In response to a question in comments, yes, I believe we have screwed up the economy massively during the entire post-war period. We have over-invested in housing for nearly 60 years. The ten year or more bubble in residential real estate is clear evidence of massive over-investment during that period.

Military spending has been excessive over the period of the last, roughly, 60 years. We have been at war for seventeen of the last twenty-two years.

Healthcare spending has been excessive over the period of the last, roughly, 30 years.

I have previously posted links to studies which suggest that our financial sector is about three times the size that it should be for an economy of our size.

All of the above tie up capital in relatively unproductive ways. That will continue as long as we insist on doubling down on our prior mistakes.

The sums involved aren’t just in the trillions of dollars but in the scores of trillions of dollars.

So, hell yes, I think the degree of misallocation in the economy has been enormous. It didn’t look so bad at the beginning but the consequences become worse and worse every year. That’s the nature of compounding.

The weekly unemployment claims have risen to 424,000.

The revised first quarter 2011 GDP is the same as the original estimate: 1.8%.

Durable goods orders fell 3.6%, the largest drop in six months.

Commercial real estate prices have reached a new post-bubble low.

New home sales tied a record low for April.

Is this the recovery that will put 8 million unemployed (twice that many when you add the underemployed) back to work?

While we’re on the subject let’s engage in a thought experiment. Let’s say, arguendo, that you expect GDP to grow at 2% indefinitely. Does it make sense to time-shift future growth, i.e. to reduce future growth below that 2% level, to produce more growth now?

Similarly, let’s say that you don’t know what would cause GDP to grow at a level greater than 2% a year. Same question.

We have done very much the same things that Japan did (rescue banks without restoring health to the financial system, very low interest rates, fiscal stimulus, quantitative easing). The results are very much the same as they were in Japan. Should we be surprised?

There is almost no limit to the amount of conflicting advice being offered these days. The editors of the New York Times are appalled by the state of the housing market:

…over all, sales and construction have been flat for two years, while prices, driven down by foreclosures, are plumbing new depths.

Even a recent drop in foreclosure filings isn’t a reason for optimism. April was the seventh straight decline in monthly filings — which include notices of default, auction and bank repossessions — according to RealtyTrac, a real estate data provider. But the decline appears to be largely the result of banks slowing the foreclosure process in order to keep properties off the market until prices recover. The catch is that prices are unlikely to recover as long as millions of foreclosures are imminent.

This isn’t just bad news for homeowners. Selling and building of houses are one of the economy’s most powerful engines. Until the market recovers, the entire recovery is imperiled. Falling home equity dents consumer confidence, making things even worse.

Since the problems in housing are not self-curing, a government fix is in order.

Unfortunately, their prescription—more regulation and compliance—is unlikely to improve the housing market. At best it will prevent things from getting worse.

As I understand it we currently have a ten year overhang in the inventory of housing. Will preventing new properties from coming on the market reduce that? I don’t think so.

Whether we should continue to subsidize the housing market is an interesting question. IMO we should not. However, whatever we do we cannot reinflate the housing bubble and I don’t think we should even try. It already represents an enormous misallocation of capital and the solution to that is to cut the losses and remove the barriers that prevent the capital from flowing to more productive sectors of the economy.

In contrast with the editors of the NYT Donald Marron believes that we need to stop subsidizing housing (among other things):

Hundreds of billions of dollars of spending are disguised as tax cuts.

It’s not hard to see why. Voters like tax cuts more than spending increases. Politicians understand that, so they convert spending into tax breaks.

The ethanol tax credit is a perfect example. Fuel producers qualify for a 45-cent tax credit for each gallon of ethanol they blend into gasoline. Blenders calculate their income taxes like other businesses, then deduct the value of the credit before they send their check to the Internal Revenue Service (IRS).

The ethanol subsidy thus looks like a tax cut, but it’s really government spending in disguise. The Department of Energy could accomplish the same thing by sending out subsidy checks. The same is true for dozens of other tax provisions, such as the business credit for research and development and personal tax breaks for mortgage interest, health insurance, and charitable giving.

Here are the highest valued tax expenditures in the individual income tax:

Those four items account for more than half of the total. There are other possible targets (child credit, charitable contributions, state and local taxes, etc.) but those four are the big ticket items. The ethanol subsidy, weighing in at under $10 billion is small potatoes by comparison. Please note: I support eliminating the ethanol subsidy but we need to have realistic expectations of what it would accomplish.

Just for the record I favor eliminating all of those tax expenditures AKA deductions with the exception of lower tax rates for long-term capital gains. However, doing so will have secondary effects we should acknowledge and one of those secondary effects will be to depress the housing market even farther.

I’ve just published a foreign policy-related post at Outside the Beltway:

Arab Spring Update

In this post I provide a terse summary of the situation respect to the protests in the Middle East and North Africa with links to news coverage and commentary. Suggestions of additional links to news or commentary would be appreciated in comments.

When I first read this

TOYOTA IS UPPING PRIUS PRODUCTION: 36,000 units headed to U.S. this summer.

over at Glenn Reynolds’s place I thought it was good news: Toyota had overcome its production issues for Priuses and its supply chain issues caused by the earthquake and tsunami. A remarkable feat. However, when I read the article to which Glenn linked:

U.S. sales of the Toyota Prius slipped from 18,605 in March of 2011 to 12,477 in April, a decline that’s largely attributed to a shortage in supply related to the quake and tsunami that rattled Japan on March 11. However, by late March, Toyota had resumed Prius production, if on a limited level.

Now, Bob Carter, Toyota’s group vice president and general manager, says that Prius production, which was halted for a solid two weeks following the quake and has been steady at 50 percent capacity since late March, will increase to 70 percent in June. This, Carter said, will allow Toyota to ship at least 36,000 Prius hybrids to the U.S. this summer to partially satisfy demand. According to Ward’s Auto, that’s 60 to 70 percent of the Prius’ typical summer inventory level.

it told a somewhat different story.

The bottom line here is that Toyota is on track to sell fewer Priuses in the United States this year than last. Last year Toyota sold about 140,000 Priuses in the United States. That’s a spit in the ocean whether you related it to Toyota’s total worldwide sales (about 8 million vehicles), or Toyota’s total U. S. sales (something like 3 million vehicles). Toyota is struggling to get their ability to sell and deliver back up to where it was last year.

Is this good news or bad news? I think bad news but it’s pretty darned hard to tell based on the way it’s being pitched.

Continuing to ruminate on Brad DeLong’s post I cited below and this post from Mike Konczal, I have a question to ask. For those who believe that the economic problems we’re facing right now are most accurately characterized by a short-fall in aggregate demand, wouldn’t we need to restore the level of demand that prevailed in 2006 to achieve the employment level we had in 2006?

Shouldn’t we be looking at what aggregate demand would have been absent the two bubbles in rapid succession of the 90s and the Aughts? A baseline, non-bubble economy? I realize that it’s impossibly complex to make that sort of determination but isn’t it safe to say that employment would have been much lower absent those two bubbles?

I think that the aggregate demand story is most compelling when viewed from a short-term perspective but to tell the complete story of what we’re experiencing today you’ve got to look at the structural problems in our economy that have been building over the period of the last 30 years or more. In my view our present problems are not amenable to short-term meat-ax economic engineering solutions like wage and price controls (as Nixon tried forty years ago) or stimulus packages of the sort that the Bush and Obama Administrations both implemented and which have had mixed results (the clearest result being picking winners, e.g. the financial sector, GM employees and losers, the unemployed) and create even bigger problems down the road.

We’re down the road. There are no pleasant, palatable solutions left.

Brad DeLong considers the macroeconomy, fiscal deficits, and the Congress:

It is a fact that if congress simply goes home–doesn’t do anything for the next 10 years except keep the federal government on autopilot, or if it does do things if it pays for whatever increases in spending it enacts by raising taxes and pays for whatever tax cuts it enacts by cutting spending–that we do not have a long run deficit problem. If congress goes home for ten years our program spending is matched to our tax revenues, which means a declining debt burden because the growth rate of the economy is larger than the interest rate on our debt.

Our belief that we have a long-run deficit problem is based upon the belief that congress will pass laws that increase spending and that cut taxes–that it will repeal the Independent Payment Authorization Board’s authority to try to make Medicare more efficient, that it will repeal the Affordable Care Act’s tax on high-cost health plans. Given that the fear is based on a belief that some future congress will bust the budget, it is hard to see how we can address this fear through any possible piece of legislation today–for no congress can bind its successors.

This is a problem.

While I think that Dr. DeLong is a bit overly sanguine about the prospects for growth and that the IPAB (even without Congressional meddling) will succeed in reducing the inexorable and unaffordable upwards path of healthcare spending, I think the essential thrust of this argument is correct. And based in experience.

Why doesn’t this argument strongly suggest that the fight for fiscal sanity necessarily must move towards amending the Constitution to force a rules-based budgeting approach on the Congress?

I’m trying to digest Vermont’s healthcare reform plan. At first glance they appear to be doing some things correctly, e.g. universal healthcare, reduction in administrative costs via single payer plan. The aspirational component of the plan are good, too, e.g. they want to move away from fee for service and towards compensation for patients’ health.

I’m filled with questions about the plan that don’t appear to be answered in the empowering legislation (linked above). How will it be financed? How will they actually transition away from fee for services? Will companies and the self-employed who currently self-insure be compelled to pay for Green Mountain Care? I don’t see how it can work otherwise.

How will out-of-state employees be handled? How will out-of-state care of Vermont residents be handled? Isn’t there a hazard of scads of phony residences being established?

I think that some of the benefits they’re touting are hand-waving, particularly the notion that the plan will make it attractive for businesses to relocate to Vermont. Healthcare is an important thing but it’s not the only thing. I suspect that as many companies will find Vermont’s plan discouraging as encouraging.

I also am disappointed that they don’t seem to be addressing the supply side of the equation. If the new Green Mountain Care is successful at controlling costs beyond the headroom created by converting to single-payer, won’t it induce healthcare providers (physicians, hospitals, etc.) to leave Vermont? If it’s not successful at controlling costs, it will collapse. Furthermore, I’m suspicious of “beggar thy neighbor” policies of which this appears to be another instance.

As the old line goes the devil is in the details and I guess I’ll need to wait for those.

The Watcher’s Council has announced its winners for last week. First place in the Council category was The Colossus of Rhodey’s Why We Don’t Revere Our Intellectuals.

First place in the non-Council category was Sultan Knish with Allahu Akbar. Former
You can see the full results here.

Here are the results for the previous week. First place in the Council category was The Razor’s The Abandoned.

First place in the non-Council category was American Digest with September 10, 2001: “Make no mistake, it’s not revenge he’s after. It’s a reckonin’.”.

You can see the full results here.