links for 2008-11-28

• Radical Solutions For A Crazy Crisis - Roubini - Forbes.com
• Hoocoodanode? - Calculated Risk
• Rescue Plan Strained by Lack of Staff - WSJ.com
• Too many cooks in Obama’s economics kitchen - Willem Buiter
• The more the merrier - Econbrowser
• Dying of Consumption - Roach - NYTimes.com
• Thanksgiving: The Spin Statistics Theorem - Discover Magazine
• Shiller: Crisis May Run for `Years and Years' P1 - YouTube
• Climate change puts forests and people at risk - EurekAlert
• Recession vs inflation targeting - Stumbling and Mumbling
• How Geothermal Heat Pumps Could Power the Future - Yahoo! News
• India should hold a $1 trillion in foreign exchange reserves - voxeu.org
• The importance of pressing ahead with Doha - Comment is free
• Unorthodox monetary policy: Central banks as “stabilising speculators” - voxeu.org

Comments

[Denis Drew]

Re: Radical Solutions for a Crazy Crisis

Boost the economy in a radical way for America -- conventional, almost old fashioned for the rest of the modern OECD world -- pay labor the maximum its utility will justify, not the least the race to the wages and benefits bottom can squeeze it price down to.

Quickest jump start for the economy -- with only $350 billion? Which the taxpayer wont have to ante up?

Double the federal minimum wage which will shift about $350 billion (2 1/2 % of the cost of GDP output or 4% of personal income share) into the pockets of the 40% lowest wage Americans -- who would spend it not save it. ($500/wk -- today's 40 percentile wage! -- still not be enough to cover a realistic minimum needs budget for a family of two -- today's 40 percentile wage!).

2 1/2% is about how much GDP grows every couple of years. If everyone got their inflation raises but forwent their growth raises, a doubling of the minimum wage could pass almost unnoticed for half the country.

Doubling the minimum wage would only be the beginning of the larger overhaul of our underpaying labor market. Re-institute fair and balanced bargaining power via sector-wide labor agreements. Only sector-wide collective bargaining has the potential to eventually shift the other 11% of income share lost by the bottom 90% of earners (15% altogether) to the top 3% over the past three and a half decades.

Takes years to raise the minimum wage (three years?; $1 every 6 months?)? Would take time to convert our labor market to even the French-Canadian "lite" version of sector-wide (in French-Canada non-union firms merely accept terms worked out by non-union firms)? Once 90% of the workforce are assured they are in for (continuous) raises, in proportion to their propensity to spend, IOW in proportion to how unnecessarily (working) poor they are now, everyone's wallets will open up again.

[Barkley Rosser]

As I have noted elsewhere, I called in a public forum on Nov. 14 for the new administration to pursue a policy of "battling bubbles." I warned against using interest rates as too blunt a tool to do this, and suggested more precisely targeted policies depending on the nature of the bubble being targeted, use of buffer stocks for commodities (SPR for oil) or restrictions on particular forms of financing for others. I suggested that the CEA be the body to keep track of bubbles, but I think the idea of the Fed possibly being the body to "counter-speculate" may be a good idea, although preferably in conjunction with the CEA's advice.

[Barkley Rosser]

Oh yeah, and as for hoocoodanode? Me me me! I did.

[Production]

Nouriel Roubini..."The world economy has been massively imbalanced for the last decade with the U.S. being the consumer of first and last resort...All the while, China and other emerging markets have been the producers of first and last resort, spending less than their income..."

China et al were producing more than they consumed. The US was consuming more than it produced. Forced savings cannot replace the credit formerly extended by China et al, because forced savings does not extract goods/services from China et al. Total domestic credit must fall if China et al won't loan their excess production any more.

[Quality of Life]

All forced savings does is to force one group of domestic consumers to consume a smaller fraction of what they produce, so that the goods/services can be loaned out to other domestic consumers. GDP is increased to the extent that those who lost goods/services are forced to work overtime to replace the lost goods/services (reducing their quality of life).

This is considered magic by those who don't understand the process. In reality, it is forced labor. Goods/services are transferred from inflation vulnerable entities to the central bank, which then loans out the goods/services. Ownership of the goods/services is transferred as well, so the inflation vulnerable entities never get repaid.

Redistribution of this sort can never replace the surplus production once borrowed from China et al. It can also never replace normal circular flow voluntary savings because the extraction process is regressive. That is, goods/services are extracted from the bottom 90%, who cannot afford to lose very much. Voluntary savings tends to be by the upper group, which can afford to loan a significant fraction of their goods/services.

In short, forced savings cannot completely replace voluntary savings. It will always be at a much lower level, and come at great cost to those who permanently lose goods/services.

[Short Run Phillips Curve]

A short term side effect of forced savings is that borrowers use the extracted goods services to trade for items that can be produced by the unemployed. Thus a few unemployed are hired back. Eventually the extractions process becomes so painful to the bottom that they rebel, and demand that it stop (ask for COLA). Then ever more inflation is required to extract the same quantity of goods/services from the bottom, and a wage/price spiral stagnates the economy.

Once again, forced savings cannot replace voluntary savings. The goods/services come from different groups, and only voluntary savings can be sustained at reasonable levels over long periods of time. Voluntary circular flow must be maintained for the credit system to be stable.

[bob mcmanus]

I don't want to hear Roach or anyone else in Finance telling me he wants to play with some greater percentage of my money.

[Consumption Smoothing]

Stephen Roach..."Runaway consumption must now give way to a renewal of saving and investment."

A nation cannot borrow all savings (goods/services) from overseas indefinitely. Eventually, the entire nation will belong to foreign entities, and then there will be nothing to trade for additional loaned goods/services. Domestic voluntary circular flow results in a slow inter generational transfer of ownership. Generations regularly recycle. Thus, normal consumption smoothing over the life span is sustainable.

"We don’t need to reinvent the wheel to come up with effective saving policies."

No we don't. People will voluntarily produce more than they consume (loan} during their prime working years, if they think they will be repaid the same quantity of goods/services when they need it (old age). They will not produce more than they consume if they don't think they will be repaid, or repaid a much smaller quantity of goods/services (inflation). Human nature does not change.

Circular flow cannot be maintained unless there is a stable form of long term savings.

[btg]

Roubini:
"Second, the Fed could do what it last did in the 1950s: directly purchase long-term government bonds as a way of pushing downward their yield and thus reduce the yield-curve spread. But even such action may not be very successful in a world where such long rates depend as much as anything else on the global supply of savings relative to investment. Thus, even radical action such as outright Fed purchases of 10- or 30-year U.S. Treasury bonds may not work as much as desired.

Next, the Fed could try to directly affect the credit spread (the spread between long-term market rates and long-term government bond yields). Radical actions could take the form of: outright purchases of corporate bonds; outright purchases of mortgages and private and agency MBS as well as agency debt"

This is what I, non-economist, have argued here.

As for the other posts regarding Roubini, I agree that the US has to start producing and not just borrowing and spending - but how do you enforce this? Trade policy? Limiting foreign investment - even if the government manages to borrow domestically, what is to stop foreign investors from buying up corporate America, particularly if the uS pursues a low-dollar strategy as part of the means of discouraging imports/encouraging exports.

[Denis Drew]

Re: Radical solutions

http://hnn.us/articles/55614.html...
...at which history professor James Livingston explains simply that if business squeezes too much money out of labor, then, demand drops and business has no healthy place to invest its excess profits (plant and equipment) and heads out in search speculative paper which the only alternative (dot.com start ups with no realistic business model, risky real estate): leading us from bubble to bubble.

http://hnn.us/articles/55368.html...
...at which Livingston saith:
"By 1937, industrial output and national income had regained the levels of 1929, and the volume of new auto sales exceeded that of 1929." "That rising demand was a result of net contributions to consumers’ expenditures out of federal deficits, and of new collective bargaining agreements, not the eradication of unemployment."

[anne]

[There is a problem with Typepad, comments are not appearing on the thread or cannot be called up by clicking on the side index. The problem appeared for a day, then disappeared but now has appeared again.]

[anne]

Where the interest rate for the 3 month Treasury closed at 0.01%, the 2 year at 1.00% and the 10 year is 2.92%, the Vanguard short-term investment grade fund is yielding 6.15% and the intermediate-term investment grade fund is yielding 7.66%. There is no sign from the bond market that Federal Reserve action has broadened the availability of commercial credit.