Alan Krueger (Chairman of President Barack Obama’s Council of Economic Advisers)

Tweets:

I would only add that education is no panacea.? We?ve thrown a lot of money at it for years, with little incremental results.? Structural changes are needed to remove substandard teachers, eliminate collective bargaining if needed, move back to a ?basics? curriculum similar to that used in the 50s (with updated science & history), etc.? We have to recognize that we have let fools dictate our curricula, and reverse the damage.

Other Stuff

Thanks to Peter Cook, Tom Keene, and Stephanie Call at Bloomberg for humoring me.? Thanks to Cate Long (bright lady) and other tweeters for covering the conference.

There was a lot of love for Canada, thinking it to be far better run than the US, as its financial economy teeters with too much mortgage debt.

And some more tweets:

I also got the final question on that panel:

They didn?t have a good answer, though Engle tried.? That said, with valuations so high, it looks like investors are confident, or they ?have learned to stop worrying, and learned to love the Bomb.?

It was a very good conference; I learned a lot.? You can view the videos off of Bloomberg.

Economics

CFO of UPS talked about two scenarios for rises in interest rates: good: improvement in productivity, bad: stagflation. Senator Ben Cardin said “We know that if interest rates go up it would make it very difficult for the Federal Government to participate in creating growth.” (As if the government can create growth without getting out of the way.)

Cardin also Congress has schizophrenia about the Fed.? He asked if we would rather have Congress run monetary policy.? I would say someone has to be responsible to the electorate over monetary policy.? Central Bank independence is nice in concept, but what if you get a bunch of deluded idealists who believe in an untested policy, like we have today?? As voters, we need to have the ability to replace them, or better, limit the abilities of the central bank so that it doesn?t matter so much what they do.? Then Congress will have to take hard actions, knowing they can be replaced in a few years.

?Yellen has right of first refusal at Fed, as the next Chairman,? Laurence Meyer said.? Another commented that the Vice-Chair has never succeeded the Chairman before.? Personally, I think she would be worse than Greenspan and Bernanke.? More dovish than both.? Maybe bring on Warsh, Lacker, Prosser, etc.

 

US Postal Service

Cardin commented “I don?t think outsourcing saves money for government.”? I would agree, but it means returning to a government with more bodies, paid less, and limiting the influence of lobbyists.? It also means reducing complexity in laws and regulations.

He also commented “I believe that the role of the Post Office is universal service and overnight delivery is part of that.”

One twitter commenter wrote: USPS Corbett is asked if we even need the postal service. Quick answer: Yes. Audience quietly whispers: ?Dinosaur.?

USPS CFO thought there was a long-term solution. He wants regulatory changes, allowing delivery of alcohol, and other things prohibited now. He wants more independence from current regulations.

Lunch

I had delicious food and good conversation at lunch. I sat with Tom Keene & my former professor Steve Hanke of Johns Hopkins & the Cato Institute.? The two of them talked about their mutual experiences at the same school in Colorado for undergraduate study.? Keene asked what he should ask Krueger on unemployment.? The table volunteered a number of good ideas, mine was to ask whether the higher unemployment wasn?t structural because of global competition.

China

Here are a few tweets, none written by me:

Once again, I got the final question:

Infrastructure

This was a shibboleth muttered by many, that fixing infrastructure was a no-brainer of an idea, and I partially agree.? I would say, “Fine, what programs are you going to cut in order to fix infrastructure?” Government decisions work best when you compare spending versus spending, and taxes versus taxes.? If we did that, we would have better spending and better taxes.

Personally, I would eliminate whole government departments and hand the responsibility back to the states.? That would reduce subsidy problems, and make government more responsible.? National government is irresponsible government.

Corporate Tax Reform

Those that talked about corporate tax reform had a seeming unity, but that existed only where cute were to be made.? Any structural changes had some who would oppose. As I have said: If business were already agreed on tax policy, tax policy would have changed already.? Though the panelists were optimistic on corporate tax reform, I am not.? If it were easy, it would be done already.

Tom Keene brought up the corporate tax code given the Apple bond deal. Krueger said a deal could be done if the tax base could be broadened.? (Apple borrows money in the US to buy back stock, leaving cash overseas that it cannot repatriate without getting taxed.)

John Rogers of the CFA Institute asked a question on differential taxation of dividends/interest, and of course the panel goes for ending double taxation.

The final question from the audience was mine, where I asked:

They said the agreement was close enough.? Wishful thinking to me.

Dodd-Frank

Many argued for more capital at banks. A few argued that there was enough capital already.? No one argued that there was not enough liquidity, which is my position.? Most financial crises are liquidity crises, and can be solved by having a large amount of high quality unencumbered assets.

Many felt that Dodd-Frank was unduly complex, somewhat of a waste, and subject to the reasoning of study committees.? Some felt there was no “too big to fail problem,” and that we ought to leave the big banks alone.? Not a lot of agreement among panelists.

My conclusion was this:

My point is this: you can’t solve busts.? You can constrain booms, if you dare (calling William McChesney Martin), and that will preserve the economy, though many will complain.

Gary Gensler

Gensler, chair of CFTC, traced the crisis to the derivatives markets when it was really due to bad mortgage lending.? I say that some losses were tied to the derivatives, but the real losses came from the mortgage underwriting, which came first.

For every winner on a derivative, there is a loser. The costs net to zero, but on the original loan there are real loan losses.? Solvency regulation should have prohibited financial institutions from taking default risk using derivatives, unless fully hedged.? Or, all derivative positions have to be reflected in the balance sheets, and disclosed in the footnotes, in detail, like insurance companies do.

What?s that, you say? They won?t do derivatives then?? Good.

He also alleged that 8 million jobs lost since 2008 due to unregulated swaps market.? Not likely in my opinion; again, the economy suffers from bad mortgage lending.

Gensler said that we will move away from Libor. I think that any benchmark not based on trades will be gamed, as well as those based on trades.? You can?t get away from gaming in financial markets.? Punish it where you find it, but you will never find it all.

Gensler used humor to avoid questions, and burned a lot of time (like running down the shot clock in Basketball).? The final question came from me:

Give the guy some credit: he said no.

More in Part 4

Unemployment

A few in the first panel suggested the new normal for unemployment was 6.5%-7.0%.? I think it should be higher.? To Alan Krueger, Chairman of the?White House Council of Economic Advisers, my question was asked,

He mumbled for a bit and partially agreed and disagreed.? The answer wasn’t that coherent.? He did say at the end that low-paid workers in the US don’t compete against foreign workers, which is partially true.

Healthcare Spending

A number said the PPACA [Obamacare] will bring down health costs.? That’s not true, costs have already risen significantly, and will rise more, as sicker patients now get insured.? That’s the “affordable” in the “Affordable Care Act.”? It makes insurance more expensive for most people, while making it affordable for the sick.? More of the discussion on healthcare spending came under discussions of state finances, and Medicare.

On the State of the States

Tom Corbett, Governor of Pennsylvania hangs his hat on selling the state liquor monopoly and fracking.? The former is a one-shot deal, and isn?t large enough to significantly affect unfunded liabilities.

He mentioned that 1 in 6 people in Pennsylvania on Medicaid would become 1 in 4 under Obamacare. Pennsylvania is 2nd highest state for expenses per head in Medicaid because of optional coverages that Pennsylvania covers.? Perhaps the optional coverages will get dropped.

Pennsylvania also leaves the benefits/fees of fracking to local governments, where it is needed.? Some municipalities have reduced taxes as a result.

On pensions he was asked how current policy was sustainable, because it wouldn’t fly in private sector.? He did not have a good answer.

The estimable Cate Long sent me this: Report: Pension Litigation Summary Across the States. It summarizes all of the cases that the States are trying to fight in order to reduce the pension & retiree health benefits they pay to employees.

On the Pension & Other Post-Employment Benefits panel, they made the case that the states are in deep trouble, with little way out.? Ed Rendell made the case for a single payer health system. I say the same point can be made for no health insurance, which would lower costs more.

Ed Rendell made the comment “If a city goes bankrupt, it can?t borrow again.” Bloomberg’s Glasgall replied, “Orange County went bankrupt and can still borrow.”

Ravitch commented “Wall Street keeps going to cities and convincing them to borrow against future revenues. It should stop.?? It is a trap, but municipalities can borrow against the future, like the Poway School District in California.

Rendell made the case for telling truth & shared sacrifice. He thinks the voters aren?t dumb and that if you made the case to them, they would agree to higher taxes.

Ravitch commented that municipal bankruptcy is an admission that democracy has failed.? He added the threat of bankruptcy can make all of the parties focus; the biggest state risk is confiscatory tax levels, not reduced benefits. He also said the upping Medicare age to 67 would not just help the deficit; money would have to come from somewhere to pay 65-66 medical costs.

The moderator made a point about the frenzy in the junk municipal market, where the returns were comparable to equities over the past year. ?Ravitch commented that cities & states have no choice but to have access to debt markets

Governor McDonnell of Virginia was supposed to speak about sequestration, Instead, he got grilled by interviewer on perceived conflicts of interest regarding Star Scientific.? This was newsworthy, but not what the conference was supposed to be about.? Bloomberg should have had its interviewer stick to the topic at hand.? This was an economic conference, and not a general interview.

Once the intended interview got going McDonnell said: “Everyone knows we are broke. At some point the crushing amount of debt will catch up with us.”? He then went on to talk about our unfunded entitlement liabilities.? He then added as a Governor his state?s budget had to be balanced, as it was with the rest of the states.

Sadly, states only balance on a cash basis, which means if they have a penny left in the till at the end of year, they are balanced. Various pension, healthcare and other liabilities are not fully funded all states in the Union.? There is no state in the union which has all of its future liabilities funded.

Not one.

More in part 3

 

I was at the Bloomberg Washington Summit on April 30th;?I arrived late, despite leaving with a half hour to spare, and the Internet was down, so I puzzled over how to cover the event.? What kicked me over the edge was that Bloomberg jams its programs together with no rest breaks except lunch.? Thus I decided to cover the conference mostly via Twitter, and lob in questions to the Q&A.? As it was, I tweeted around 80 times, and lobbed in 17 questions, of which 8 were used out of the 15-20 or so audience questions that were used.

I would like to discuss some of the broad themes here, and give my opinions on the matter.

US Budget Deficits

There was the traditional bifurcation here, kind of like, “Lord, make me a Christian, but not yet!”? They saw the the need to bring down the deficit, but not yet.? Sadly that means that the deficit won’t go down much, or may even rise.

Personally, I think that the fiscal multiplier is low, perhaps negative, so reducing the deficit may actually stimulate the economy as resources move from unproductive government uses, to productive private uses.

And then there was my question:

They agreed it did matter what the money is spent on, contra Keynesian notions.? One agreed it would better be done at the state level.? Others said we could not afford to reduce the deficit.

Sequester

I like the sequester because it reduces the deficit.? Is it ham-fisted?? Yes.? Could things be done better? Yes.? So why do I like it?? It reduces the deficit, and politicians can’t agree on what to do about spending.? This forces the nation to figure out what it really cares about, versus past laziness.

I would increase the sequester, add in entitlements, and reduce the deficit to zero, if I could.? The screaming would motivate a real solution, because with no pain, there is no pressure for a solution.

Everyone carped about the sequester.? The Democrats blamed everything on it.? The Republican Governor of Virginia engaged in special pleading because it hurt defense spending in his state, and defense was necessary for the good of the republic.? My question, which he hemmed and hummed over was:

In general, the sequester was a “whipping boy” that took the hit for bad monetary policy and large deficits.? The Democrats blame the results of their bad policy on the sequestration.

More in part 2.