Economist's View

Stiglitz: Too Big to Live

When Ben Bernanke was asked about the "too big to fail" problem not too long ago, the WSJ Economics blog reports:

Federal Reserve Chairman Ben Bernanke voiced skepticism that breaking-up big banks is the way to solve the so-called too big to fail problem...

Asked for his thoughts on Bank of England Gov. Mervyn King’s recent speech that advocated breaking up banks that were so large that their failure would represent a risk to the broader financial system, Bernanke said that making banks smaller would not necessarily be the solution to the problem. Smaller banks can also play important roles in financial systems, he said. He noted that during the 1930s, the U.S. didn’t have too many large bank failures, but the country suffered thousands of failures of smaller banks that added to the woes of the Great Depression. “I don’t think simply making banks smaller is the way to do it,” he said.

Still, more than once during his comments to the Economic Club of New York, Bernanke emphasized that it is crucial that large financial firms be allowed to fail in order to return market discipline to the financial system.

It is not at all clear to me that breaking large banks into smaller pieces addresses the connectedness issue. Smaller banks can be just as interconnected as larger banks, and hence simply breaking banks up without examining the effect it has on the underlying financial network connections may not reduce systemic risk.

Joseph Stiglitz says break them up whenever possible, regulate them heavily when it's not possible:

Too Big to Live, by Joseph E. Stiglitz, Commentary, Project Syndicate: A global controversy is raging... Mervyn King, the governor of the Bank of England, has called for restrictions on the kinds of activities in which mega-banks can engage. ... King is right to demand that banks that are too big to fail be reined in. In the United States, the United Kingdom, and elsewhere, large banks have been responsible for the bulk of the cost to taxpayers. ...

The crisis is a result of at least eight distinct but related failures:

• Too-big-to-fail banks have perverse incentives; if they gamble and win, they walk off with the proceeds; if they fail, taxpayers pick up the tab.
• Financial institutions are too intertwined to fail...
• Even if individual banks are small, if they engage in correlated behavior – using the same models – their behavior can fuel systemic risk;
• Incentive structures within banks are designed to encourage short-sighted behavior and excessive risk taking.
• In assessing their own risk, banks do not look at the externalities that they (or their failure) would impose on others, which is one reason why we need regulation in the first place.
• · Banks have done a bad job in risk assessment – the models they were using were deeply flawed.
• · Investors, seemingly even less informed about the risk of excessive leverage than banks, put enormous pressure on banks to undertake excessive risk.
• · Regulators, who are supposed to understand all of this and prevent actions that spur systemic risk, failed. They, too, used flawed models and had flawed incentives; too many didn’t understand the role of regulation; and too many became “captured” by those they were supposed to be regulating.

... There are, of course, costs to regulations, but the costs of having an inadequate regulatory structure are enormous. We have not done nearly enough to prevent another crisis... King is right: banks that are too big to fail are too big to exist. If they continue to exist, they must exist in what is sometimes called a “utility” model, meaning that they are heavily regulated.

In particular, allowing such banks to continue engaging in proprietary trading distorts financial markets. Why should they be allowed to gamble, with taxpayers underwriting their losses? What are the “synergies”? Can they possibly outweigh the costs? Some large banks are now involved in a sufficiently large share of trading ... that they have, in effect, gained the same unfair advantage that any inside trader has.

This may generate higher profits for them, but at the expense of others. It is a skewed playing field – and one increasingly skewed against smaller players. Who wouldn’t prefer a credit default swap underwritten by the US or UK government; no wonder that too-big-to-fail institutions dominate this market.

The one thing nowadays that economists agree upon is that incentives matter. ... Given the lack of understanding of risk by investors, and deficiencies in corporate governance, bankers had an incentive not to design good incentive structures. It is vital to correct such flaws – at the level of the organization and of the individual manager.

That means breaking up too-important-to fail (or too-complex-to-fix) institutions. Where this is not possible, it means stringently restricting what they can do and imposing higher taxes and capital-adequacy requirements, thereby helping level the playing field. ...

Even if we fix bank incentive structures perfectly ... the banks will still represent a big risk. The bigger the bank, and the more risk-taking in which big banks are allowed to engage, the greater the threat to our economies and our societies. ... What is required is a multi-prong approach, including special taxes, increased capital requirements, tighter supervision, and limits on size and risk-taking activities.

Such an approach won’t prevent another crisis, but it would make one less likely – and less costly if it did occur.

I think limiting connectedness and limiting leverage ratios are both essential elements of reform. There will always be vulnerabilities, even in a system that has only small financial institutions, and we may not be able to identify the vulnerabilities in time. Shocks are going to happen. Limiting connectedness and leverage ratios for both big and small firms (along with regulation on what types of activities they can engage in, which addresses an aspect of connectedness) will reduce the magnitude of the damage to the financial system and the broader economy that those inevitable shocks are able to bring about.

Paul Krugman: An Affordable Truth

Will the meeting in Copenhagen produce a meaningful agreement on greenhouse gas emissions?:

An Affordable Truth, by Paul Krugman, Commentary, NY Times: Maybe I’m naïve, but I’m feeling optimistic about the climate talks starting in Copenhagen on Monday. President Obama now plans to address the conference on its last day, which suggests that the White House expects real progress. It’s also encouraging to see developing countries — including China, the world’s largest emitter of carbon dioxide — agreeing, at least in principle, that they need to be part of the solution.

Of course, if things go well in Copenhagen, the usual suspects will go wild. We’ll hear cries that the whole notion of global warming is a hoax perpetrated by a vast scientific conspiracy... We’ll also, however, hear cries that climate-change policies will destroy jobs and growth.

The truth, however, is that cutting greenhouse gas emissions is affordable as well as essential. Serious studies say that we can achieve sharp reductions in emissions with only a small impact on the economy’s growth. And the depressed economy is no reason to wait — on the contrary, an agreement in Copenhagen would probably help the economy recover.

Why should you believe that cutting emissions is affordable? First, because financial incentives work.

Action on climate, if it happens, will take the form of “cap and trade”: businesses ... will ... be able to increase their profits if they can burn less carbon — and there’s every reason to believe that they’ll be clever and creative about finding ways to do just that. ...

The truth is that conservatives who predict economic doom if we try to fight climate change are betraying their own principles. They claim to believe that capitalism is infinitely adaptable, that the magic of the marketplace can deal with any problem. But for some reason they insist that cap and trade — a system specifically designed to bring the power of market incentives to bear on environmental problems — can’t work.

Well, they’re wrong — again. For we’ve been here before.

The acid rain controversy of the 1980s was in many respects a dress rehearsal for today’s fight over climate change. Then as now, right-wing ideologues denied the science. Then as now, industry groups claimed that any attempt to limit emissions would inflict grievous economic harm.

But in 1990 the United States went ahead anyway with a cap-and-trade system for sulfur dioxide. And guess what. It worked, delivering a sharp reduction in pollution at lower-than-predicted cost.

Curbing greenhouse gases will be a much bigger and more complex task — but we’re likely to be surprised at how easy it is once we get started. ...

Still, should we be starting a project like this when the economy is depressed? Yes... — in fact, this is an especially good time to act, because the prospect of climate-change legislation could spur more investment spending.

Consider, for example, the case of investment in office buildings. Right now, with vacancy rates soaring and rents plunging, there’s not much reason to start new buildings. But suppose that a corporation that already owns buildings learns that over the next few years there will be growing incentives to make those buildings more energy-efficient. Then it might well decide to start the retrofitting now, when construction workers are easy to find and material prices are low.

The same logic would apply to many parts of the economy, so that climate change legislation would probably mean more investment over all. And more investment spending is exactly what the economy needs.

So let’s hope my optimism about Copenhagen is justified. A deal there would save the planet at a price we can easily afford — and it would actually help us in our current economic predicament.

Fed Watch: Structural and Cyclical

Tim Duy:

Structural and Cyclical, by Tim Duy: For several months, I have been telling stories that decompose US economic activity into what I think of as cyclical and structural dynamics.  I believe the distinction is very important to firms, markets, and policymakers who need to be aware when one dynamic is clouding their view of the other.

The cyclical dynamics, in my opinion, are the most spectacular, the most visible.  The real cyclical fireworks began in the second half of 2009, as the energy price shock decimated household budgets, quickly followed by a financial shock that triggered an additional pullback in demand.  Firms unexpectedly found they had far too much excess capacity in this environment, and began the process of "rightsizing."  Lob losses mounted even as falling energy costs and lower interest rates for those not credit constrained began to put a floor under spending.

Eventually, firms would realign capacity with the new level of demand, and job losses would taper off.  That would mark the early stages of the cyclical bottom, the point at which growths returns.  The initial growth spurt could be very rapid, as firms restock inventory and pent-up demand comes into play.  The additional of government stimulus will add additional fuel to the fire. 

Once the early stages of recovery are complete, the story shifts from cyclical to structural.  The boost from inventory correction, pent-up demand, and government stimulus fade, and the underlying growth rate, the fundamental rates of activity, becomes evident.  Now your expectations about the nation's economic direction depend on the weight you place on the structural factors.  If you place nearly zero weight on those factors, then growth remains fairly high as the economy rapidly returns to potential.  In effect, cyclical dynamics dominate your story; the Fed is simply flipping a switch that shifts the economy from high to low states and back again, a traditional post-WWII business cycle.  If you place heavy weight on structural stories, you talk about the inability to revert to past patterns of consumer spending growth due to excessive household debt, a reversion to global imbalances that supports outsized import growth, lack of an asset bubble to compensate for these structural problems, etc.  With these stories in your toolkit, you expect a low underlying growth rate - barely at potential growth - in which case the gap between actual and potential output remains distressingly high for possibly years to come.

I tend to view incoming data through both cyclical and structural lenses.  The employment report is a prime example.  Clearly, the steady improvement in the rate of deterioration of nonfarm payrolls since the spring follows the cyclical pattern as firms stop chasing demand down and thus stabilize their workforces.  Moreover, recent increases in temporary help hiring also points to firming labor demand in the months ahead.  It would seem that stronger growth does in fact have the desired impact on labor markets, and that fiscal stimulus helped accelerate recovery in the labor markets. 

At the same time, though, one has to wonder what happens as the stimulus begins to fade?  Will there be sufficient demand from other sectors to compensate for fiscal and monetary withdrawal?  It is worth recalling the patterns of labor market dynamics as we exited from the 2001:

After the post-recession boost  - inventory correction, pent-up demand, etc. - labor markets quickly returned to a period of stagnation that lasted until the housing bubble began to take hold.  What in the next two years can we expect to take the place of that bubble?  Furthermore, if you are worried about a relapse in the pace of growth, the ISM reports last week were not exactly comforting.  Both revealed an overall slowing of activity, and employment signals were not exactly consistent with a strong rebound in hiring anytime soon.  For that matter, the ADP report, while not one of my favorites to begin with, came in far below the actual NFP numbers, suggesting that maybe this employment report was a little stronger than the underlying trend. 

Also worth noting is the dismal reports on retail sales that appear to have largely slipped below the radar last week.  From the Wall Street Journal:

links for 2009-12-06

• Big Paydays for Sovereign Funds, the White Knights of the Crisis - NYT
• Treasury Forecasts Smaller Loss From Bank Rescue - NYTimes.com
• On Animal Spirits and Knee-Jerk Reactions - Rajiv Sethi
• Is newer better? The Penn World Table growth estimates - voxeu.org
• The price of oil and the macroeconomy - voxeu.org
• Moral hazard, time inconsistency, and banking in the long run - Irish Economy
• The Visionary - Economic Principals
• Business must champion low-carbon growth - Nicholas Stern
• Bernanke Confirmation? - David Kotok
• Microlending Fails - Overcoming Bias
• Abnormal Returns - links
• Marginal Revolution - links
• Brad DeLong - links

Did Bank Executives Lose Enough to Learn their Lesson?

Will the losses that financial executives suffered as a result of the crisis provide the discipline necessary to prevent excessive risk taking in the future? Not according to this analysis:

Bankers had cashed in before the music stopped, by Lucian Bebchuk, Alma Cohen, and Holger Spamann, Commentary, Financial Times: According to the standard narrative, the meltdown of Bear Stearns and Lehman Brothers largely wiped out the wealth of their top executives. Many – in the media, academia and the financial sector – have used this account to dismiss the view that pay structures caused excessive risk-taking and that reforming such structures is important. That standard narrative, however, turns out to be incorrect.

It is true that the top executives at both banks suffered significant losses on shares they held when their companies collapsed. But our analysis ... shows the banks’ top five executives had cashed out such large amounts since the beginning of this decade that, even after the losses, their net pay-offs during this period were substantially positive. ...

Our analysis undermines the claims that executives’ losses on shares during the collapses establish that they did not have incentives to take excessive risks. ...[R]epeatedly cashing in large amounts of performance-based compensation based on short-term results did provide perverse incentives – incentives to improve short-term results even at the cost of an excessive rise in the risk of large losses at some (uncertain) point in the future.

To be sure, executives’ risk-taking might have been driven by a failure to recognise risks or by excessive optimism, and thus would have taken place even in the absence of these incentives. But given the structure of executive pay, the possibility that risk-taking was influenced by these incentives should be taken seriously.

The need to reform pay structures is not, as many have claimed, simply a politically convenient sideshow. ... To understand what has happened, and what lessons should be drawn, it is important to get the facts right. In contrast to what has been thus far largely assumed, the executives were richly rewarded for, not financially devastated by, their leadership of their banks during this decade.

It doesn't really matter whether executive compensation structures caused or contributed to the crisis or not. If the manner in which executives are paid creates perverse incentives and distorts decisions away from the best interests of shareholders, as it appears to do, then both the level and structure of the compensation should be fixed.

Deposits in Failed Banks as a Percent of GDP

Rolfe Winkler says suggestions that the current financial crisis was not as bad as the Great Depression are wrong and he offers this chart as evidence:

He adds:

If you add JP Morgan and Wells Fargo to the chart, it looks much worse. Goldman and Morgan Stanley don’t have deposits, but did have $2 trillion in liabilities between them as of August 31, ‘08

The Fed deserves more credit than it is getting for avoiding a much, much worse outcome for the economy. Yes, the Fed made mistakes, but are you really convinced that if Bernanke had been replaced by Larry Summers - and that was the likely outcome if he had been removed no matter how much you might wish it to be otherwise - things would have been better rather than worse? I'm not.

But I do want to add a few words about Bernanke's recent testimony before congress. I criticized Greenspan for taking a stand on fiscal policy in his testimony before congress, and I am not pleased that Bernanke waded into these waters. I think it's fine for the Fed chair to explain how budget deficits interact with monetary policy, how budget deficits affect the Fed's policy choices, what the Fed is likely to do if deficits persist (e.g., when markets return to normal, if deficits begin pressuring interest rates upward, will the Fed let interest rates rise or not?), matters that affect monetary policy in a fairly direct fashion. But to take stands on particular programs (e.g. Social Security and Medicare), to give advice on fiscal policy beyond its implications for monetary policy, to comment on matters outside of its purview unnecessarily politicizes the Fed. I have supported Bernanke's reappointment (if for no other reason than it's hard to imagine a viable candidate who would do better - be careful what you wish for), but this was disappointing.

Will Deficits Bankrupt Our Grandchildren?

Robert Frank says complaints that running deficits to offset downturns will bankrupt our grandchildren are "absurd":

How to Run Up a Deficit, Without Fear, by Robert H. Frank, Commentary, NY Times: Few subjects rival the federal budget deficit in its power to provoke muddled thinking.

It’s a pity, because there are really only three basic truths that policy makers need to know about deficits: First, it’s actually good to run them during deep economic downturns. Second, whether deficits are bad in the long run depends on how borrowed money is spent. And third, eliminating deficits entirely would not require any painful sacrifices. ...

The first proposition comes from ... Keynes, who argued that when total spending falls well below the level required for full employment, the economy won’t recover quickly on its own. Consumers won’t lead the way... And most businesses won’t invest... Only government ... has both the motive and opportunity to increase spending significantly during deep downturns.

Of course, if the government borrows to do so, the debt must eventually be repaid (or the interest on it must be paid forever). That fact has provoked strident protests about government “bankrupting our grandchildren.”

It’s an absurd complaint. Failure to stimulate the economy would mean a longer downturn. That ... would mean ... reduced tax receipts, increased unemployment insurance payouts, and depressed private investment. The net result? Higher total public borrowing and a permanent decline in productivity...

Once the economy is back on its feet, deficit logic changes. At full employment, extra borrowing often compromises future prosperity, just as critics say. ...

But the reverse would be true if government borrowing were used for productive investments. After decades of neglect of the nation’s infrastructure, attractive public investment opportunities abound. ... When government undertakes such investments, our grandchildren become richer, not poorer. ...

To eliminate deficits, we need additional revenue. The encouraging news is that we could raise more than enough to balance government budgets by ... tax[ing] activities that cause harm to others. Called Pigovian taxes ... such levies create a burden that is more than offset by the reductions they cause in costly side effects of everyday activities. ...

When producers emit sulfur dioxide into the atmosphere,... the resulting acid rain harms others. As the ... Clean Air Act demonstrated, the most efficient ... remedy was to tax sulfur dioxide emissions. ... Similarly, when motorists enter congested roadways, they impose additional delays on others. Here, too, taxation is the best remedy...

When the transactions of financial speculators fuel asset bubbles, they increase the risk of financial meltdowns. A small tax on those transactions would reduce this risk. ... Carbon dioxide emissions contribute to global warming. Here as well, taxation offers the most efficient and least intrusive remedy.

Anti-tax zealots denounce all taxation as ... depriving citizens of their right to spend their hard-earned incomes as they see fit. Yet nowhere does the Constitution ... does it grant us the right to harm others with impunity. No one is permitted to steal our cars or vandalize our homes. Why should opponents of taxation be allowed to harm us in less direct ways?

Taxes on harmful activities would be justified quite apart from any need to balance government budgets. But such taxes would also generate ample revenue for the public services we demand, quieting the ill-considered commentary about deficits. ...

[See also: "Bogus Arguments about the Burden of the Debt"]

links for 2009-12-05

• The Ayatollahs of Academic Privatization - unsettling economics
• Employment: Conflicting Signals - Macro View
• Will Big Business Save the Earth? - NYTimes.com - Jared Diamond
• Lessons from the Real Estate Boom and Bust of the 1920s - Eugene White
• A silver lining in the climate talks cloud - Robert Stavins
• A balanced reaction to “The Civil War in Development Economics” - Aid Watch
• Credit Writedowns - links

"Why Welfare Reform Fails its Recession Test"

Was welfare reform enacted during the Clinton administration a mistake?:

Why welfare reform fails its recession test, by Peter Edelman and Barbara Ehrenreich, Commentary, Washington Post: We all like to imagine that there'll be something to stop our fall if we hit hard times. ... "There's always welfare, isn't there?"

Actually, no. When President Bill Clinton signed welfare reform into law, he didn't just end welfare as we knew it. For all practical purposes,... he brought an end to cash help of any kind for families with children in much of the country. While welfare reform was long ago declared a success in some quarters, it was deeply flawed from the beginning. The recession has shown how seriously unprepared it left us for hard times. ...

"Can Science Fight Media Disinformation?"

Is better science education the answer to our "media disinformation" problem?:

War Is Peace: Can Science Fight Media Disinformation?, by Lawrence M. Krauss, Commentary, Scientific American: ...The rise of a ubiquitous Internet, along with 24-hour news channels has, in some sense, had the opposite effect from what many might have hoped such free and open access to information would have had. It has instead provided free and open access, without the traditional media filters, to a barrage of disinformation. Nonsense claims had more difficulty gaining traction in the days when print journalism held sway and newspaper editors had the final word on what made its way into homes and when television news consisted of a half-hour summary of what a trained producer thought were the most essential stories of the day.

Now fabrications about “death panels” and oxymoronic claims that ”government needs to keep its hands off of Medicare” flow freely on the Internet, driving thousands of zombielike protesters to Washington to argue that access to health care will undermine their fundamental freedom to have their insurance canceled if they get sick. And 24-hour news channels, desperate to provide ”breaking” coverage at all hours, end up serving as public relations vehicles for any celebrity who happens to make an outrageous claim or, worse, decide that the competition for ratings requires them to be anything but ”fair and balanced” in their reporting.

“Fair and balanced,” however, doesn’t mean putting all viewpoints, regardless of their underlying logic or validity, on an equal footing. Discerning the merits of competing claims is where the empirical basis of science should play a role. I cannot stress often enough that what science is all about is not proving things to be true but proving them to be false. What fails the test of empirical reality, as determined by observation and experiment, gets thrown out like yesterday’s newspaper. One doesn’t need to debate about whether the earth is flat or 6,000 years old. These claims can safely be discarded, and have been, by the scientific method.

What makes people so susceptible to nonsense in public discourse? Is it because we do such a miserable job in schools teaching what science is all about—that it is not a collection of facts or stories but a process for weeding out nonsense to get closer to the underlying beautiful reality of nature? Perhaps not. But I worry for the future of our democracy if a combination of a free press and democratically elected leaders cannot together somehow more effectively defend empirical reality against the onslaught of ideology and fanaticism. [full version]

There was plenty of nonsense long before the internet and 24 hour news, but it's probably true that these developments helped to amplify and speed the spread of nonsensical claims, though I'd assert that 24 hour news (plus radio to some extent) is more responsible than the internet.

As for solving the nonsense problem through better science education, I do agree that better critical thinking skills would be helpful, that's true by definition I suppose, but that's not enough. Nobody can be an expert on health care, global warming, and all the other important issues they face. The underlying scientific, economic, political, sociological, etc. issues are too difficult (in some cases even for the experts). To overcome that, we have to rely upon people we can trust, often experts who can help to guide us to the correct decisions, but sometimes it's a trusted intermediary. Critical thinking skills can help us determine who to listen to, but it still comes down to trusting that you are getting the best possible analysis of the problem

For good or bad -- I'm still making up my mind about that -- I think that a trust that was once there is gone, at least to some degree. People believed Walter Cronkite, they trusted scientists, Dr. Spock had all the answers about how to raise your kids, but trust in the media, scientists, politicians, doctors, and so on has eroded (yes, economists too). I'd cite 24 hours news and its ilk as part of the reason, but I'm not sure that's been the fundamental driving force behind the change.

Maybe people are right to be more skeptical of the information they receive -- maybe they trusted too much in the past (and there could be an overreaction during the adjustment, causing trust to fall even further). If so, then the increase in uncertainty brought about by declining trust in experts and other sources of information would be consistent with the appearance of more nonsense in the public discourse attempting to fill the void.

links for 2009-12-04

• The German debate over method - Daniel Little
• Why do (bad) banks (really) matter? - Nick Rowe
• Why a cap-and-trade system can be bad for your health - voxeu.org
• Brad Delong - unsettling economics
• What is Happening to the Reform in Health Reform? - Swampland
• New Deal 2.0 - links
• The Stash - links
• FT Alphaville - links
• Abnormal Returns - links
• Credit Writedowns - links
• Marginal Revolution - links
• Economists Forum - links
• Market Talk - links
• PSD - links

"Enough Posturing Politics. Time to Let the Experts Lead"

Jeff Sachs says that in order to make progress on curtailing greenhouse gases, we need to get politicians out of the way and involve "scientists, engineers and ordinary citizens ... in a true discussion about our common future, and especially the tradeoffs, costs and choices":

Enough posturing politics. Time to let the experts lead, by Jeffrey Sachs, Commentary, CiF: We can only marvel at the disarray. Here we are, 17 years after the signing of the UN framework convention on climate change, two years after the decision in Bali to agree a new climate policy, one year after Barack Obama's election, and days out from the Copenhagen conference. Yet a real global strategy to avoid catastrophe remains elusive.

Yes, there is some progress. ... The mayhem, however, is at least as great. Greenhouse gas concentrations in the atmosphere continue to mount, and will do so for years or decades to come. The Wall Street Journal, America's biggest circulation paper, rails each day against climate science. Backroom deals in the US Congress with industrial lobbies threaten to eviscerate already watered-down proposals for limiting carbon emissions. A vote on the US legislation has been postponed till next spring at the earliest, and a similar bill has just been defeated in Australia.

The truth is that even if we reach a political agreement, we're not yet on track to achieve practical, significant and sustained progress... – we've somehow turned a life-and-death challenge into a scrum. After Copenhagen, which probably will be concluded with a patch-up accord, it will be vital to change paths from the one we've been on essentially since before Kyoto in 1997.

We've debated for years about who should control emissions, by how much, when, and according to binding or non-binding commitments. Yet we can't settle these issues without also getting into the details about the deployment of low-carbon technologies, social behaviors and the quantitative realities of energy systems, transport technologies, food production, water scarcity, and population trends. We will continue to go around in circles until we are much more systematic in bringing scientific and engineering realities to the table. Our negotiations need much greater grounding in our true options and their costs.

These issues are tough and complex. Each nation's plausible choices depend on what technologies will be available and when. ... We will need, in short, a lot more brainstorming than negotiation, at least until the world's plausible options and trade-offs come into view. When can low-carbon power plants truly be brought online? When will electric vehicles be ready for mass sales? Will carbon capture really work and if so, where? Which countries and regions ... have the right kind of geology to store carbon underground, and who is going to monitor it? Dare we advocate a massive revival of the nuclear power industry, in a world fraught with nuclear proliferation? During two years of lead-up to Copenhagen, the official negotiations never gave a place for such questions to be posed, much less answered. ...

We have spent a lot of time debating the merits of tradable permits versus taxation but have failed to understand that operational policies must go far beyond either instrument. The future of nuclear power, for instance, depends not so much on tradable permits as on issues of safety, reliability, and risks of proliferation or terrorism. Similarly emissions trading may eventually spur the use of carbon capture and sequestration, but only after several such plants have been tried on the public expense, to investigate the real engineering and costs of possible technologies, and the real feasibility of safe, long-term storage in geological sites. The scale-up of solar and wind power will depend on land use choices, the future of the power grid, and the ability to store power.

The costs of these approaches can only be judged after more thorough testing and analysis. Thus the side payments that rich countries will have to make to poor ones to adopt such technologies can't yet be determined precisely. When the EU or any country announces their contribution to the poorer countries in Copenhagen, the number will be pulled out of the hat, and probably far too low. It's past time to do ... the real financial homework.

Perhaps it's no surprise we are stuck. Climate change is the most complicated issue the world has faced. Complex – but not hopeless. It's time to put the expertise at the front table, not to supplant public debate and discussion but finally to inform it. Copenhagen should be the end of negotiation by politicians with technical issues kept in the shadows or ignored. Let's get scientists, engineers and ordinary citizens involved in a true discussion about our common future, and especially the tradeoffs, costs and choices. Together we can prove that our world is still capable of reaching long-range agreements when our children's lives and wellbeing hang in the balance.

Employment Report Shows Small Decline in Unemployment

The unemployment rate dropped from 10.2% to 10.0%. That's an improvement and that is good news, but the improvement is small, payroll employment was essentially unchanged, long-term unemployment remains a problem, the number will be revised later and could go higher (or lower), and if this takes the steam out of efforts to further stimulate jobs, it will have the perverse effect of making the unemployment problem last longer, and hence be worse.

See also Paul Krugman (who worries this will undermine efforts to further stimulate jobs and the economy), Brad DeLong (who notes that the payroll employment is flat), Justin Fox and David Leonhardt (who break down the underlying numbers and note the long-term unemployment problem), Spencer (who also looks at wage income), and Calculated Risk, Part 2, Part 3 (who shows the numbers graphically).

Paul Krugman: Reform or Else

Anyone who is concerned about the national debt should support health care reform:

Reform or Else, by Paul Krugman, Commentary, NY Times: Health care reform hangs in the balance. Its fate rests with a handful of “centrist” senators — senators who claim to be mainly worried about whether the proposed legislation is fiscally responsible.

But if they’re really concerned with fiscal responsibility, they shouldn’t be worried about what would happen if health reform passes. They should, instead, be worried about what would happen if it doesn’t pass. For America can’t get control of its budget without controlling health care costs...

Some background: Long-term fiscal projections for the United States paint a grim picture. Unless there are major policy changes, expenditure will consistently grow faster than revenue, eventually leading to a debt crisis.

What’s behind these projections? An aging population, which will raise the cost of Social Security, is part of the story. But the main driver ... is the ever-rising cost of Medicare and Medicaid. ...

You might think ... that extending coverage to those who would otherwise be uninsured would exacerbate the problem. But you’d be wrong, for two reasons.

First, the uninsured in America are, on average, relatively young and healthy; covering them wouldn’t raise overall health care costs very much.

Second, the proposed health care reform links the expansion of coverage to serious cost-control measures for Medicare. Think of it as a grand bargain: coverage for (almost) everyone, tied to an effort to ensure that health care dollars are well spent.

Are we talking about real savings, or just window dressing? Well, the health care economists I respect are seriously impressed by the cost-control measures in the Senate bill, which include efforts to improve incentives for cost-effective care, the use of medical research to guide doctors toward treatments that actually work, and more. ...

Over the next decade, the Congressional Budget Office has concluded, the proposed legislation would reduce, not increase, the budget deficit. And ... it would greatly improve our long-run fiscal prospects.

But there’s another reason failure to pass reform would be devastating — namely, the nature of the opposition.

The Republican campaign against health care reform has rested in part on ... arguments that go back to the days when Ronald Reagan was trying to scare Americans into opposing Medicare — denunciations of “socialized medicine,” claims that universal health coverage is the road to tyranny, etc.

But in the closing rounds of the health care fight, the G.O.P. has focused more and more on an effort to demonize cost-control efforts. The Senate bill would impose “draconian cuts” on Medicare, says Senator John McCain, who proposed much deeper cuts ... as part of his presidential campaign. “If you’re a senior and you’re on Medicare, you better be afraid of this bill,” says Senator Tom Coburn.

If these tactics work, and health reform fails, think of the message this would convey: It would signal that any effort to deal with the biggest budget problem we face will be successfully played by political opponents as an attack on older Americans. It would be a long time before anyone was willing to take on the challenge again; remember that after the failure of the Clinton effort, it was 16 years before the next try at health reform.

That’s why anyone who is truly concerned about fiscal policy should be anxious to see health reform succeed. If it fails, the demagogues will have won, and we probably won’t deal with our biggest fiscal problem until we’re forced into action by a nasty debt crisis.

So to the centrists still sitting on the fence over health reform: If you care about fiscal responsibility, you better be afraid of what will happen if reform fails.

"The Case for $6 Trillion More Monetary Stimulus"

Tim Duy passes this along:

No Exit: The Case for $6 Trillion More Monetary Stimulus, by Joseph Gagnon, Peterson Institute for International Economics: A lively debate is under way between those who want more fiscal stimulus to create jobs and those who worry that our national debt is already too high. Both sides are ignoring the obvious alternative--one that would create jobs and lower the deficit. In a newly-posted Policy Brief, I present the argument for easier monetary policy in all the main developed economies.

As the latest job figures demonstrate, the economies of the United States, the euro area, Japan, and the United Kingdom are suffering from historically high rates of unemployment. In all four economies, the overwhelming majority of forecasters see weak economic growth and lackluster job creation over the next two to three years. In Washington, the Obama administration has just held a Jobs Summit, underscoring the concern about how to put more Americans back to work. Clearly, we need more macroeconomic stimulus to reduce the suffering and allay the long-term damage caused by persistent unemployment as well as to ward off the risk of harmful deflation. But record peacetime fiscal deficits and rapidly rising public debt point to monetary policy, rather than fiscal policy, as the way to go.

Short-term interest rates already have been reduced to near zero. But the Federal Reserve and its counterparts have other tools to use for monetary stimulus. Over the past year, the Federal Reserve and the Bank of England have pushed down long-term borrowing costs for both the public and private sectors through their large-scale purchases of long-term bonds. There is considerable scope for additional purchases to drive borrowing costs even lower. The European Central Bank and the Bank of Japan should join the Federal Reserve and the Bank of England in combined purchases of an additional $6 trillion in long-term bonds designed to push 10-year bond yields down another 75 basis points. At a time of concern about fiscal deficits, it is important to note that reducing yields on government debt actually reduces the federal deficit. Reducing yields on private debt will also speed the repair of private sector balance sheets and encourage businesses to invest and expand employment. A more rapid recovery further reduces fiscal deficits by raising revenues.

It is time to stop arguing about tradeoffs. Monetary policy can create jobs and reduce the deficit at the same time.

links for 2009-12-03

• Bernanke, Pro and Con - Economix
• Jobs and commercial real estate: Still keeping us up at night - macroblog
• Q&A: Former Fed Official Poole on Bernanke and Politics - RTE
• The Economics of Hyman Minsky - Rajiv Sethi
• Was Henry George Right After All? - Economic Principals
• Current historical sociology: George Steinmetz - UnderstandingSociety
• Canada's housing starts following recovery script - Worthwhile Canadian Initiative
• Economix - links
• Economists Forum - links
• Money Supply - links
• FT Alphaville
• Abnormal Returns - links
• The Stash - links
• Market Talk - links
• Marginal Revolution - links
• Credit Writedowns - links

Savings Gluts and Bubbles

Robin Wells says our current problems began with a global savings glut that was caused by "thrifty Germans, and state-owned enterprises in China – along with governments of other countries, of course, turning a blind eye to the escalating problems." And, she argues, if something isn't done to eliminate the glut, then asset bubbles and instability will continue, "exacerbating income inequality and favoring wealthy bankers and the Chinese elite":

Big savers got us into this mess, as well as big spenders, by Robin Wells, Commentary, Comment is Free: The world is trapped in a global savings glut. It is both the source of our economic woes and an obstacle to the task of pulling ourselves out of the ditch. Worse yet, the glut's continued existence will feed a succession of asset bubbles until we confront it, head on, and find ways to soak up the excess.

Yes, we can blame the City and Wall Street for turning the global savings glut into fissile material. But that's like saying, "hyenas do what hyenas do". Given extraordinarily lax regulation and a flood of money to play with, bankers were just acting according to their incentive schemes. They merely took advantage of the opportunities the glut presented. The real culprits are thrifty Germans, and state-owned enterprises in China – along with governments of other countries, of course, turning a blind eye to the escalating problems.

The flood of savings in the global economy arose from Germany and China's persistent trade surpluses over the last decade. A country with such a surplus sells more to its trading partners than it buys in return. Persistent deficit countries – the US, Britain, Iceland, and the eurozone excluding Germany, France and Italy – sell assets to the surplus countries to pay for their deficits. Thus persistent surplus countries accumulate the assets of persistent deficit countries: in the case of China, US treasury bills; in the case of Germany, Spanish eurobonds, sterling notes, and US sub-prime mortgages.

What makes this a global glut is that the world as a whole is saving more than can be profitably invested. The corollary is that, eventually, those funds will earn less than nothing. And through financial engineering, those losses are now distributed around the world.

"The Civil War in Development Economics"

Anything with the words "Civil War" in it is catching my attention today:

The Civil War in Development Economics, by William Easterly: Few people outside academia realize how badly Randomized Evaluation has polarized academic development economists for and against. My little debate with Sachs seems like gentle whispers by comparison.

Want to understand what’s got some so upset and others true believers? A conference volume has just come out from Brookings. At first glance, this is your typical sleepy conference volume, currently ranked on Amazon at #201,635.

But attendees at that conference realized that it was a major showdown between the two sides, and now the volume lays out in plain view the case for the prosecution and the case for the defense of Randomized Evaluation.

OK, self-promotion confession, I am one of the editors of the volume, and was one of the organizers of the conference... Angus Deaton also gave a major luncheon talk at the conference, which was already committed for publication elsewhere. A previous blog discussed his paper.

Here’s an imagined dialogue between the two sides on Randomized Evaluation (RE) based on this book:

FOR: Amazing RE power lets us identify causal effect of project treatment on the treated.

AGAINST: Congrats on finding the effect on a few hundred people under particular circumstances, too bad it doesn’t apply anywhere else.

FOR: No problem, we can replicate RE to make sure effect applies elsewhere.

AGAINST: Like that’s going to happen. Since when is there any academic incentive to replicate already published results? And how do you ever know when you have enough replications of the right kind? You can’t EVER make a generic “X works” statement for any development intervention X. Why don’t you try some theory about why things work?

FOR: We are now moving in the direction of using RE to test theory about why people behave the way they do.

AGAINST: I think we might be converging on that one. But your advertising has not yet got the message, like the JPAL ad on “best buys on the Millennium Development Goals.”

FOR: Well, at least it’s better than your crappy macro regressions that never resolve what causes what, and where even the correlations are suspect because of data mining.

AGAINST: OK, you drew some blood with that one. But you are not so holy on data mining either, because you can pick and choose after the research is finished whatever sub-samples give you results, and there is also publication bias that shows positive results but not zero results.

FOR: OK we admit we shouldn’t do that, and we should enter all REs into a registry including those with no results.

AGAINST: Good luck with that. By the way, even if do you show something “works,” is that enough to get it adopted by politicians and implemented by bureaucrats?

FOR: But voters will want to support politicians who do things that work based on rigorous evidence.

AGAINST: Now you seem naïve about voters as well as politicians. Please be clear: do RE-guided economists know something the local people do not know, or do they have different values on what is good for them? What about tacit knowledge that cannot be tested by RE? Why has RE hardly ever been used for policymaking in developed countries?

FOR: You can take as many potshots as you want, at the end we are producing solid evidence that convinces many people involved in aid.

AGAINST: Well, at least we agree on the on the much larger question of what is not respectable evidence, namely, most of what is currently relied on in development policy discussions. Compared to the evidence-free majority, what unites us is larger than what divides us.

[On the civil war reference: I'm at the University of Oregon, and my brother played football for Oregon State many years ago - he was a defensive end - so to the extent that either of us cares after all these years, it's a Ducks versus Beavers family war as well (the next generation seems to care more than we do).]

Fed Watch: Bubbles and Policy

Tim Duy discusses the type of bubble-popping strategy the Fed ought to pursue:

Bubbles and Policy, by Tim Duy: The Wall Street Journal carried a front page article today detailing changing views at the Federal Reserve regarding the policy treatment of emerging bubbles of speculative activity. Much of the ground has been well tread. Is monetary policy or regulatory policy the best mechanism to address bubbles? I tend to favor the latter category, should we have a regulatory environment that is not essentially captured by those policymakers are supposed to regulate. Interest rate policy is a rather blunt weapon that kills indiscriminately. For instance, I am sympathetic with the view that interest rates were not necessarily too low during the build up of the housing bubble. Indeed, relatively low rates of investment (equipment and software) growth suggests that real rates were actually too high. But capital flowed to housing instead of more productive investment activities because that was the path of least resistance. Policymakers could have chosen to put some grit on that path by, for example, aggressively evaluating lending standards with regards to products such as "Liar's Loans," etc., but chose to follow a hands off approach.

What caught my attention in the article was this passage:

Yet the question of whether and how to tackle bubbles before they burst is becoming a growing concern amid fears of new bubbles developing in commodities markets and in emerging economies. Gold prices are up more than 50% in a year's time. China's Shanghai Composite stock index is up more than 75% this year. Stocks in Brazil are up even more. Oil prices have rebounded. They remain far below last year's peaks but a return to those highs could fuel inflation in goods and services more directly than tech stocks or housing did.

I think it is important to recognize what bubbles should be the focus of Federal Reserve concerns. After all, the Fed is charged with maintaining price stability and maximum sustainable employment in the United States. Why should the Fed be concerned with housing prices in Hong Kong or stock prices in Brazil and China? Don't those bubbles fall under the responsible of foreign central banks? It seems clear that in such cases, the extent of the Fed's concerns should be limited to the regulatory arena. Are US based banks lending into those bubbles, thereby setting the stage for negative feedback loops? If so, raise capital requirements on that lending, tighten underwriting standards, etc. Just don't derail the US recovery by raising rates to pop a bubble in Brazil.

I will admit that oil prices can be a bit more tricky. The gains in oil prices seem silly given ongoing evidence that the world is awash in oil. From the WSJ:

Café owner Ken Kennard sees the glut in the global oil market as a potential environmental threat to this sleepy seaside tourist hub.

Mr. Kennard is worried about a fleet of oil tankers -- almost 40 in all, each packing hundreds of thousands of barrels of crude and oil-derived products -- that have anchored several miles off the coast of southeast England in recent months.

The heavy traffic stems from a near-record excess oil supply, a byproduct of the recession, that is prompting producers to stash oil offshore until they can find customers. The excess supply hasn't stopped oil prices from surging almost 80% this year and padding the pockets of big oil producers like Royal Dutch Shell PLC and the Organization of Petroleum Exporting Countries.

To be sure, some of the rise in the price of oil is attributable to the decline in the Dollar, a natural consequence of low US interest rates and an important channel for the transmission of monetary policy. But it is not clear that higher oil prices necessarily yield additional core inflationary pressure given the current institutional arrangements between labor and management. The recent experience has been that individuals were not able to convert high inflation expectations in 2008 into higher wages. Instead, the opposite occurred as consumption sunk and unemployment skyrocketed. All of which means the Fed would need to think long and hard about leaning against the oil price increase if that entailed contractionary monetary policies; the costs are potentially high relative to the benefits. Here again, though, regulators need to be carefully evaluating the nature of lending into the oil space.

My views on this topic have shifted somewhat over the past two years. In early 2008, I was concerned that the Fed's rush to lower rates was contributing to destructive oil price bubble. But, in retrospect, nations that pegged to the Dollar and thus imported the Fed's easy policy were just as much, if not more, to blame, as those central banks failed to maintain policies appropriate for domestic conditions.

In short, the Fed does need to be aware of the full set of consequences of their policy stance. But bubbles abroad should not prevent the Fed from adopting the right policy stance for the US economy. Indeed, many of the bubbles discussed now clearly should not be the responsibility of the Fed.

"Worrisome Thoughts on the Way to the Jobs Summit"

Robert Reich is looking past the jobs forum, and he's worried:

Worrisome Thoughts on the Way to the Jobs Summit, by Robert Reich: Most ideas for creating more jobs assume jobs will return when the economy recovers. So the immediate goal is to accelerate the process. ...

But here's the real worry. The basic assumption that jobs will eventually return when the economy recovers is probably wrong. Some jobs will come back, of course. But the reality that no one wants to talk about is a structural change in the economy that's been going on for years but which the Great Recession has dramatically accelerated.

Under the pressure of this awful recession, many companies have found ways to cut their payrolls for good. They’ve discovered that new software and computer technologies have made workers in Asia and Latin America just about as productive as Americans, and that the Internet allows far more work to be efficiently outsourced abroad.

This means many Americans won’t be rehired unless they’re willing to settle for much lower wages and benefits. Today's official unemployment numbers hide the extent to which Americans are already on this path. Among those with jobs, a large and growing number have had to accept lower pay... Or they've lost higher-paying jobs and are now in a new ones that pays less.

Yet reducing unemployment by cutting wages merely exchanges one problem for another. ... So let's be clear: The goal isn’t just more jobs. It's more jobs with good wages. Which means the fix isn’t just temporary measures to accelerate a jobs recovery, but permanent new investments in the productivity of Americans.

What sort of investments? Big ones that span many years: early childhood education for every young child, excellent K-12, fully-funded public higher education, more generous aid for kids from middle-class and poor families to attend college, good health care, more basic R&D that's done here in the U.S.,... a power grid that's up to the task, and so on.

Without these sorts of productivity-enhancing investments, a steadily increasing number of Americans will be priced out of competition in world economy. More and more Americans will face a Hobson's choice of no job or a job with lousy wages. It's already happening.

"The Economics and Policy of Illegal Immigration in the United States"

Gordon Hanson on illegal immigration:

The Economics and Policy of Illegal Immigration in the United States, by Gordon H. Hanson: Executive Summary Policymakers across the political spectrum share a belief that high levels of illegal immigration are an indictment of the current immigration policy regime. An estimated 12 million unauthorized immigrants live in the United States, and the past decade saw an average of 500,000 illegal entrants per year. Until recently, the presence of unauthorized immigrants was unofficially tolerated. But since 2001, policymakers have poured huge resources into securing US borders, ports, and airports; and since 2006, a growing range of policies has targeted unauthorized immigrants within the country and their employers.

Notwithstanding these efforts, no agreement has materialized on a system to replace the status quo and, in particular, to divert illegal flows to legal ones. Policy inaction is a result not only of a partisan divide in Washington, but also of the underlying economic reality that despite its faults, illegal immigration has been hugely beneficial to many US employers, often providing benefits that the current legal immigration system does not.

links for 2009-12-02

• Why Didn’t Canada’s Housing Market Go Bust? - FRB Cleveland
• Too risky to regulate? Not with proper verification - Ed Glaeser
• Senator Sanders Moves to Hold Up Bernanke Confirmation - NYTimes.com
• What Should Senators Ask Bernanke? Economists Weigh In - WSJ
• Enough posturing politics. Time to let the experts lead - Jeffrey Sachs
• ‘Summit’ Or Stunt? - Market Talk
• Messy regional problems and collaborative leaders - UnderstandingSociety
• The Civil War in Development Economics - Aid Watch
• Making TBTF Policy Work: Prompt Corrective Action - Economics of Contempt
• What Went Wrong? - David Wessel - Big Think
• Uncertainty and the Fed - Freakonomics
• Economics-haters are going to hate this post - Environmental Economics
• Fed Debates New Role: Bubble Fighter - WSJ.com
• New Deal 2.0 - links
• FT Alphaville - links
• Economix - links
• The Stash - links
• Economists Forum - links
• Money Supply - links
• Abnormal Returns - links
• Credit Writedowns - links
• Marginal Revolution - links
• Brad DeLong - links

"The Wrong Jobs Summit"

Brad DeLong says the wrong people are meeting at the jobs forum:

The wrong jobs summit, by Brad DeLong, Commentary, The Week: The White House is hosting a jobs summit this week. I, however, cannot but think that ... it will be the wrong people talking about the wrong things.

Let me back up. Ever since the 1930s, economists trying to analyze the determinants of spending have focused on two of the economy’s markets: the market for liquidity and the market for savings. ...

For the government to boost jobs, it must to do something to change the balance of supply and demand in either the market for liquidity or the market for savings. In general, the ... Federal Reserve ... acts to tweak supply and demand in the market for liquidity. The president and Congress act to tweak supply and demand in the market for savings. ...

Right now, if you ask the decisive members of congress—by which I mean the Blue Dog Democrats in the House, or the most conservative Democrats and most liberal Republicans in the Senate —why the president and the Congress are not doing more to reduce unemployment and boost spending and income, the answer you’ll get is ... well, you probably wouldn't get an intelligible answer.

But if you did get an explanation for the lack of congressional action it would go something like this: Attempts to ... boost spending would (a) increase the national debt burden on future taxpayers and (b) lead to a large decline in bond prices and a boost in interest rates. Why? Because businesses would try to increase their liquidity to support higher spending, driving up interest rates, which, in turn, would cause businesses to cut back on investment, thus neutralizing most or all of the stimulative policies.

Similarly, if you were to ask the Federal Reserve why it isn’t doing more to reduce unemployment and boost spending and income, the answer you would get is this: Spending is in no way constrained by a shortage of liquidity..., indeed we have “flooded the zone” with liquidity. As a result, the Fed is disinclined to pursue additional tweaks ... in ... liquidity because it fears such efforts would fuel destructive inflation in the future without boosting employment and spending in the present.

Both of these arguments are comprehensible... But they cannot both be true at the same time. Either the economy is so awash in liquidity that the Federal Reserve cannot do much to boost spending—in which case additional spending by the government won’t generate any substantial rise in interest rates. Or additional government spending will crowd out investment...—in which case the economy is not awash in liquidity, and quantitative easing by the Federal Reserve could do a lot right now to boost spending and employment.

It appears that what we have here is a failure to communicate. ...

Thus we need a jobs summit right now. We need the White House's National Economic Council and key congressional “centrists” on one side and the Federal Reserve Open Market Committee on the other to meet. Those two groups seem to have very inconsistent views of the economic situation. ... Something has to give. If they could reach agreement on whose view ... is likely correct, then a rescue plan—entailing either more government spending or greater liquidity—would become obvious.

Until that “jobs summit” is convened, others are moot.

What Types of Employment Policies Should be Discussed at the Jobs Forum?

At MoneyWatch:

What Types of Employment Policies Should be Discussed at the Jobs Forum?, by Mark Thoma

Several categories of employment policy are evaluated, and there's speculation at the end about what might happen as a result of the administration's jobs forum on Thursday.

links for 2009-12-01

• Denmark and Better Place in Ambitious Test for Electric Cars - NYTimes.com
• Ten Ways to Move the Budget Back Toward a Sustainable Path - Jeff Frankel
• Christina Romer: Putting Americans Back to Work - WSJ.com
• Choosing an invoicing currency - voxeu.org
• Why Copenhagen must be the end of the beginning - Martin Wolf
• Styles of epistemology in world sociology - UnderstandingSociety
• Philly Fed’s Plosser Calls for Rate Increases Sooner Rather Than Later - RTE
• New Deal 2.0 - links
• Economix - links
• The Stash - links
• Money Supply - links
• Abnormal Returns - links
• Credit Writedowns - links
• Marginal Revolution - links
• Economists Forum - links
• naked capitalism - links
• Market Talk - links
• Brad DeLong - links

The Ascent, Fall, and Limits of Dubai

Kenneth Rogoff and Edward Glaeser on Dubai. They are both more optimistic about Dubai's future than I thought they'd be:

The Limits of Dubai, by Kenneth Rogoff, Commentary, Project Syndicate: Global investors are in a giant huff over Dubai’s decision to allow ... Dubai World to seek a six-month standstill (implying at least partial default) on payments on some $26 billion in debt. What exactly did investors expect when they purchased bonds in companies with names like “Limitless World,” one of Dubai World’s bankrupt real-estate subsidiaries? Talk about a bubble mentality. ...

There are those that revel in what they see as a come-uppance for brash Dubai’s outsized ambitions. I, for one, do not share this view. Yes, Dubai, with its man-made islands, hotels simulating Venice, and roof-top tennis courts, is a real-world castle in the sand. Yet, Dubai has also shown the rest of the Middle East what entrepreneurial spirit can accomplish.

Its airport has become a global hub... And, with its relatively open goods and capital markets, Dubai has become a trading hub not only for the entire Middle East, but also for parts of Africa and Asia. ... Yes, Dubai is certainly an autocratic state where finances are tightly and secretively controlled..., a central reason why the Dubai World default came as such a shock.

But, in many ways, Dubai’s rulers have been remarkably tolerant of free expression. ... Anyone familiar with Dubai understands that ... a much broader embrace of creativity that has allowed the country to court elite foreign professionals in finance and other industries. ...

Unfortunately, Dubai ultimately proved subject to the laws of financial gravity. This time was not different. Massive speculation and borrowing led to excessive debt burdens and ultimately, to default.

Is this the end of the road for Dubai’s epic growth? I doubt it. Countries throughout the world and throughout history have defaulted on their debts and lived to talk about it, even prosper. ...

Will there be contagion to vulnerable countries in Europe and elsewhere? Not just yet. While the Dubai case is not different, it is special, so the effect on investor confidence should remain contained... But investors are learning the hard way that no country’s possibilities and resources are limitless.

Edward Glaeser:

The Ascent, and Fall, of Dubai, by Edward L. Glaeser, Economix: Last Wednesday, the government of Dubai announced the restructuring of Dubai World...

Dubai World has more in common with ambitious American real estate developers than with the sovereign wealth fund of neighboring Abu Dhabi, which takes ... vast oil earnings and invests them worldwide. Dubai has few petrodollars and Dubai World is borrowing billions to build a glittering commercial metropolis on the edge of sand and sea. The glint of hubris has long shone off the glass walls of Dubai’s soaring skyscrapers, but overreaching ambition always lies behind the creation of great cities. ...

In 1985, the emir decreed the opening of the Jebel Ali Free Zone, which is now also part of Dubai World. The Free Zone offers easy permitting, good infrastructure and little taxation, right next to a port with easy access to the Middle East and to India. ...

Dubai’s leader, Mohammed bin Rashid al-Maktoum, has long understood that in an age of mobile talent, Dubai must be an attractive place for consumption as well as production — a consumer city. Dubai’s long-run success depends on attracting skilled workers who will not stay in a city that offers only sun-baked purgatory. For a decade, the sheik has tried to promote ... Dubai ... into a place of pleasure with soaring skyscrapers, vast malls and spectacular luxury hotels. ... Dubai recognizes the opportunity that comes from the strictness of neighboring Islamic states. Pleasure can be a comparative advantage of Dubai...

While Dubai’s good infrastructure, pro-business government and consumer amenities may enable the city to eventually succeed..., Dubai has now massively overbuilt relative to the level of current demand. Dubai now has the tallest building in the world, and 11 skyscrapers that are taller than any European building.

Fifty-story buildings are an efficient way to deliver plenty of space, but extreme height is far more expensive and a bellwether of irrational exuberance. ...

Great cities have long been built by great gamblers, and Dubai’s sheik may well be the second greatest city-builder — after the Chinese government — of our age. Many of those gamblers have ended up bankrupt, but their structural legacies remain, providing the space that connects humanity and facilitates the success of our urban world.

Even if Dubai’s real estate prices continue to drop, which is certainly quite possible, there will remain a strong incentive to fill its buildings. If the structures remain occupied, then Dubai, and its sheik’s dream of a great metropolis, will survive.

"A Lost Decade for Private Sector Jobs"

Private sector employment is lower than it was a decade ago:

A Lost Decade for Private Sector Jobs, by Jon Hilsenrath, Real Time Economics: To mark this week’s focus on the dismal state of the U.S. job market, check out the following chart, which shows the trajectory of private sector U.S. employment since 1998. It tells a story of a lost decade for U.S. workers.

The U.S. now produces fewer private sector jobs than it did a decade ago. This been the case since August, and it’s getting worse. ... Not since the Labor Department began tracking payroll employment in 1939 has there been such a stretch with no net job gains. ...

With the economy recovering from last year’s shock, private sector firms might start hiring again. But it likely will take months if not years to make up this gap.

How to explain the gap? One obvious answer is that the U.S. has suffered through two recessions during this stretch. The first, in 2001, was short and mild but included more than two years of job cuts. The second one starting in 2007 has been long and brutal. The other answer is that the U.S. has enjoyed a big burst of productivity growth during this stretch — which means firms are producing more with fewer workers. In the long-run this is supposed to be a good development because it leads to profit and income gains. But the short-term costs are looking increasingly more debilitating.

It’s worth nothing that overall employment is higher than it was a decade ago, but that’s only because the government has produced two million additional jobs during that stretch. You can expect both sides of Washington’s political spectrum to spin the lost decade for jobs in their own direction. Republicans will use it to blast Mr. Obama’s big government approach — though it’s worth remembering that most of these jobs were lost when a Republican controlled the White House. Democrats will use the data to demonstrate the benefits of a helping government hand in down economic times. ...

The administration is holding a jobs summit later this week, but the fear is that it is more for show than anything else, and it is not clear what, if anything, will come of it. If so, that's a mistake. The administration needs to do more than just acknowledge that it "feels your pain," it needs to alleviate some of the problem with a jobs program that produces results. The midterm elections are less than a year away, and there's every indication that when the election is held the employment problem will still be present and that could be problematic for Democrats.

I don't like using the election as a reason and motivation to do something about this problem, the struggles that the unemployed face should be enough on its own to motivate action, but if elections are what it takes to move congress and the administration to do something about this, then I suppose we'll have to settle for that. But given the lags in the process of creating jobs, I'd say six months is optimistic, there's only a month or two left before it will be too late to do anything in time to affect employment before the election. And if it doesn't get done in time to help congress get votes, it's unlikely it will get done at all no matter how bad the problem gets.

One final note. Timidity the first time around -- even if it was driven by political realities -- is part of the problem. With a more aggressive package employment would likely be much improved right now, but unfortunately that's not the policy that was implemented. If the administration puts a jobs program in place that is too reserved and does little to help with employment, that will make its political problems even worse since it will appear that its job policy was largely a failure. If it does move on a jobs program -- as it should -- it needs to be sufficiently aggressive and it needs to target jobs directly. Then we should all cross our fingers, not because of worry over the election (though losing ground would be a big disappointment for Democrats), but in the hopes that jobs will come to households struggling to make ends meet.

[Note: A version of this is also posted at MoneyWatch.]

CBO: Estimated Impact of the American Recovery and Reinvestment Act

The CBO says the stimulus package worked. See " Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output as of September 2009, CBO."

Here's the key table from the report:

[click to enlarge]

links for 2009-11-30

• Seven Answers to Climate Contrarian Nonsense -: Scientific American
• Deflating the bubble - Charles Goodhart
• Why it is hard to imagine consumption reigniting - Richard Green
• Good financial innovation: small business equity investing - interfluidity
• Fed Begins Testing a Strategy to Exit a Securities Program - NYT
• Credit booms gone bust - Economists' Forum
• American Jobs Plan - EPI
• GAO Report on Recovery Act’s Jobs Impact Widely Misunderstood - CBPP
• Why the Chinese don’t spend - James Surowiecki
• Comparative history - Daniel Little
• US personal bankruptcy reform exacerbated the housing crisis - voxeu.org
• Fed under fire - Money Supply
• naked capitalism - links
• New Deal 2.0 - links
• Lane Kenworthy - links
• The Stash - links
• Credit Writedowns - links
• Abnormal Returns - links
• Economix - links
• Market Talk - links
• Free Exchange - links
• Economists Forum - links
• Money Supply - links
• Marginal Revolution - links
• Brad DeLong - links

James Galbraith on the Crisis

Will Consumption Growth Return to Its Pre-Recession Level?

At MoneyWatch, Will Consumption Growth Return to Its Pre-Recession Level? discusses this graph comparing the path of consumption in the current recession to the path of consumption in the three most recent recessions, and there is a brief discussion of why consumption growth is likely to be lower in the future:

[click to enlarge]

Paul Krugman: The Jobs Imperative

It's (past) time for the administration to get serious about creating jobs:

The Jobs Imperative, by Paul Krugman, Commentary, NYTimes: If you’re looking for a job right now, your prospects are terrible. There are six times as many Americans seeking work as there are job openings, and the average duration of unemployment ... is more than six months, the highest level since the 1930s.

You might think, then, that ... the employment situation would be a top policy priority. But now that total financial collapse has been averted, all the urgency seems to have vanished... There’s a pervasive sense in Washington that ... we should just wait for the economic recovery to trickle down to workers.

This is wrong and unacceptable. ... Historically, financial crises have typically been followed ... by anemic recoveries; it’s usually years before unemployment declines to anything like normal levels. And all indications are that ... the latest financial crisis is following the usual script. ...

And the damage from sustained high unemployment will last much longer. The long-term unemployed can lose their skills... Meanwhile, students who graduate into a poor labor market ... pay a price in lower earnings for their whole working lives. Failure to act on unemployment isn’t just cruel, it’s short-sighted.

So it’s time for an emergency jobs program.

How is a jobs program different from a second stimulus? It’s a matter of priorities. The 2009 Obama stimulus bill was focused on restoring economic growth. ... That strategy might have worked if the stimulus had been big enough — but it wasn’t. And as a matter of political reality, it’s hard to see how the administration could pass a second stimulus big enough to make up for the original shortfall.

So our best hope now is for a somewhat cheaper program that generates more jobs for the buck. Such a program should shy away from measures, like general tax cuts, that at best lead only indirectly to job creation... Instead, it should consist of measures that more or less directly save or add jobs.

One such measure would be another round of aid to beleaguered state and local governments... More aid would help avoid ... the elimination of hundreds of thousands of jobs.

Meanwhile, the federal government could provide jobs by ... providing jobs. It’s time for at least a small-scale version of the New Deal’s Works Progress Administration, one that would offer relatively low-paying (but much better than nothing) public-service employment. There would be accusations that the government was creating make-work jobs, but the W.P.A. left many solid achievements in its wake. And the key point is that direct public employment can create a lot of jobs at relatively low cost. ...[T]he Economic Policy Institute, a progressive think tank, argues that spending $40 billion a year for three years on public-service employment would create a million jobs, which sounds about right.

Finally, we can offer businesses direct incentives for employment. It’s probably too late for a job-conserving program... But employers could be encouraged to add workers as the economy expands. The Economic Policy Institute proposes a tax credit for employers who increase their payrolls, which is certainly worth trying.

All of this would cost money, probably several hundred billion dollars, and raise the budget deficit in the short run. But this has to be weighed against the high cost of inaction in the face of a social and economic emergency.

Later this week, President Obama will hold a “jobs summit.” Most of the people I talk to are cynical about the event, and expect the administration to offer no more than symbolic gestures. But it doesn’t have to be that way. Yes, we can create more jobs — and yes, we should.

links for 2009-11-29

• Debate on Creating Jobs, Without Raising Deficit - NYTimes.com
• Bankers: Financial Overhaul Bill ‘Over-reacts to the Crisis’ - RTE
• The Housing Crisis and Wall Street Shame - Robert Reich
• Approaching Copenhagen with a Portfolio of Commitments - Robert Stavins
• Maturity Transformation and Liquidity Crises - Rajiv Sethi
• Market Talk - links
• naked capitalism - links
• Credit Writedowns - links
• Abnormal Returns - links
• Marginal Revolution - links
• Brad DeLong - links

"Will the Obey Plan End the War?"

If people had to pay for the cost of the war with an explicit, dedicated tax for that purpose, would they still support it? I think it's a good idea to make clear what the war costs - e.g. the $11 billion per month the war effort costs would pay for a lot of health care and other domestic needs - but I'm not sure that raising taxes during a recession (or during the inklings of a recovery) is a good idea.

The economic effects of a tax increase are one of the worries, though the size of those effects depends upon where the burden falls. If the Bush tax cuts didn't do much to help middle and lower class income and employment -- and I don't see any strong evidence that they did -- it's hard to see how reversing such taxes would have much of an effect either. But the tax surcharge proposal is broad-based, everyone would face higher taxes not just the wealthy, and the effects of a broad-based tax change might be larger. Why take a chance when the job market doing so poorly?

The main worry for me is not the size of the debt or the economic consequences (though the latter is of concern), it's the political message that raising taxes right now would send. Raising taxes to pay for the war would send the message that the federal debt is such a large problem we have to implement a tax surcharge even while the economy is struggling to recover from a recession. That is the opposite of the message I think we should be sending -- the economy and labor markets still need more help -- and it's hard to imagine how to get that help after sending a message that the debt is so worrisome.

We do have debt problems down the road, and rising health care costs are the driving force behind the budget trajectory. We will need to address this problem. In addition, we should pay for the wars and the stimulus package when the economy is on better footing. Thus, I would support legislation that raises taxes (or cuts "wasteful" spending, though good luck with that) to pay for these items at some point in the future. That would highlight the cost of the war without simultaneously sending a message that the budget problem is urgent, so urgent that it ties our hands from doing anything more. It would also blunt the inevitable "tax increases will kill jobs" objection that is sure to come.

So yes, let's raise taxes now to pay for these things, but the tax changes shouldn't take effect until the economy surpasses some metric for health -- unemployment falling below a particular number could be one trigger -- or it could come at some date certain in the future, e.g. two years from now, (assuming that gives the economy enough time to regain more solid footing).

If I thought that the Obey tax surcharge plan would actually end the war, or stop it sooner, I might see this differently. But it seems to me that highlighting budget problems now would be more likely to affect funding for needed social programs such as food stamps and unemployment compensation than it would be to affect the war effort.

I'm curious to hear your thoughts on this:

Will the Obey Plan End the War?, by Bruce Bartlett, Commentary, Forbes: In recent years, Republicans have been characterized by two principal positions: They like starting wars and don't like paying for them. George W. Bush initiated two major wars in Iraq and Afghanistan, but adamantly refused to pay for either of them by cutting non-military spending or raising taxes. Indeed, at his behest, Congress actually cut taxes and established a massive new entitlement program, Medicare Part D.

Bush's actions were unprecedented. During every previous major war in American history, presidents demanded sacrifices from rich and poor alike. As Robert Hormats explains in his 2007 book, The Price of Liberty: Paying for America's Wars, "During most of America's wars, parochial desires--such as tax breaks for favored groups or generous spending for influential constituencies--have been sacrificed to the greater good. The president and both parties in Congress have come together … to cut nonessential spending and increase taxes."

During World War II, federal revenues roughly tripled as a share of the gross domestic product (GDP) and the number of people paying income taxes expanded tenfold, from 3% of the population in 1939 to 30% by 1943. In 1940, a family of four needed close to $80,000 of income in today's dollars before it paid any federal income taxes at all. By the war's end, it saw its effective tax rate rise from 1.5% to 15.1%. (Today such a family only pays a federal income tax rate of about 6%.) But taxes weren't the only way the war was paid for. Spending on nondefense programs was cut almost in half, from 8.1% of GDP in 1940 to 4.4% in 1945.

Even during wars closer in magnitude to those in which we are presently engaged, significant sacrifices were made. In 1950 and 1951 Congress increased taxes by close to 4% of GDP to pay for the Korean War, even though the high World War II tax rates were still largely in effect. In 1968, a 10% surtax was imposed to pay for the Vietnam War, which raised revenue by about 1% of GDP. And there was conscription during both wars, which can be viewed as a kind of tax that was largely paid by the poor and middle class--young men from wealthy families largely escaped its effects through college deferments.

However, Bush and his party, which controlled Congress from 2001 to 2006, never asked for sacrifices from anyone except those in our nation's military and their families. I think that's because the Republicans understood, implicitly, that the American people's support for the wars in Iraq and Afghanistan has always been paper thin. Asking them to sacrifice through higher taxes, domestic spending cuts or reinstatement of the draft would surely have led to massive protests akin to those during the Vietnam era or to political defeat in 2004. George W. Bush knew well that when his father raised taxes in 1990 in part to pay for the first Gulf War, it played a major role in his 1992 electoral defeat.

"Dangers of an Overheated China"

Tyler Cowen:

Dangers of an Overheated China, by Tyler Cowen, Commentary, NY Times: ...Several hundred million Chinese peasants have moved from the countryside to the cities over the last 30 years... To help make this work, the Chinese government has subsidized its exporters by pegging the renminbi at an unnaturally low rate to the dollar...; additional subsidies have included direct credit allocation and preferential treatment for coastal enterprises.

These aren’t the recommended policies you would find in a basic economics text, but it’s hard to argue with success. ... Those same subsidies, however, have spurred excess capacity... China has been building factories and production capacity in virtually every sector of its economy... Automobiles, steel, semiconductors, cement, aluminum and real estate all show signs of too much capacity. ...

Regional officials have an incentive to prop up local enterprises and production statistics... Chinese fiscal and credit policies are geared toward jobs and political stability, and thus the authorities shy away from revealing which projects are most troubled or should be canceled.

Put all of this together and there is a very real possibility of trouble. ... What will the consequences be ... if and when the Chinese economic miracle encounters a major stumble? A lot of Chinese business ventures will stop being profitable, and layoffs and unrest will most likely rise. The Chinese government may crack down further on dissent. The Chinese public may wonder whether its future lies with capitalism after all, and foreign investors in China will become more nervous.

In economic terms, the prices of Chinese exports will probably fall, as overextended businesses compete to justify their capital investments... American businesses will find it harder to compete with Chinese companies, and there will be deflationary pressures in both countries. And ... the Chinese ... may have less to lend to the United States government. ... The United States will face higher borrowing costs, and its fiscal position may very quickly become unsustainable.

That’s not so much a prediction as a very possible contingency, and we should be prepared for it. For now, we should avoid two big mistakes. The first would be to assume that just because borrowing costs are now low, we can postpone fiscal responsibility and keep running up the tab — with the aid of Chinese lending, of course. The history of financial crises shows that turning points can come swiftly...

The second mistake would be to demand too many concessions from the Chinese. What we see in the numbers today are a growing China... Yet there’s a real chance that, soon enough, Chinese economic weakness will be a bigger problem than was Chinese economic strength.

links for 2009-11-28

• Protecting the Forests, in Hopes of Countering Global Warming - NYT
• Food Stamp Use Soars Across U.S., and Stigma Fades - NYT
• Expiring insurance subsidy imperils laid-off Americans - McClatchy
• Snapping Science's Most Beautiful Moments - Spiegel
• Trade, pollution, and the environment: New evidence - voxeu.org
• In praise of (a little bit of) fiscal dominance - Worthwhile Canadian Initiative
• Paul Kedrosky - links
• Marginal Revolution - links
• Brad DeLong - links

"Catastrophe Theory and the Business Cycle"

As a follow up to the recent post on non-linear dynamics that continued the discussion on what's wrong with modern macroeconomics, here is a paper written many years ago by Hal Varian that extends the Goodwin-Kaldor model of business cycles. It is old-fashioned macro, but the interesting part is the wealth effect causing the difference between recessions and depressions. In particular, the results of the paper imply that shocks to wealth that change savings propensities -- as we are seeing now -- can cause recoveries that "may take a very long time, and differ quite substantially from the recovery pattern of a [typical] recession."

Here are a few selections from the paper:

Catastrophe Theory and the Business Cycle, by Hal Varian: In this paper we examine a variation on Kaldor's (1940) model of the business cycle using some of the methods of catastrophe theory. (Thom (1975), Zeeman (1977)). The development proceeds in several stages. Section I provides a brief outline of catastrophe theory, while Section II applies some of these techniques to a simple macroeconomic model. This model yields, as a special case, Kaldor's business cycles. ... In Section III, we describe a generalization of Kaldor's model that allows not only for cyclical recessions, but also allows for long term depressions. Section IV presents a brief review and summary.

"Independent Does Not Mean Unaccountable"

As you might guess given my recent posts defending Fed independence, I agree with this:

The right reform for the Fed, by Ben Bernanke, Commentary, Washington Post: For many Americans, the financial crisis, and the recession it spawned, have been devastating... Understandably, many people are calling for change. ... As a nation, our challenge is to design a system of financial oversight that will ... provide a robust framework for preventing future crises...

I am concerned ... that ... some leading proposals in the Senate would strip the Fed of all its bank regulatory powers. And a House committee recently voted to repeal a 1978 provision that was intended to protect monetary policy from short-term political influence. These measures ... would seriously impair the prospects for economic and financial stability in the United States. The Fed played a major part in arresting the crisis, and we should be seeking to preserve, not degrade, the institution's ability to foster financial stability and to promote economic recovery without inflation. ...

The proposed measures are at least in part the product of public anger over ... the rescues of some individual financial firms. The government's actions... -- as distasteful and unfair as some undoubtedly were -- were unfortunately necessary to prevent a global economic catastrophe that could have rivaled the Great Depression in length and severity...

Moreover, looking to the future, we strongly support measures -- including the development of a special bankruptcy regime for financial firms whose disorderly failure would threaten the integrity of the financial system -- to ensure that ad hoc interventions of the type we were forced to use last fall never happen again. Adopting such a resolution regime, together with tougher oversight of large, complex financial firms, would make clear that no institution is "too big to fail" -- while ensuring that the costs of failure are borne by owners, managers, creditors and the financial services industry, not by taxpayers.

The Federal Reserve ... did not do all that it could have to constrain excessive risk-taking in the financial sector in the period leading up to the crisis. We have extensively reviewed our performance and moved aggressively to fix the problems. ... There is a strong case for a continued role for the Federal Reserve in bank supervision. Because of our role in making monetary policy, the Fed brings unparalleled economic and financial expertise to its oversight of banks...

This expertise is essential for supervising highly complex financial firms and for analyzing the interactions among key firms and markets. Our supervision is also informed by the grass-roots perspective derived from the Fed's unique regional structure and our experience in supervising community banks. At the same time, our ability to make effective monetary policy and to promote financial stability depends vitally on the information, expertise and authorities we gain as bank supervisors, as demonstrated in episodes such as the 1987 stock market crash and the financial disruptions of Sept. 11, 2001, as well as by the crisis of the past two years.

Of course, the ... ability to take such actions without engendering sharp increases in inflation depends heavily on our credibility and independence from short-term political pressures. Many studies have shown that countries whose central banks make monetary policy independently of such political influence have better economic performance...

Independent does not mean unaccountable. In its making of monetary policy, the Fed is highly transparent, providing detailed minutes of policy meetings and regular testimony before Congress, among other information. Our financial statements are public and audited by an outside accounting firm; we publish our balance sheet weekly; and we provide monthly reports with extensive information on all the temporary lending facilities... Congress, through the Government Accountability Office, can and does audit all parts of our operations except for the monetary policy deliberations and actions covered by the 1978 exemption. The general repeal of that exemption would serve only to increase the perceived influence of Congress on monetary policy decisions, which would undermine the confidence the public and the markets have in the Fed to act in the long-term economic interest of the nation. ...

 Now more than ever, America needs a strong, nonpolitical and independent central bank with the tools to promote financial stability and to help steer our economy to recovery without inflation.

While I agree on the independence and regulation statements, one thing I do wonder about is why there is such widespread acceptance of the idea that we have to live with institutions that are so big that their failure is a threat to the financial system and the economy. The notion seems to be that large, dangerous firms are inevitable, so we need special procedures in place that we hope will allow them to fail without the problems spreading and creating a devastating domino effect. The concern seems to be mainly about having the procedures and authority to allow orderly dissolution of large, dangerous firms rather than preventing these firms from getting too large and too interconnected to begin with.

We need procedures for orderly dissolution in any case -- we didn't think firms were systemically important before the crash, so we need to be ready (e.g., recall the many, many statements that the crisis would be "contained"). But what is the minimum efficient scale (MES) for financial firms? That is, what is the smallest size at which economies of scale and economies of scope are fully realized?

There has been some discussion of this (e.g. Economics of Contempt versus The Baseline Scenario), but it doesn't seem to me that this question is very close to being settled. I want to know how the MES relates to the minimum size where a bank becomes systemically important. If the MES is smaller than the size where banks become systemically dangerous, break them up - their size adds nothing but risk. But if the MES is greater than the minimum dangerous size, then we have a tradeoff to make -- safety for efficiency -- and we may or may not want to force firms to reduce their size and connectedness. It depends upon the tradeoff.

But until we know what these tradeoffs are -- and I don't think we have a good sense of this -- it's very difficult to determine if the costs of breaking up banks and reducing their connectedness are greater than the benefits. I suspect that if the MES is greater than the minimum safe size, then the extra safety from reducing bank size and connectedness would be worth the loss of efficiency, and I'd like to push that position much more than I have to date. But without knowing the MES, the minimum threatening size, the minimum threatening degree of connectedness, and the costs and benefits of reducing size and connectedness, it's hard to do so with confidence.

links for 2009-11-27

• Deficits: the causes matter - Paul Krugman
• A Way Forward In Macroeconomics? - EconoSpeak
• In praise of (a little bit of) fiscal dominance - Nick Rowe
• The myth of the starship - Charlie's Diary
• The Stash - links
• FT Alphaville - links
• Chris Blattman - links
• Credit Writedowns - links
• Economix - links
• New Deal 2.0 - links
• Money Supply - links
• naked capitalism - links
• Economists Forum - links
• Market Talk - links
• Abnormal Returns - links