November 18, 2010, 8:45 am — Updated: 12:26 pm -->
By DAVID LEONHARDT
Liz Peek at FoxNews.com congratulates me for writing about the importance of economic growth. So in the spirit of maximizing growth, I want to pose a question: Why should we believe that extending the Bush tax cuts will provide a big lift to growth?
Those tax cuts passed in 2001 amid big promises about what they would do for the economy. What followed? The decade with the slowest average annual growth since World War II. Amazingly, that statement is true even if you forget about the Great Recession and simply look at 2001-7.
The competition for slowest growth is not even close, either. Growth from 2001 to 2007 averaged 2.39 percent a year (and growth from 2001 through the third quarter of 2010 averaged 1.66 percent). The decade with the second-worst showing for growth was 1971 to 1980 — the dreaded 1970s — but it still had 3.21 percent average growth.
The picture does not change if you instead look at five-year periods. Here’s a chart ranking five-year periods over the past 50 years, in descending order of average annual growth:
Bureau of Economic Analysis, via Haver Analytics
I mean this as a serious question, not a rhetorical one: Given this history, why should we believe that the Bush tax cuts were pro-growth?
Is there good evidence the tax cuts persuaded more people to join the work force (because they would be able to keep more of their income)? Not really. The labor-force participation rate fell in the years after 2001 and has never again approached its record in the year 2000.
Is there evidence that the tax cuts led to a lot of entrepreneurship and innovation? Again, no. The rate at which start-up businesses created jobs fell during the past decade.
The theory for why tax cuts should create growth and jobs is a strong one. When people are allowed to keep more of each dollar they earn, they are likely to work longer and harder. The uncertainty is the magnitude of this effect. With everything else that’s happening in a $15 trillion economy, how large of an effect on growth do tax cuts have?
Every available piece of evidence seems to suggest that the Bush tax cuts did little to lift growth. I have yet to hear a good argument to the contrary, but I’d be fascinated to see another blogger or an economist take a crack at it.
Update: A reader asks for statistics on real economic growth (that is, adjusted for inflation). The above chart is already adjusted for inflation.
19/11 Financier Sued by New York in Fraud Case
By LOUISE STORY and PETER LATTMAN
Published: November 19, 2010
Steven L. Rattner, the financier who oversaw the federal rescue of the auto industry, was formally accused by New York’s attorney general, Andrew M. Cuomo, on Thursday of engaging in a kickback scheme involving the state’s pension system.
Enlarge This Image
Andrew Harrer/Bloomberg News
Steven L. Rattner has agreed to pay $6.2 million in disgorgement and penalties in settling with the S.E.C.
Related
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On the same day that Mr. Rattner was being celebrated on Wall Street for his role in turning around General Motors, he found himself embroiled in a bitter public battle with Mr. Cuomo, he settled similar charges with the Securities and Exchange Commission and he escalated a separate legal fight against his former investment firm.
Even as a resurgent G.M. went public again in a huge stock sale on Thursday, Mr. Cuomo sought to banish Mr. Rattner for life from the securities business in New York.
The civil fraud claims, which Mr. Rattner fiercely contested, came within moments of news that the financier had settled a related dispute with the S.E.C. In that case, Mr. Rattner accepted a two-year ban from certain Wall Street businesses and, without admitting or denying wrongdoing, agreed to pay a $6.2 million fine.
Mr. Cuomo, New York’s Democratic governor-elect, is seeking stiffer penalties, including $26 million. While other major figures in the pension investigation had already resolved their cases and Mr. Rattner had been expected to reach a settlement with the S.E.C., the charges from the attorney general’s office amounted to a public showdown between Mr. Cuomo and a man who is not only a prominent figure on Wall Street but also a powerful Democratic fund-raiser.
Indeed, the dispute between Mr. Rattner and Mr. Cuomo has devolved in recent months into hostilities. After months of negotiations, neither camp has much to lose by digging in. Unless Mr. Rattner reaches a settlement with Mr. Cuomo — an outcome that, for now, seems unlikely — Mr. Cuomo will hand off the investigation to a new attorney general when he becomes governor in January.
Mr. Rattner lashed out at Mr. Cuomo’s office on Thursday and accused the attorney general of political grandstanding. He also took aim at the private investment company he helped found, the Quadrangle Group, which settled with Mr. Cuomo and the S.E.C. several months ago.
“I will not be bullied,” Mr. Rattner said. “This episode is the first time during 35 years in business that anyone has questioned my ethics or integrity.” He added, “I intend to clear my name by defending myself vigorously against this politically motivated lawsuit.”
Within hours, Mr. Cuomo’s office fired back, saying that Mr. Rattner had stonewalled its investigation. “Mr. Rattner now has a lot to say as he spins his friends in the press, but when he was questioned under oath about his pension fund dealings, he was much less talkative, taking the Fifth and refusing to answer questions 68 different times,” said Richard Bamberger, a spokesman for Mr. Cuomo.
Mr. Rattner’s lawyers went on the offensive on Thursday with a flurry of court filings contesting Mr. Cuomo’s allegations. In one document related to a dispute with Quadrangle, Mr. Rattner’s lawyers wrote: “The time for the scapegoating of Mr. Rattner is over.”
The lawyers also sought to gain access to internal communications in Mr. Cuomo’s office related to the case because Mr. Rattner wanted to know who there was leaking information to the news media.
Mr. Rattner’s dispute with Mr. Cuomo began several years ago, when the attorney general’s office began examining how investment firms won business from the pension fund and whether they had improper dealings with officials.
Investments from New York’s fund not only yielded management fees — $5 million in Quadrangle’s case — but also added a luster that helped attract other investors. Pay-to-play practices have since been banned by some pension funds.
The dispute between Mr. Rattner and Mr. Cuomo escalated in 2009, after Mr. Rattner became a leader of the federal auto task force helping to restructure G.M. and Chrysler. For Mr. Rattner, it was a triumphant return to Washington, where he worked early in his career as a reporter for The New York Times.
By the time Mr. Rattner was named to the auto task force, Mr. Cuomo’s office had already granted Mr. Rattner immunity from criminal charges related to the kickbacks because his e-mails did not indicate that he had played a personal role in the matter.
After Mr. Rattner left Quadrangle, the firm investigated its involvement with the state pension fund and discovered e-mails that had not been turned over to Mr. Cuomo’s office. Those became central to Mr. Cuomo’s case against Mr. Rattner; the attorney general’s office was furious that the messages had not been originally provided.
Tensions flared in the spring when Quadrangle settled with the S.E.C. and Mr. Cuomo’s office, without Mr. Rattner’s involvement. Quadrangle asked Mr. Rattner to pay more than half of the $12 million it settled for, with the rest paid by current and former partners at the firm. Mr. Rattner earned upwards of $190 million, including earnings from investments he made, during his nine years at the firm, according to a person with knowledge of his pay.
Davidson Goldin, a spokesman for Mr. Rattner, said Mr. Rattner believed his share of the $12 million should be lower and reflect his stake in Quadrangle.
In August, Mr. Cuomo’s office issued a subpoena for Mr. Rattner to be questioned at a deposition. “Given that the attorney general made repeated threats of prosecution, of course Mr. Rattner’s lawyers advised him not to speak,” in response to any of 68 questions he was asked, said Mr. Goldin, his spokesman. Mr. Goldin was referring to possible perjury charges related to the early discrepancies in accounts about Mr. Rattner’s involvement in the case. Mr. Cuomo has not filed perjury or other criminal charges.
Despite his legal troubles, Mr. Rattner has maintained a busy schedule of news media appearances. His wife, Maureen White, has also remained active in fund-raising circles. Ms. White donated $5,000 early this year to Eric T. Schneiderman, who will replace Mr. Cuomo as attorney general. Her donation, however, was made before Mr. Schneiderman announced that he was running for that office. A spokesman for Mr. Schneiderman declined to discuss the case but said he would be tough as attorney general.
Mr. Cuomo’s office notified Mr. Rattner’s lawyers on Wednesday night that it planned to file suit on Thursday, according to two people briefed on the phone call. When a CNBC reporter asked Mr. Rattner on Thursday if the investigations would take away any of the shine of G.M.’s success, Mr. Rattner demurred.
“Well, others will have to judge that,” he replied. “What I would say for me, it was the most painful episode I’ve ever been through in my professional life.”
Nicholas Confessore contributed reporting.
A version of this article appeared in print on November 19, 2010, on page A1 of the New York edition.
Published: November 19, 2010
Steven L. Rattner, the financier who oversaw the federal rescue of the auto industry, was formally accused by New York’s attorney general, Andrew M. Cuomo, on Thursday of engaging in a kickback scheme involving the state’s pension system.
Enlarge This Image
Andrew Harrer/Bloomberg News
Steven L. Rattner has agreed to pay $6.2 million in disgorgement and penalties in settling with the S.E.C.
Related
Post a Comment on Dealbook
On the same day that Mr. Rattner was being celebrated on Wall Street for his role in turning around General Motors, he found himself embroiled in a bitter public battle with Mr. Cuomo, he settled similar charges with the Securities and Exchange Commission and he escalated a separate legal fight against his former investment firm.
Even as a resurgent G.M. went public again in a huge stock sale on Thursday, Mr. Cuomo sought to banish Mr. Rattner for life from the securities business in New York.
The civil fraud claims, which Mr. Rattner fiercely contested, came within moments of news that the financier had settled a related dispute with the S.E.C. In that case, Mr. Rattner accepted a two-year ban from certain Wall Street businesses and, without admitting or denying wrongdoing, agreed to pay a $6.2 million fine.
Mr. Cuomo, New York’s Democratic governor-elect, is seeking stiffer penalties, including $26 million. While other major figures in the pension investigation had already resolved their cases and Mr. Rattner had been expected to reach a settlement with the S.E.C., the charges from the attorney general’s office amounted to a public showdown between Mr. Cuomo and a man who is not only a prominent figure on Wall Street but also a powerful Democratic fund-raiser.
Indeed, the dispute between Mr. Rattner and Mr. Cuomo has devolved in recent months into hostilities. After months of negotiations, neither camp has much to lose by digging in. Unless Mr. Rattner reaches a settlement with Mr. Cuomo — an outcome that, for now, seems unlikely — Mr. Cuomo will hand off the investigation to a new attorney general when he becomes governor in January.
Mr. Rattner lashed out at Mr. Cuomo’s office on Thursday and accused the attorney general of political grandstanding. He also took aim at the private investment company he helped found, the Quadrangle Group, which settled with Mr. Cuomo and the S.E.C. several months ago.
“I will not be bullied,” Mr. Rattner said. “This episode is the first time during 35 years in business that anyone has questioned my ethics or integrity.” He added, “I intend to clear my name by defending myself vigorously against this politically motivated lawsuit.”
Within hours, Mr. Cuomo’s office fired back, saying that Mr. Rattner had stonewalled its investigation. “Mr. Rattner now has a lot to say as he spins his friends in the press, but when he was questioned under oath about his pension fund dealings, he was much less talkative, taking the Fifth and refusing to answer questions 68 different times,” said Richard Bamberger, a spokesman for Mr. Cuomo.
Mr. Rattner’s lawyers went on the offensive on Thursday with a flurry of court filings contesting Mr. Cuomo’s allegations. In one document related to a dispute with Quadrangle, Mr. Rattner’s lawyers wrote: “The time for the scapegoating of Mr. Rattner is over.”
The lawyers also sought to gain access to internal communications in Mr. Cuomo’s office related to the case because Mr. Rattner wanted to know who there was leaking information to the news media.
Mr. Rattner’s dispute with Mr. Cuomo began several years ago, when the attorney general’s office began examining how investment firms won business from the pension fund and whether they had improper dealings with officials.
Investments from New York’s fund not only yielded management fees — $5 million in Quadrangle’s case — but also added a luster that helped attract other investors. Pay-to-play practices have since been banned by some pension funds.
The dispute between Mr. Rattner and Mr. Cuomo escalated in 2009, after Mr. Rattner became a leader of the federal auto task force helping to restructure G.M. and Chrysler. For Mr. Rattner, it was a triumphant return to Washington, where he worked early in his career as a reporter for The New York Times.
By the time Mr. Rattner was named to the auto task force, Mr. Cuomo’s office had already granted Mr. Rattner immunity from criminal charges related to the kickbacks because his e-mails did not indicate that he had played a personal role in the matter.
After Mr. Rattner left Quadrangle, the firm investigated its involvement with the state pension fund and discovered e-mails that had not been turned over to Mr. Cuomo’s office. Those became central to Mr. Cuomo’s case against Mr. Rattner; the attorney general’s office was furious that the messages had not been originally provided.
Tensions flared in the spring when Quadrangle settled with the S.E.C. and Mr. Cuomo’s office, without Mr. Rattner’s involvement. Quadrangle asked Mr. Rattner to pay more than half of the $12 million it settled for, with the rest paid by current and former partners at the firm. Mr. Rattner earned upwards of $190 million, including earnings from investments he made, during his nine years at the firm, according to a person with knowledge of his pay.
Davidson Goldin, a spokesman for Mr. Rattner, said Mr. Rattner believed his share of the $12 million should be lower and reflect his stake in Quadrangle.
In August, Mr. Cuomo’s office issued a subpoena for Mr. Rattner to be questioned at a deposition. “Given that the attorney general made repeated threats of prosecution, of course Mr. Rattner’s lawyers advised him not to speak,” in response to any of 68 questions he was asked, said Mr. Goldin, his spokesman. Mr. Goldin was referring to possible perjury charges related to the early discrepancies in accounts about Mr. Rattner’s involvement in the case. Mr. Cuomo has not filed perjury or other criminal charges.
Despite his legal troubles, Mr. Rattner has maintained a busy schedule of news media appearances. His wife, Maureen White, has also remained active in fund-raising circles. Ms. White donated $5,000 early this year to Eric T. Schneiderman, who will replace Mr. Cuomo as attorney general. Her donation, however, was made before Mr. Schneiderman announced that he was running for that office. A spokesman for Mr. Schneiderman declined to discuss the case but said he would be tough as attorney general.
Mr. Cuomo’s office notified Mr. Rattner’s lawyers on Wednesday night that it planned to file suit on Thursday, according to two people briefed on the phone call. When a CNBC reporter asked Mr. Rattner on Thursday if the investigations would take away any of the shine of G.M.’s success, Mr. Rattner demurred.
“Well, others will have to judge that,” he replied. “What I would say for me, it was the most painful episode I’ve ever been through in my professional life.”
Nicholas Confessore contributed reporting.
A version of this article appeared in print on November 19, 2010, on page A1 of the New York edition.
17/11 A Hedge Fund Republic?
Op-Ed Columnist
By NICHOLAS D. KRISTOF
Published: November 17, 2010
Earlier this month, I offended a number of readers with a column suggesting that if you want to see rapacious income inequality, you no longer need to visit a banana republic. You can just look around.
Damon Winter/The New York Times
Nicholas D. Kristof
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My point was that the wealthiest plutocrats now actually control a greater share of the pie in the United States than in historically unstable countries like Nicaragua, Venezuela and Guyana. But readers protested that this was glib and unfair, and after reviewing the evidence I regretfully confess that they have a point.
That’s right: I may have wronged the banana republics.
You see, some Latin Americans were indignant at what they saw as an invidious and hurtful comparison. The truth is that Latin America has matured and become more equal in recent decades, even as the distribution in the United States has become steadily more unequal.
The best data series I could find is for Argentina. In the 1940s, the top 1 percent there controlled more than 20 percent of incomes. That was roughly double the share at that time in the United States.
Since then, we’ve reversed places. The share controlled by the top 1 percent in Argentina has fallen to a bit more than 15 percent. Meanwhile, inequality in the United States has soared to levels comparable to those in Argentina six decades ago — with 1 percent controlling 24 percent of American income in 2007.
At a time of such stunning inequality, should Congress put priority on spending $700 billion on extending the Bush tax cuts to those with incomes above $250,000 a year? Or should it extend unemployment benefits for Americans who otherwise will lose them beginning next month?
One way to examine that decision is to put aside all ethical considerations and simply look at where tax dollars will do more to stimulate the economy. There the conclusion is clear: You get much more bang for the buck putting money in the hands of unemployed people because they will promptly spend it.
In contrast, tax cuts for the wealthy are partly saved — that’s both basic economic theory and recent history — so they are much less effective in creating jobs. For example, Republicans would give the richest 0.1 percent of Americans an average tax cut of $370,000. Does anybody really think that those taxpayers are going to rush out and buy Porsches and yachts, start new businesses, and hire more groundskeepers and chauffeurs?
In contrast, a study commissioned by the Labor Department during the Bush administration makes clear the job-creation power of unemployment benefits because that money is immediately spent. The study suggested that the current recession would have been 18 percent worse without unemployment insurance and that this spending preserved 1.6 million jobs in each quarter.
But there is also a larger question: What kind of a country do we aspire to be? Would we really want to be the kind of plutocracy where the richest 1 percent possesses more net worth than the bottom 90 percent?
Oops! That’s already us. The top 1 percent of Americans owns 34 percent of America’s private net worth, according to figures compiled by the Economic Policy Institute in Washington. The bottom 90 percent owns just 29 percent.
That also means that the top 10 percent controls more than 70 percent of Americans’ total net worth.
Emmanuel Saez, an economist at the University of California at Berkeley who is one of the world’s leading experts on inequality, notes that for most of American history, income distribution was significantly more equal than today. And other capitalist countries do not suffer disparities as great as ours.
“There has been an increase in inequality in most industrialized countries, but not as extreme as in the U.S.,” Professor Saez said.
One of America’s greatest features has been its economic mobility, in contrast to Europe’s class system. This mobility may explain why many working-class Americans oppose inheritance taxes and high marginal tax rates. But researchers find that today this rags-to-riches intergenerational mobility is no more common in America than in Europe — and possibly less common.
I’m appalled by our growing wealth gaps because in my travels I see what happens in dysfunctional countries where the rich just don’t care about those below the decks. The result is nations without a social fabric or sense of national unity. Huge concentrations of wealth corrode the soul of any nation.
And then I see members of Congress in my own country who argue that it would be financially reckless to extend unemployment benefits during a terrible recession, yet they insist on granting $370,000 tax breaks to the richest Americans. I don’t know if that makes us a banana republic or a hedge fund republic, but it’s not healthy in any republic.
•
I invite you to visit my blog, On the Ground. Please also join me on Facebook, watch my YouTube videos and follow me on Twitter.
A version of this op-ed appeared in print on November 18, 2010, on page A37 of the New York edition.
By NICHOLAS D. KRISTOF
Published: November 17, 2010
Earlier this month, I offended a number of readers with a column suggesting that if you want to see rapacious income inequality, you no longer need to visit a banana republic. You can just look around.
Damon Winter/The New York Times
Nicholas D. Kristof
On the Ground
Nicholas Kristof addresses reader feedback and posts short takes from his travels.
Go to Blog »
Go to Columnist Page »
Readers' Comments
Readers shared their thoughts on this article.
Read All Comments (475) »
My point was that the wealthiest plutocrats now actually control a greater share of the pie in the United States than in historically unstable countries like Nicaragua, Venezuela and Guyana. But readers protested that this was glib and unfair, and after reviewing the evidence I regretfully confess that they have a point.
That’s right: I may have wronged the banana republics.
You see, some Latin Americans were indignant at what they saw as an invidious and hurtful comparison. The truth is that Latin America has matured and become more equal in recent decades, even as the distribution in the United States has become steadily more unequal.
The best data series I could find is for Argentina. In the 1940s, the top 1 percent there controlled more than 20 percent of incomes. That was roughly double the share at that time in the United States.
Since then, we’ve reversed places. The share controlled by the top 1 percent in Argentina has fallen to a bit more than 15 percent. Meanwhile, inequality in the United States has soared to levels comparable to those in Argentina six decades ago — with 1 percent controlling 24 percent of American income in 2007.
At a time of such stunning inequality, should Congress put priority on spending $700 billion on extending the Bush tax cuts to those with incomes above $250,000 a year? Or should it extend unemployment benefits for Americans who otherwise will lose them beginning next month?
One way to examine that decision is to put aside all ethical considerations and simply look at where tax dollars will do more to stimulate the economy. There the conclusion is clear: You get much more bang for the buck putting money in the hands of unemployed people because they will promptly spend it.
In contrast, tax cuts for the wealthy are partly saved — that’s both basic economic theory and recent history — so they are much less effective in creating jobs. For example, Republicans would give the richest 0.1 percent of Americans an average tax cut of $370,000. Does anybody really think that those taxpayers are going to rush out and buy Porsches and yachts, start new businesses, and hire more groundskeepers and chauffeurs?
In contrast, a study commissioned by the Labor Department during the Bush administration makes clear the job-creation power of unemployment benefits because that money is immediately spent. The study suggested that the current recession would have been 18 percent worse without unemployment insurance and that this spending preserved 1.6 million jobs in each quarter.
But there is also a larger question: What kind of a country do we aspire to be? Would we really want to be the kind of plutocracy where the richest 1 percent possesses more net worth than the bottom 90 percent?
Oops! That’s already us. The top 1 percent of Americans owns 34 percent of America’s private net worth, according to figures compiled by the Economic Policy Institute in Washington. The bottom 90 percent owns just 29 percent.
That also means that the top 10 percent controls more than 70 percent of Americans’ total net worth.
Emmanuel Saez, an economist at the University of California at Berkeley who is one of the world’s leading experts on inequality, notes that for most of American history, income distribution was significantly more equal than today. And other capitalist countries do not suffer disparities as great as ours.
“There has been an increase in inequality in most industrialized countries, but not as extreme as in the U.S.,” Professor Saez said.
One of America’s greatest features has been its economic mobility, in contrast to Europe’s class system. This mobility may explain why many working-class Americans oppose inheritance taxes and high marginal tax rates. But researchers find that today this rags-to-riches intergenerational mobility is no more common in America than in Europe — and possibly less common.
I’m appalled by our growing wealth gaps because in my travels I see what happens in dysfunctional countries where the rich just don’t care about those below the decks. The result is nations without a social fabric or sense of national unity. Huge concentrations of wealth corrode the soul of any nation.
And then I see members of Congress in my own country who argue that it would be financially reckless to extend unemployment benefits during a terrible recession, yet they insist on granting $370,000 tax breaks to the richest Americans. I don’t know if that makes us a banana republic or a hedge fund republic, but it’s not healthy in any republic.
•
I invite you to visit my blog, On the Ground. Please also join me on Facebook, watch my YouTube videos and follow me on Twitter.
A version of this op-ed appeared in print on November 18, 2010, on page A37 of the New York edition.
18/11 Axis of Depression
Op-Ed Columnist
By PAUL KRUGMAN
Published: November 18, 2010
What do the government of China, the government of Germany and the Republican Party have in common? They’re all trying to bully the Federal Reserve into calling off its efforts to create jobs. And the motives of all three are highly suspect.
Fred R. Conrad/The New York Times
Paul Krugman
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It’s not as if the Fed is doing anything radical. It’s true that the Fed normally conducts monetary policy by buying short-term U.S. government debt, whereas now, under the unhelpful name of “quantitative easing,” it’s buying longer-term debt. (Buying more short-term debt is pointless because the interest rate on that debt is near zero.) But Ben Bernanke, the Fed chairman, had it right when he protested that this is “just monetary policy.” The Fed is trying to reduce interest rates, as it always does when unemployment is high and inflation is low.
And inflation is indeed low. Core inflation — a measure that excludes volatile food and energy prices, and is widely considered a better gauge of underlying trends than the headline number — is running at just 0.6 percent, the lowest level ever recorded. Meanwhile, unemployment is almost 10 percent, and long-term unemployment is worse than it has been since the Great Depression.
So the case for Fed action is overwhelming. In fact, the main concern reasonable people have about the Fed’s plans — a concern that I share — is that they are likely to prove too weak, too ineffective.
But there are reasonable people — and then there’s the China-Germany-G.O.P. axis of depression.
It’s no mystery why China and Germany are on the warpath against the Fed. Both nations are accustomed to running huge trade surpluses. But for some countries to run trade surpluses, others must run trade deficits — and, for years, that has meant us. The Fed’s expansionary policies, however, have the side effect of somewhat weakening the dollar, making U.S. goods more competitive, and paving the way for a smaller U.S. deficit. And the Chinese and Germans don’t want to see that happen.
For the Chinese government, by the way, attacking the Fed has the additional benefit of shifting attention away from its own currency manipulation, which keeps China’s currency artificially weak — precisely the sin China falsely accuses America of committing.
But why are Republicans joining in this attack?
Mr. Bernanke and his colleagues seem stunned to find themselves in the cross hairs. They thought they were acting in the spirit of none other than Milton Friedman, who blamed the Fed for not acting more forcefully during the Great Depression — and who, in 1998, called on the Bank of Japan to “buy government bonds on the open market,” exactly what the Fed is now doing.
Republicans, however, will have none of it, raising objections that range from the odd to the incoherent.
The odd: on Monday, a somewhat strange group of Republican figures — who knew that William Kristol was an expert on monetary policy? — released an open letter to the Fed warning that its policies “risk currency debasement and inflation.” These concerns were echoed in a letter the top four Republicans in Congress sent Mr. Bernanke on Wednesday. Neither letter explained why we should fear inflation when the reality is that inflation keeps hitting record lows.
And about dollar debasement: leaving aside the fact that a weaker dollar actually helps U.S. manufacturing, where were these people during the previous administration? The dollar slid steadily through most of the Bush years, a decline that dwarfs the recent downtick. Why weren’t there similar letters demanding that Alan Greenspan, the Fed chairman at the time, tighten policy?
Meanwhile, the incoherent: Two Republicans, Mike Pence in the House and Bob Corker in the Senate, have called on the Fed to abandon all efforts to achieve full employment and focus solely on price stability. Why? Because unemployment remains so high. No, I don’t understand the logic either.
So what’s really motivating the G.O.P. attack on the Fed? Mr. Bernanke and his colleagues were clearly caught by surprise, but the budget expert Stan Collender predicted it all. Back in August, he warned Mr. Bernanke that “with Republican policy makers seeing economic hardship as the path to election glory,” they would be “opposed to any actions taken by the Federal Reserve that would make the economy better.” In short, their real fear is not that Fed actions will be harmful, it is that they might succeed.
Hence the axis of depression. No doubt some of Mr. Bernanke’s critics are motivated by sincere intellectual conviction, but the core reason for the attack on the Fed is self-interest, pure and simple. China and Germany want America to stay uncompetitive; Republicans want the economy to stay weak as long as there’s a Democrat in the White House.
And if Mr. Bernanke gives in to their bullying, they may all get their wish.
A version of this op-ed appeared in print on November 19, 2010, on page A31 of the New York edition.
By PAUL KRUGMAN
Published: November 18, 2010
What do the government of China, the government of Germany and the Republican Party have in common? They’re all trying to bully the Federal Reserve into calling off its efforts to create jobs. And the motives of all three are highly suspect.
Fred R. Conrad/The New York Times
Paul Krugman
Go to Columnist Page »
Blog: The Conscience of a Liberal
Readers' Comments
Share your thoughts.
Post a Comment »
Read All Comments (48) »
It’s not as if the Fed is doing anything radical. It’s true that the Fed normally conducts monetary policy by buying short-term U.S. government debt, whereas now, under the unhelpful name of “quantitative easing,” it’s buying longer-term debt. (Buying more short-term debt is pointless because the interest rate on that debt is near zero.) But Ben Bernanke, the Fed chairman, had it right when he protested that this is “just monetary policy.” The Fed is trying to reduce interest rates, as it always does when unemployment is high and inflation is low.
And inflation is indeed low. Core inflation — a measure that excludes volatile food and energy prices, and is widely considered a better gauge of underlying trends than the headline number — is running at just 0.6 percent, the lowest level ever recorded. Meanwhile, unemployment is almost 10 percent, and long-term unemployment is worse than it has been since the Great Depression.
So the case for Fed action is overwhelming. In fact, the main concern reasonable people have about the Fed’s plans — a concern that I share — is that they are likely to prove too weak, too ineffective.
But there are reasonable people — and then there’s the China-Germany-G.O.P. axis of depression.
It’s no mystery why China and Germany are on the warpath against the Fed. Both nations are accustomed to running huge trade surpluses. But for some countries to run trade surpluses, others must run trade deficits — and, for years, that has meant us. The Fed’s expansionary policies, however, have the side effect of somewhat weakening the dollar, making U.S. goods more competitive, and paving the way for a smaller U.S. deficit. And the Chinese and Germans don’t want to see that happen.
For the Chinese government, by the way, attacking the Fed has the additional benefit of shifting attention away from its own currency manipulation, which keeps China’s currency artificially weak — precisely the sin China falsely accuses America of committing.
But why are Republicans joining in this attack?
Mr. Bernanke and his colleagues seem stunned to find themselves in the cross hairs. They thought they were acting in the spirit of none other than Milton Friedman, who blamed the Fed for not acting more forcefully during the Great Depression — and who, in 1998, called on the Bank of Japan to “buy government bonds on the open market,” exactly what the Fed is now doing.
Republicans, however, will have none of it, raising objections that range from the odd to the incoherent.
The odd: on Monday, a somewhat strange group of Republican figures — who knew that William Kristol was an expert on monetary policy? — released an open letter to the Fed warning that its policies “risk currency debasement and inflation.” These concerns were echoed in a letter the top four Republicans in Congress sent Mr. Bernanke on Wednesday. Neither letter explained why we should fear inflation when the reality is that inflation keeps hitting record lows.
And about dollar debasement: leaving aside the fact that a weaker dollar actually helps U.S. manufacturing, where were these people during the previous administration? The dollar slid steadily through most of the Bush years, a decline that dwarfs the recent downtick. Why weren’t there similar letters demanding that Alan Greenspan, the Fed chairman at the time, tighten policy?
Meanwhile, the incoherent: Two Republicans, Mike Pence in the House and Bob Corker in the Senate, have called on the Fed to abandon all efforts to achieve full employment and focus solely on price stability. Why? Because unemployment remains so high. No, I don’t understand the logic either.
So what’s really motivating the G.O.P. attack on the Fed? Mr. Bernanke and his colleagues were clearly caught by surprise, but the budget expert Stan Collender predicted it all. Back in August, he warned Mr. Bernanke that “with Republican policy makers seeing economic hardship as the path to election glory,” they would be “opposed to any actions taken by the Federal Reserve that would make the economy better.” In short, their real fear is not that Fed actions will be harmful, it is that they might succeed.
Hence the axis of depression. No doubt some of Mr. Bernanke’s critics are motivated by sincere intellectual conviction, but the core reason for the attack on the Fed is self-interest, pure and simple. China and Germany want America to stay uncompetitive; Republicans want the economy to stay weak as long as there’s a Democrat in the White House.
And if Mr. Bernanke gives in to their bullying, they may all get their wish.
A version of this op-ed appeared in print on November 19, 2010, on page A31 of the New York edition.
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