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from Felix Salmon:

A smarter way of subsidizing parenthood

Ben Walsh has a great roundup of the discussion surrounding Reihan Salam’s proposal that we institute a surtax on the childless. At a societal level, we want population growth — more children — but when it comes to individual households like my own, there are often compelling reasons to have few or no children at all. As countries get richer, their birth rates decline, with nasty demographic consequences.

One fix to this problem is simple: more immigration. Salam has another: giving people a bigger financial incentive to procreate, baked in to the tax code. But take a step back, and no one’s really disagreeing with the fundamental premise underlying such proposals. A country can only thrive if it has the human capital to do so, and it’s one of the most important roles of any government to maximize the value of its country’s aggregate human capital. One way it does that is by encouraging population growth; but the main way it does that is by providing universal education. After all, as technology advances, the skills that a country’s workers boast are ever more important than the simple number of warm bodies in the labor force. If your country falls far behind on education (think Portugal, or even Puerto Rico), then it will surely fall behind economically as well.

So if you don’t want to start fiddling with the tax code to try to penalize the childless, maybe an easier way to achieve much the same goal would be to invest more, at a federal level, in education.

Right now, most education funding happens locally — which encourages the idea that education is more for the benefit of individual children than it is for the benefit of the nation as a whole. Each community is responsible for its own education funding, and parents are prone to paying enormous sums, in the form of higher property prices and higher property taxes, in order to get their kids into better-funded schools where the kids come from wealthier households. Those sums are a substantial cost of having kids —as, of course, is all the money that parents pay towards other forms of education, including private-school fees and college tuition fees. On top of that, the student-loan crisis is essentially an artifact of the way in which US society forces individuals to pay for their own education, even though that education will ultimately benefit society as a whole.

from Felix Salmon:

Janet Yellen didn’t gaffe

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It’s become received opinion that Janet Yellen made a “rookie gaffe” in her first press conference as Fed chair, thereby “rattling markets”. She didn’t.

According to Peter Coy, Yellen made a “substantial blunder”. John Cassidy says she “got into trouble” when she told Reuters’ Ann Saphir that the Fed would wait “something on the order of around six months” after QE ends before starting to raise rates. Clive Crook was so perturbed by the presser that he is beginning to doubt the wisdom of the Fed having any kind of forward guidance at all. Mohamed El-Erian seems inclined to agree: the markets aren’t mature enough, he says, to internalize new information without over-extrapolating (i.e., freaking out).

from Felix Salmon:

Annals of captured regulators, NY Fed edition

Peter Eavis has a worrying story today: the chairman of the New York Fed, William Dudley, has effectively, behind the scenes, managed to delay the implementation of an important new piece of bank regulation.

The first thing to remember here is that delaying regulations is an extremely profitable game for the financial industry. If a new regulation will cost a bank $100 million per year, and the bank gets that new regulation delayed by a year, then it’s just made $100 million in excess profit. What’s more, the further away you get from the crisis, the harder it becomes for new rules to grow teeth. So when the banking lobby doesn't like a certain piece of regulation, its tool of choice is to bog it down and delay it to the point at which no one but the banking lobby cares any more. And then allow it to be implemented with so many loopholes and carve-outs that it’s effectively toothless.

from Felix Salmon:

The bank tax rises from the dead

Back in January 2010, Barack Obama — flanked by Tim Geithner, Larry Summers, and Peter Orszag — unveiled a new tax on big banks, or a “financial crisis responsibility fee”, as he liked to call it. Of course, this being Washington, the initiative never got off the ground, and was largely forgotten — until now:

The biggest U.S. banks and insurance companies would have to pay a quarterly 3.5 basis-point tax on assets exceeding $500 billion under a plan to be unveiled this week by the top Republican tax writer in Congress.

from Felix Salmon:

Felix Salmon smackdown watch, pensions edition

Many thanks to John Arnold for responding to my post about how he (and his foundation) should approach pension reform. We agree on many things, it turns out; but there's one big area where we disagree, which is encapsulated most cleanly in the question of what exactly is going on in San Jose mayor Chuck Reed's Pension Reform Act. I characterized Reed's ballot initiative as "allowing governments to default on their pension obligations", and "an attempt to renege on governments’ existing pension obligations". Arnold says I'm entirely wrong about that:

Salmon repeatedly claims that my wife, Laura, and I and our foundation, LJAF, “support plans making it easier for governments to default on existing promises.” Nothing could be further from the truth. We strongly believe that pension reform should not aim to cut or eliminate benefits...

from Felix Salmon:

Pension politics

David Sirota has a very important scoop today: the PBS series “Pension Peril” has secretly* been funded by John Arnold, a billionaire powerbroker with an aggressively anti-pensions political agenda. This looks very bad for PBS — but it’s also bad for Arnold, who generally gets glowing press, and who would seem to have no good reason to have insisted on secrecy when writing the $3.5 million check that made the series possible.

The PBS series in question seems to fall uncritically into line with the beliefs of Arnold and other Very Serious People — that pension liabilities are a huge problem, and that the only way to fix them is to reduce the amount that pensioners get paid. But of course it’s not nearly as simple as that.

from Felix Salmon:

Puerto Rico needs to prepare for its default

Ryan McCarthy has a good round-up of Puerto Rico’s debt problems, which have now been exacerbated by S&P downgrading the island’s bonds to junk status. (Moody’s and Fitch are certain to do so as well, in short order.) For a good one-stop overview of most of the big issues, I can recommend Nuveen Asset Management’s note, which includes this chart:

Screen Shot 2014-02-05 at 5.21.10 PM.png

What you’re seeing here is a vicious cycle: as debt problems pile up, economic activity decreases, which causes even bigger debt problems, even lower economic activity, and so on. Puerto Rico is now shrinking at a 6% annual pace, and that number is probably going to get worse before it gets better. The chances of the island’s economy actually growing at any point in the foreseeable future seem remote: indeed, the country has essentially been in one long and nasty continuous recession since 2006.

from Felix Salmon:

Barack Obama vs zombies

There's a strain of triumphalism coursing through the blogosphere today, on the grounds that the bonkers wing of the Republican party is going to have achieved exactly none of its own goals, while inflicting upon itself a massive black eye. The markets are feeling vindicated too: over the past week of DC craziness, the stock market has risen, pretty steadily, a total of about 2.5%. As a trading strategy, "tune out all news from inside the Beltway" seems to have worked very well -- it's a complete vindication of the Nassim Taleb idea that investors shouldn't read the newspaper. On top of that, the potential debt default was by its nature almost impossible to trade: outside a few obscure instruments like US CDS, it's very difficult to make money from a trade betting that tails are going to get fatter, for a short while.

But as a feeling of relief courses through Washington and the markets, let's not get carried away. Yes, as Jonathan Chait says, it's very good news that the House Republicans' plan collapsed. But the can hasn't been kicked very far down the road: we're going to hit the debt ceiling again in just a few short months. And at that point, one of two things will happen. Either the Republicans, licking their self-inflicted wounds from the current fiasco, will quietly and efficiently pass a bill while getting nothing in return. Or, in the spirit of "if at first you don't succeed", they will try, try again.

from Felix Salmon:

The default has already begun

The big question in Washington this week is whether, in the words of the NYT, we're going to see "a legislative failure and an economic catastrophe that could ripple through financial markets, foreign capitals, corporate boardrooms, state budget offices and the bank accounts of everyday investors". In this conception -- and I have subscribed to it just as much as anybody else -- the sequester is bad, the shutdown is worse, and the default associated with hitting the debt ceiling is so catastrophic as to be unthinkable.

This frame is a useful one, not least for the politicians in Washington, who seem to have become inured to the suffering caused by the shutdown, and downright blasé about the negative consequences of the sequester. Both of them could last more or less indefinitely were it not for the debt ceiling, which is helpfully providing a hard-and-fast deadline: Congress is going to have to come up with a deal before the ceiling is reached, because the alternative is, well, the zombie apocalypse.

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