my last ditch effort until i suck it up and go back to michael's to buy heavier stock.

or until i decide that paper flowers are a no go, period.

or until i decide that rock candy was always the best idea.

or until i decide that candles are the obvious choice.

Rosy Scenario, or the Audacity of Hope?

Here (in red) are the growth forecasts used to put out the new Obama administration budget, followed by the consensus forecast of a panel of "Blue Chip" private forecasters (in blue, naturally). (Source. Go to Table 3.)

2009: -1.2% -1.9%
2010: +3.2% +2.1%
2011: +4.0% +2.9%
2012: +4.6% +2.9%
2013: +4.2% +2.8%

Accumulating the difference, you find that Team Obama projects about 6 percent higher GDP in 2013 than do private forecasters.

A related news story:

The Obama administration's outlook has private economists wondering: Has Rosy Scenario made a comeback?...

Nariman Behravesh, chief economist at IHS Global Insight, a major private forecasting firm, called the administration's forecasts "way too optimistic" and said it could represent a return to the overly optimistic forecasts of previous administrations confronted by surging budget deficits.

"They used to joke during the Reagan years that the highest ranking woman in the administration was Rosy Scenario," he said. "We may be seeing a return of Rosy Scenario."

The actual highest ranking woman on the economic team is named Christy, not Rosy, and here is what she had to say:

Speaking to reporters Thursday, White House economist Christina Romer called the projections an "honest forecast" by the administration's professional forecasters. "I'd reject the premise that we're noticeably rosier," she said. "We certainly are somewhat more optimistic, but certainly nothing out of the ballpark."

Moving the Goal Posts

From the Committee for a Responsible Budget:

In constructing their budget baseline � the metric against which the costs of policy changes are measured � the Administration departed from the practice of assuming a �current-law� baseline, and instead decided to use a �current-policy� baseline. A current-law baseline assumes that changes in the budget will occur as they are scheduled to under the law (i.e. provisions scheduled to expire will be allowed to do so). Instead, Obama�s baseline assumes: 1) the practice of patching the AMT on an annual basis will continue; 2) all of the 2001/2003 tax cuts will be made permanent; 3) the wars in Iraq and Afghanistan will continue to cost as much as in FY2008 (inflation adjusted); 4)Congress will continue to enact �Medicare Pay Patches;� and 5) funding will be allotted for anticipated disaster relief....

Taken together, the measures in the Obama baseline will increase this new current law baseline deficit by $482 billion (excluding interest) in FY2013 and more than $5 trillion over ten years. (Interest payments account for another $1.5 trillion over ten years, but some of this is due to already-enacted legislation such as the economic stimulus). President Obama will use this baseline, rather than a current-law baseline, to assess whether new policies meet the goal of budget neutrality, and from this metric his proposals reduce the deficit by roughly $2 trillion over ten years....

The budget includes many policies that have been omitted in recent budgets, such as the cost of patching the Alternative Minimum Tax and funds for operations in Iraq and Afghanistan. The Administration should be commended for the increase in transparency in the budget resulting from including the policies they support. This is a vast improvement on the past practice of omitting policies that would clearly be part of the budget.

However, by putting these policies not just in the budget, but in the baseline, the Administration gives itself a free pass on paying for patching the AMT, making the 2001 and 2003 tax cuts permanent, and the costs of not abiding by the slated Medicare physical payment cuts. Choosing not to offset the costs of these policies is a clear violation of the PAYGO principle, where the cost of new policies should be offset through additional savings.

Assuming that war spending will continue at FY2008 levels (adjusted for inflation) � an amount even beyond what President Bush�s policy would have required � strikes us as a gimmick to build up the spending amount in order to reduce it and claim �savings�.

Tax Rates of the Rich and Poor

I posted this information a while back, but it is all the more relevant today in light of President Obama's recently proposed tax changes.

From a recent CBO report, here are effective tax rates (total taxes divided by total income) for 2005, the most recent year available:

Lowest quintile: 4.3 percent
Second quintile: 9.9 percent
Middle quintile: 14.2 percent
Fourth quintile: 17.4 percent
Percentiles 81-90: 20.3 percent
Percentiles 91-95: 22.4 percent
Percentiles 96-99: 25.7 percent
Percentiles 99.0-99.5: 29.7 percent
Percentiles 99.5-99.9: 31.2 percent
Percentiles 99.9-99.99: 32.1 percent
Top 0.01 Percentile: 31.5 percent

N.B.: These figures include all federal taxes, not just income taxes.

That is, even before the Obama tax hikes, the rich face average tax rates more than twice those of the middle class, and about seven times those of the lowest quintile. These data do not tell you the optimal degree of tax progressivity, but they do describe the starting point from which policy is working.
---

Update: Here are the CBO data graphed for David Leonhardt's article on the Obama policy changes:

LONDON - fashion week aw 09, bonus

#554: let's eat cake. or something.

i don't think i've ever really talked about or featured cakes on this blog.

and it's because i don't plan to order one. srsly.

i mean. if we do order cake, it'll most likely be yummy sheetcake to serve. not a grandiose wedding cake for display. maybe we'll have a little one so we can do the cake cutting thing. i don't know. to me, the wedding cake is as memorable as the favors. which to me, means it's not that memorable. key words: to me.

i will say that i happen to like one of the major wedding trends (is it fading yet) of serving cupcakes in lieu of wedding cake. fiance and i happen to lurve cupcakes. sprinkles being our fave, of course.

but at $3.75 a pop (as big as they are), i'm not sure we want to go there.

enter starbucks.


$5.95/four cupcakes.

they have vanilla, chocolate, and red velvet. the triad. the trinity. i haven't done the taste test yet. but i would suspect they're good. sugar + butter = friends forever, right?

we haven't discussed yet what we're going to do about the whole cake thing. but when we do, i'll bring this up as an option.

#553: "somewhere over the rainbow".

remember the rainbow on acid talk?


via snippet and ink.

this board is killer. it's so fun...in a 'busy dream' kind of way.

Which budget deficit?

I am in the midst of preparing the 7th edition of my intermediate macroeconomics textbook. The following draft of a new case study is relevant for current policy debates:

Case Study
Accounting for TARP

In 2008, many U.S. banks found themselves in substantial trouble, and the federal government put substantial taxpayer funds into rescuing the financial system. A case study in Chapter 11 discusses the reasons for this financial crisis, the ramifications, and the policy responses. But here we note one particular small side effect: It made measuring the federal government�s budget deficit more difficult.

As part of the financial rescue package, called the Troubled Assets Relief Program (TARP), the U.S. Treasury bought preferred stock in many banks. In essence, the plan worked as follows. The Treasury borrowed money, gave the money to the banks, and in exchange became a part owner of those banks. In the future, the banks were expected to pay the Treasury a preferred dividend (similar to interest) and would eventually repay the initial investment as well. When that repayment occurred, the Treasury would relinquish its ownership share in the banks.

The question then arose: How should the government�s accounting statements reflect these transactions?

The U.S. Treasury adopted the conventional view that these TARP expenditures should be counted like any other spending. When the banks repaid the Treasury, these funds would be counted as revenue. Accounted for in this way, TARP caused a surge in the budget deficit when the funds were distributed to the banks, but it would lead to a smaller deficit, and perhaps a surplus, in the future when repayments were received from the banks.

The Congressional Budget Office, however, took a different view. Because most of the TARP expenditures were expected to be repaid, the CBO thought it was wrong to record this spending like any other. Instead, CBO believed �the equity investments for TARP should be recorded on a net present value basis adjusted for market risk, rather than on a cash basis as recorded thus far by the Treasury.� That is, for the purposes of this program, CBO adopted a form of capital budgeting. But it took into account that these investments might not pay off. In their estimation, every dollar spent on the TARP program cost the taxpayer only about 25 cents. If the actual cost turned out to be larger than the estimated 25 cents, the CBO would record those additional costs later, and if the actual cost turned out to be less than projected, the CBO would later book a gain for the government.

The bottom line: Because of these differences in accounting, while the TARP funds were being distributed, the budget deficit as estimated by CBO was much smaller than the budget deficit as recorded by the U.S. Treasury.

Update: Here is how President Obama's new budget treats the issue:

Estimates of the value of the financial assets acquired by the Federal Government to date suggest that the Government will get back approximately two-thirds of the money spent purchasing such assets�so the net cost to the Government is roughly 33 cents on the dollar. These transactions are typically reflected in the budget at this net cost, since that budgetary approach best reflects their impact on the Government�s underlying fiscal position. The figure recorded in this Budget as a placeholder similarly reflects this net cost concept. The $250 billion reserve would support $750 billion in asset purchases.

------

Addendum: If you teach macroeconomics and would like to consider the 7th edition for your course, please contact Scott Guile at sguile@whfreeman.com.

Moral Hazard

Click on the graphic to enlarge.

Victor Zarnowitz

An obituary for economist Victor Zarnowitz.

POTUS Approval after One Month

Gallup reports:

President Obama's job approval is now 63 percent, which is almost exactly the average over the past 40 years for Presidents at this point in their first terms (62 percent). His disapproval rating is a bit higher than average (24 versus 16 percent).

The least popular president one month in: Ronald Reagan (55 percent).

The most popular president one month in: Jimmy Carter (71 percent).

My Favorite Children's Books

Here.

LONDON - fashion week aw 09, man day, 02/25/09

Ricardian Equivalence

Source. Click on the graphic to enlarge.

The Formula That Killed Wall Street

The Gaussian copula.

Glaeser on the Mortgage Interest Deduction

Ed does not like it.

Leonhardt vs Obama

President Obama yesterday:

In order to save our children from a future of debt, we will also end the tax breaks for the wealthiest 2% of Americans. But let me perfectly clear, because I know you�ll hear the same old claims that rolling back these tax breaks means a massive tax increase on the American people: if your family earns less than $250,000 a year, you will not see your taxes increased a single dime. I repeat: not one single dime. In fact, the recovery plan provides a tax cut � that�s right, a tax cut � for 95% of working families.

David Leonhardt today:

To the extent that Mr. Obama has talked about raising taxes, he has focused on households that make at least $250,000 a year. And their taxes will certainly need to go up. In the last three decades, as the pretax income of the top 1 percent of earners has soared, their total federal tax rate has fallen to 31 percent, from 37 percent, according to the Congressional Budget Office.

But the problem can�t be solved just by taxing the rich. That top 1 percent pays only about one-quarter of federal taxes. Once the recession ends, taxes on the not-so-rich will need to rise, too.

Who wants to be a professor?

The Harvard Crimson looks at the allure of academia.

This Day in History

February 25, 1919:

Oregon passes the nation's first per-gallon tax on gasoline.

LONDON - fashion week aw 09, day 5, 02/24/09

#551: woe.

i feel like crap today.

i just got played bigtime by one of my girlfriends and i'm just not feeling very inspired in general.

so.

Mixed Messages

Chinese policymakers must be bemused, or at least confused. The current message from Washington:

US Secretary of State Hillary Clinton has pleaded with China to continue buying US Treasury bonds amid mounting fears that Washington may struggle to finance bank bail-outs and ballooning deficits over the next two years. "It's a safe investment. The United States has a well-deserved financial reputation," she told Chinese television stations at the end of her diplomatic tour of Asia.

The message one month ago:

President Barack Obama believes China is �manipulating� its currency, his choice to head the U.S. Treasury said on Thursday....Washington will �aggressively� use all its diplomatic tools to press Beijing to move faster on currency reform, New York Federal Reserve Bank President Timothy Geithner said ...U.S. Treasury bond prices fell on worries China could respond to Mr. Geithner�s frank comments by dumping U.S. Treasury bonds.

The inconsistency in the policy here becomes fully apparent only when one understands how China "manipulates" its currency: It keeps the value of the yuan lower than it otherwise might be by supplying yuan and demanding dollars in foreign-exchange markets. Those dollars are then invested in U.S. Treasuries.

In other words, Secretary Clinton is now asking the Chinese to do precisely what Secretary Geithner asked them not to do.

The Spending Stimulus Debate

Brad DeLong of UC Berkeley is Pro.
Michele Boldrin of Wash U is Con.

Epistemological Modesty

David Brooks has a great column today.

Banking Fixes

MIT's Ricardo Caballero has a proposal to fix the banking system.
So does Columbia's Jeffrey Sachs.

The Paradox of Thrift

Click on the graphic to enlarge.

when life gives you lemons: a lemonade sampler

{each photo links to its shop}

so i'm headed home tomorrow, and my beloved is on day five of a cleansing lemonade detox. color me puzzled. last week i got home from work one night and there were giant bags of lemons all over the kitchen. ?wha??... had never heard of such a thing, although it's evidently popular, and i refuse to link to it because it might just be a bit unhinged, and i fear for all of us. plus i didn't find him particularly toxed in the first place (visualize, if you will, little floating air hearts circling my head... yes, i have it bad).

all this kvetching to say: i plan to join him in this crazy venture tomorrow. and i really, reeeallly love to eat. i'd like to say i love adventuring with him *more* than 3 squares plus snacks... (and coffee... oh god, the coffee...)

prediction: by friday i will be posting food. all kinds of food.

(god, i'm such a wuss! i just get so *angry* when i'm hungry. hopefully i won't go on some wild-eyed lemon-cayenne jihad and hold up the ice cream parlor behind our apartment building.)

speaking of lemons/lemonade, please allow me to veer briefly into serious (and warning! Depressing) public-service-announcement turf. as always, please feel free to skip.

one of the many reasons i took time off from the blog was that my stepfather died unexpectedly just before christmas. he was 48, much younger than my mom;* this year would have been their 10th anniversary. have been trying to help her untangle a scalding hot mess of troubles since then, which is why i'm here in florida. so much i could tell you, it would break your heart -- it breaks mine.

will simply say this from my soapbox: one of the best ways you show you love each other, in any long-term relationship but most especially a legal one, is to make sure you have an up-to-date will, plus a living will with your health directives. i know, it's a downer. it sounds lame, or you're young, or it's expensive -- please, if you can plan a wedding you can do this. even if you don't own stuff or have/intend to have kids, but especially if you do. make a plan together for what would happen if you weren't there to help your people figure it out, and write it down. do it for love.

end soapbox! we will be ok, with some hard work. there are some big damn lemons life bowls you over with some days -- and still there's so much beautiful in the world. please take care of each other!

*my mom will absolutely kill me if she reads this part. good thing i have a will.